<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1998
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. 41 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 42 [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)
(630) 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, Illinois 60181
(Name and Address of Agent for Service)
Copies to:
Wayne W. Whalen, Esq.
Thomas A. Hale, Esq.
Skadden, Arps, Slate, Meagher & Flom (Illinois)
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.
TITLE OF SECURITIES BEING REGISTERED SHARES OF BENEFICIAL INTEREST, PAR
VALUE $0.01 PER SHARE.
================================================================================
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains six Prospectuses and seven Statements
of Additional Information describing seven 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 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 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 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;
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; 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; DISTRIBUTION AND SERVICE PLANS;
Custodian and Independent Auditors; Investment
Advisory and Other Services; Trustees and Officers;
The Distributor; Distribution and Service Plans; 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; Report of Independent
Accountants; 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 LOCATION OR CAPTION
FORM N-1A -------------------
<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;
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;
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;
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>
PART B
<S> <C> <C>
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; DISTRIBUTION AND SERVICE PLANS;
Investment Advisory and Other Services; Custodian and
Independent Auditors; Trustees and Officers; The
Distributor; Distribution and Service Plans; 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; Report of
Independent Accountants; 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 LOCATION OR CAPTION
FORM N-1A -------------------
<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; 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;
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; 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>
PART B
<S> <C> <C>
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; DISTRIBUTION AND SERVICE PLANS;
Investment Advisory and Other Services; Trustees and
Officers; The Distributor; Distribution and Service
Plans; 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; Report of Independent
Accountants; 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;
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; 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; DISTRIBUTION AND SERVICE PLANS;
Custodian and Independent Auditors; Investment
Advisory and Other Services; Trustees and Officers;
The Distributor; Distribution and Service Plans; 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; Report of Independent
Accountants; 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;
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; 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; DISTRIBUTION AND SERVICE PLANS;
Custodian and Independent Auditors; Legal Counsel;
Investment Advisory and Other Services; Trustees and
Officers; The Distributor; Distribution and Service
Plans; 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; Report of Independent Accountants;
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 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; 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>
(xi)
<PAGE> 14
<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; DISTRIBUTION AND SERVICE PLANS;
Custodian and Independent Auditors; Legal Counsel;
Investment Advisory and Other Services; Trustees and
Officers; The Distributor; Distribution and Service
Plans; 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; Report of Independent Accountants;
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
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 and 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.
The Fund's investment adviser is Van Kampen American Capital Investment
Advisory Corp. (the "Adviser"). 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.
------------------
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, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated April 30, 1998, 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) 421-2833. The Statement of Additional Information
has been filed with the Securities and Exchange Commission ("SEC") and is
available along with other related Fund materials at the SEC's internet web site
(http://www.sec.gov). ------------------
VAN KAMPEN AMERICAN CAPITAL SM
------------------
THIS PROSPECTUS IS DATED APRIL 30, 1998.
<PAGE> 16
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Shareholder Transaction Expenses............................ 7
Annual Fund Operating Expenses and Example.................. 8
Financial Highlights........................................ 10
The Fund.................................................... 12
Investment Objective and Policies........................... 12
Municipal Securities........................................ 16
Investment Practices........................................ 20
Investment Advisory Services................................ 23
Alternative Sales Arrangements.............................. 24
Purchase of Shares.......................................... 26
Shareholder Services........................................ 36
Redemption of Shares........................................ 41
Distribution and Service Plans.............................. 44
Distributions from the Fund................................. 46
Tax Status.................................................. 47
Fund Performance............................................ 52
Description of Shares of the Fund........................... 53
Additional Information...................................... 54
Appendix A: Description of Municipal Securities Ratings..... 55
</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> 17
- ------------------------------------------------------------------------------
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. There is no assurance that the Fund will achieve its
investment objective.
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 and 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.
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.
3
<PAGE> 18
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 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 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
4
<PAGE> 19
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, Class B Shares and Class C Shares sometimes are
referred to herein collectively as "CDSC Shares." See "Alternative Sales
Arrangements."
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 contingent deferred sales charge ("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 eight 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.
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
5
<PAGE> 20
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. (the
"Adviser") is the Fund's investment adviser.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the "Distributor")
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 foregoing is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
6
<PAGE> 21
- ------------------------------------------------------------------------------
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 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 CDSC 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 Share Purchases 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 by the Distributor on behalf of the investor. See "Distribution and
Service Plans."
7
<PAGE> 22
- ------------------------------------------------------------------------------
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%(2) 1.00%(2)
Other Expenses (as a percentage of average
daily net assets)......................... 0.23% 0.23% 0.23%
Total Expenses (as a percentage of average
daily net assets)......................... 0.94% 1.71% 1.71%
</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.
(2) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted as a fund-level expense by the
rules of the National Association of Securities Dealers, Inc. ("NASD").
8
<PAGE> 23
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 0.94% for Class
A Shares, 1.71% for Class B Shares, and
1.71% for Class C Shares, (ii) 5.00% annual
return and (iii) redemption at the end of
each time period:
Class A Shares............................. $57 $76 $ 97 $157
Class B Shares............................. $57 $89 $108 $182*
Class C Shares............................. $27 $54 $ 93 $202
You would pay the following expenses on the
same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares............................. $57 $76 $ 97 $157
Class B Shares............................. $17 $54 $ 93 $182*
Class C Shares............................. $17 $54 $ 93 $202
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A Shares after eight years.
The purpose of the foregoing tables is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years and is
included to provide a means for the investor to compare expenses levels of funds
with different fee structures over varying investment periods. To facilitate
such comparisons, all Funds are required by the SEC to utilize a 5.00% annual
return assumption. 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 CDSC schedule relating to the Class B
Shares of the fund from which the purchase of Class B Shares was originally
made. 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 "Distribution and Service Plans."
9
<PAGE> 24
- --------------------------------------------------------------------------------
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 YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
31, 1997 31, 1996 31, 1995 31, 1994 31, 1993 31, 1992 31, 1991 31, 1990
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $14.474 $14.984 $13.848 $15.629 $14.529 $15.687 $15.632 $16.378
------- ------- ------- ------- ------- ------- ------- -------
Net Investment Income............. .895 .963 1.024 .956 1.052 1.064 1.173 1.269
Net Realized and Unrealized
Gain/Loss....................... .376 (.513) 1.072 (1.717) 1.158 (1.047) .097 (.755)
------- ------- ------- ------- ------- ------- ------- -------
Total from Investment Operations... 1.271 .450 2.096 (.761) 2.210 .017 1.27 .514
Less Distributions from and in
Excess of Net Investment Income... .900 .960 0.960 1.020 1.110 1.175 1.215 1.260
------- ------- ------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period............................ $14.845 $14.474 $14.984 $13.848 $15.629 $14.529 $15.687 $15.632
======= ======= ======= ======= ======= ======= ======= =======
Total Return(a).................... 9.05% 3.21% 15.52% (4.93%) 15.82% 0.08% 8.51% 3.23%
Net Assets at End of Period (in
millions)......................... $ 706.3 $ 671.9 $ 665.8 $ 603.0 $ 636.2 $ 566.1 $ 626.7 $ 630.3
Ratio of Expenses to Average Net
Assets(b)......................... .94% .99% 0.95% .87% 1.03% 1.08% 1.09% 1.04%
Ratio of Net Investment Income to
Average Net Assets(b)............. 6.09% 6.60% 7.05% 6.48% 6.95% 7.07% 7.54% 7.95%
Portfolio Turnover................. 63% 59% 59% 101% 91% 44% 65% 97%
<CAPTION>
CLASS A SHARES
-------------------
YEAR YEAR
ENDED ENDED
DECEMBER DECEMBER
31, 1989 31, 1988
-------- --------
<S> <C> <C>
Net Asset Value, Beginning of the
Period............................ $16.183 $15.874
------- -------
Net Investment Income............. 1.306 1.311
Net Realized and Unrealized
Gain/Loss....................... .205 .319
------- -------
Total from Investment Operations... 1.511 1.630
Less Distributions from and in
Excess of Net Investment Income... 1.316 1.321
------- -------
Net Asset Value, End of the
Period............................ $16.378 $16.183
======= =======
Total Return(a).................... 9.71% 10.66%
Net Assets at End of Period (in
millions)......................... $ 623.0 $ 453.6
Ratio of Expenses to Average Net
Assets(b)......................... .90% .84%
Ratio of Net Investment Income to
Average Net Assets(b)............. 8.02% 8.16%
Portfolio Turnover................. 66% 79%
</TABLE>
(Continued on following page)
- ---------------
(a)Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b)For the years ended December 31, 1995 through December 31, 1996, the impact
on the Ratios of Expenses and Net Investment Income to Average Net Assets due
to the Adviser's reimbursement of expenses was less than 0.01%.
See Financial Statements and Notes Thereto
10
<PAGE> 25
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CONTINUED (for a share outstanding throughout the
periods)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES
------------------------------------------------------------ ------------------------------
MAY 1, 1993
(COMMENCEMENT
YEAR YEAR YEAR YEAR OF DISTRIBUTION) YEAR YEAR YEAR
ENDED ENDED ENDED ENDED TO ENDED ENDED ENDED
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
31, 1997 31, 1996 31, 1995 31, 1994 31, 1993 31, 1997 31, 1996 31, 1995
-------- -------- -------- -------- ---------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................ $14.474 $14.983 $13.850 $15.621 $14.670 $14.474 $14.987 $13.846
------- ------- ------- ------- ------- ------- ------- -------
Net Investment Income............. .774 .843 0.908 .841 .656 .778 .851 0.910
Net Realized and Unrealized
Gain/Loss....................... .384 (.506) 1.071 (1.718) .945 .378 (.518) 1.077
------- ------- ------- ------- ------- ------- ------- -------
Total from Investment Operations... 1.158 .337 1.979 (.877) 1.601 1.156 .333 1.987
Less Distributions from and in
Excess of Net Investment Income... .788 .846 0.846 .894 .650 .788 .846 0.846
------- ------- ------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period............................ $14.844 $14.474 $14.983 $13.850 $15.621 $14.842 $14.474 $14.987
======= ======= ======= ======= ======= ======= ======= =======
Total Return(a).................... 8.23% 2.40% 14.62% (5.69%) 11.12%* 8.23% 2.33% 14.70%
Net Assets at End of Period (in
millions)......................... $ 229.6 $ 173.8 $ 137.9 $ 112.4 $ 56.6 $ 38.6 $ 18.8 $ 9.5
Ratio of Expenses to Average Net
Assets(b)......................... 1.71% 1.75% 1.70% 1.64% 1.74% 1.71% 1.75% 1.69%
Ratio of Net Investment Income to
Average Net Assets(b)............. 5.30% 5.84% 6.25% 5.70% 5.95% 5.24% 5.84% 6.19%
Portfolio Turnover................. 63% 59% 59% 101% 91% 63% 59% 59%
<CAPTION>
CLASS C SHARES
---------------------------
AUGUST 13, 1993
(COMMENCEMENT
YEAR OF DISTRIBUTION)
ENDED TO
DECEMBER DECEMBER
31, 1994 31, 1993
-------- ----------------
<S> <C> <C>
Net Asset Value, Beginning of
Period............................ $15.610 $15.030
------- -------
Net Investment Income............. .824 .369
Net Realized and Unrealized
Gain/Loss....................... (1.694) .580
------- -------
Total from Investment Operations... (.870) .949
Less Distributions from and in
Excess of Net Investment Income... .894 .369
------- -------
Net Asset Value, End of the
Period............................ $13.846 $15.610
======= =======
Total Return(a).................... (5.62%) 6.37%*
Net Assets at End of Period (in
millions)......................... $ 7.6 $ 5.2
Ratio of Expenses to Average Net
Assets(b)......................... 1.64% 1.82%
Ratio of Net Investment Income to
Average Net Assets(b)............. 5.71% 5.21%
Portfolio Turnover................. 101% 91%
</TABLE>
- ---------------
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1995 through December 31, 1996, the impact
on the Ratios of Expenses and Net Investment Income to Average Net Assets
due to the Adviser's reimbursement of expenses was less than 0.01%.
* Non-Annualized.
See Financial Statements and Notes Thereto
11
<PAGE> 26
- ------------------------------------------------------------------------------
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." 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 or its
affiliates also act as investment advisers 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 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 and 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 comparable to those
12
<PAGE> 27
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 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
13
<PAGE> 28
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, 1997 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
14
<PAGE> 29
of all municipal securities held by the Fund during the 1997 fiscal year,
computed on a monthly basis.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-------------------------------------------
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............................... 25.51% 1.43%
AA/Aa................................. 4.78 0.00
A/A................................... 3.85 0.34
BBB/Baa............................... 21.97 4.81
BB/Ba................................. 2.98 21.54
B/B................................... 0.36 9.15
CCC/Caa............................... 0.00 0.69
CC/Ca................................. 0.00 0.00
C/C................................... 0.00 1.22
D..................................... 0.00 1.37
----- -----
Percentage of Rated and Unrated
Securities.......................... 59.45% 40.55%
===== =====
</TABLE>
Securities rated D are in default, and payment of interest or repayment of
principal is in arrears. Securities that are in default or with respect to which
payment of interest 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 percentage of the Fund's assets invested in securities of various grades
may from time to time vary from those set forth above.
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by the Fund's Adviser and other service providers do not properly process
and calculate date-related information and data from and after January 1, 2000.
This is commonly known as the "Year 2000 Problem". The Adviser is taking steps
that it believes are reasonably designed to address the Year 2000 Problem with
respect to computer systems that it uses and to obtain reasonable assurances
that comparable steps are being taken by the Fund's other major service
providers. At this time, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund. In addition, the Year 2000
Problem may adversely affect the issuers of securities in which the Fund may
invest which, in turn, may adversely affect the net asset value of the Fund.
15
<PAGE> 30
- ------------------------------------------------------------------------------
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.
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
16
<PAGE> 31
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 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
17
<PAGE> 32
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 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
invest-
18
<PAGE> 33
ment 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. 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, 1997, approximately 3.1% of the Fund's total net
assets were invested
19
<PAGE> 34
in zero coupon securities and none of the Fund's total net assets were invested
in payment-in-kind securities.
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 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
20
<PAGE> 35
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 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
21
<PAGE> 36
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 liquid 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 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
22
<PAGE> 37
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 $60 billion under management or
supervision. Van Kampen American Capital's more than 50 open-end and 38
closed-end funds and more than 2,500 unit investment trusts are professionally
distributed by leading financial advisers nationwide. Van Kampen American
Capital Distributors, Inc., (the "Distributor") 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 an indirect wholly-owned
subsidiary of Morgan Stanley Dean Witter & Co. The Adviser's principal office is
located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc. an investment
adviser, Morgan Stanley & Co. Incorporated, a registered broker-dealer and
investment adviser, and Morgan Stanley International, are engaged in a wide
range of financial services. Their principal businesses include securities
underwriting, distribution and trading; merger, acquisition, restructuring and
other corporate finance advisory activities; merchant banking; stock brokerage
and research services; credit services; asset management; trading of futures,
options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financial and
investing; and global custody, securities clearance services and securities
lending.
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 supervise and implement the Fund's investment activities and are
responsible for overall management of the Fund's business affairs. The Fund pays
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
23
<PAGE> 38
persons, as defined in the Investment Company Act of 1940, as amended (the "1940
Act"), of the Adviser, the Distributor, ACCESS Investor Services, Inc.
("ACCESS"), Van Kampen American Capital or Morgan Stanley Dean Witter & Co.),
the charges and expenses of independent accountants, legal counsel, transfer
agent, 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 INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors, trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to preclearance and other procedures designed to prevent conflicts of
interest.
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
24
<PAGE> 39
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 because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares or Class C Shares. It is presently the policy of the Distributor 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 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
25
<PAGE> 40
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) ACCESS' 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 Code.
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
The Fund offers three classes of shares for sale to the public on a continuous
basis through the Distributor, as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares also are offered
through members of the 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
26
<PAGE> 41
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 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. In some instances additional
compensation or promotional incentives may be offered to brokers, dealers or
financial intermediaries that have sold or may sell significant amounts of
shares during specified periods of time. 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. 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. 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.
27
<PAGE> 42
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 CDSC 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 $1 million and 0.50% on the excess
over $3 million. See "Purchase of Shares -- Deferred Sales Charge
Alternatives" for additional information with respect to CDSCs.
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 at the time of the purchase order whenever a quantity discount is
applicable to purchases. Upon such notification, an investor will receive the
lowest applicable sales charge. Quantity discounts may be modified or terminated
at any time. For more information about quantity discounts, investors should
contact their broker, dealer or financial intermediary or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or
her spouse and minor children under 21 years of age 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 trust or 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 certain open-end investment
companies advised by the Adviser or Van Kampen American Capital Asset
Management, Inc. ("Asset Management") and distributed by the Distributor.
Additional funds may be added from time to time as determined by the Fund's
Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the preceding sales charge
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 any combination of shares of the Fund
and
28
<PAGE> 43
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
sales charge 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 sales
charge table. The size of investment shown in the preceding sales charge 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 sales charge applicable to the purchases made and the
sales 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 investment 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
29
<PAGE> 44
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 ACCESS with appropriate backup data
for each participating investor in a computerized format fully compatible with
ACCESS' processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NAV PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired trustees or directors of funds advised by the Adviser
or Van Kampen American Capital Asset Management, Inc. and such persons'
families and their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley
Group Inc. and any of its subsidiaries, 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 children under 21 years of age 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 provided that such purchases are otherwise permitted by such
institutions.
30
<PAGE> 45
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay Participating Dealers
through which purchases are made an amount up to 0.50% of the amount
invested, over a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans
which invest in multiple fund families through broker-dealer retirement
plan alliance programs that have entered into agreements with the
Distributor and which are subject to certain minimum size and operational
requirements. Trustees and other fiduciaries should refer to the Statement
of Additional Information for further detail with respect to such
programs.
(6) Beneficial owners of shares of a Participating Funds held by a retirement
plan or held in a tax-advantaged retirement account who purchase shares of
the Fund with proceeds from distributions from such a plan or retirement
account other than distributions taken to correct an excess contribution.
(7) 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.
(8) Trusts created under pension, profit sharing or other employee benefit
plans qualified under Section 401(a) of the Code, or custodial accounts
held by a bank created pursuant to Section 403(b) of the Code and
sponsored by non-profit organizations defined under Section 501(c)(3) of
the Code and assets held by an employer or trustee in connection with an
eligible deferred compensation plan under Section 457 of the Code. Such
plans will qualify for purchases at net asset value provided, for plans
initially establishing accounts with the Distributor in the Participating
Funds after February 1, 1997, that (1) the initial amount invested in the
Participating Funds is at least $500,000 or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have
received proposals from the Distributor prior to February 1, 1997 based on
net asset value purchase privileges previously in effect will be qualified
to purchase shares of the Participating Funds at net asset value for
accounts established on or before May 1, 1997. Section 403(b) and similar
accounts for which Van Kampen American Capital Trust Company served as
custodian will not be eligible for net asset value purchases based on the
aggregate investment made by the plan or the number of eligible employees,
except under certain uniform criteria established by the Distributor from
time to time. A commission will be paid on the foregoing purchases as
follows: 1.00% on sales to $2 million, plus 0.80% on the next $1 million,
plus 0.50% on the next $47 million and 0.25% on the excess over $50
million.
31
<PAGE> 46
(9) Individuals who are members of a "qualified group". For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the
Fund and other Participating Funds, (iv) has a membership that the
authorized dealer can certify as to the group's members and (v) satisfies
other uniform criteria established by the Distributor for the purpose of
realizing economics of scale in distributing such shares. A qualified
group does not include one whose sole organizational nexus, for example,
is that its participants are credit card holders of the same institution,
policy holders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups.
Shares purchased in each group's participants account in connection with
this privilege will be subject to a CDSC of 1.00% in the event of
redemption within one year of purchase, and a commission will be paid to
authorized dealers who initiate and are responsible for such sales to each
individual as follows: 1.00% on sales to $2 million, plus 0.80% on the
next $1 million and 0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
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 ACCESS, the investment adviser, trust company or bank trust
department, provided that ACCESS receives federal funds for the purchase by the
close of business on the next business day 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. Authorized brokers,
dealers or financial intermediaries will be paid a service fee as described
herein under "Distribution and Service Plans" or purchases made as described in
(3) through (9) above. The Fund may terminate, or amend the terms of, offering
shares of the Fund at net asset value to such groups at any time.
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
32
<PAGE> 47
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 CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. The amount of the CDSC 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
CDSC 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 CDSC 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 CDSC 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 CDSC 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 CDSC 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 CDSC 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> 48
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 CDSC 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 $1 million and 0.50% on the
excess over $3 million.
CLASS B SHARES. Class B Shares redeemed within six years of purchase generally
will be subject to a CDSC 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 CDSC 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 CDSC of 1.00% of the dollar amount subject
thereto. Class C Shares redeemed thereafter will not be subject to a CDSC.
CONVERSION FEATURE. Class B Shares purchased on or after June 1, 1996 and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares eight years after the end of the calendar month in which the
shares were purchased. Class B Shares purchased before June 1, 1996, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares seven years after the end of the calendar month in which the
shares were purchased. Class C Shares purchased before January 1, 1997, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares ten years after the end of the calendar month in which such
shares were purchased. Such conversion will be on the basis of the relative net
asset values per share, without the imposition of any sales load, fee or other
charge. The conversion schedule applicable to a share acquired through the
exchange privilege is determined by reference to
34
<PAGE> 49
the Participating Fund from which such share originally was purchased. The
conversion of such 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 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 Shares may be suspended if such an opinion is no longer available
and such shares might continue to be subject to the higher aggregate fees
applicable to such class of shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The CDSC 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 required minimum
distributions from an IRA or another retirement plan; (iii) pursuant to the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account; (iv) in circumstances under which no commission or
transaction fee is paid to authorized dealers at the time of purchase of shares;
and (v) effected pursuant to the right of the Fund to liquidate a shareholder's
account as described herein under "Redemption of Shares." The CDSC also is
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 180 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 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
35
<PAGE> 50
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, 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 the investor's shares of
the Fund are held by ACCESS. Except as described in this Prospectus, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder who has an account in any of the
Participating Funds will receive quarterly statements 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 Fund. Such shares are acquired at net asset value per share (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) 341-2911 ((800) 421-2833
for the hearing impaired) or
36
<PAGE> 51
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 debit a bank account on a regular
basis to invest predetermined 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) 341-2911 ((800) 421-2833 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
Participating Fund, so long as the shareholder has 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 the
same class of any Participating Fund based on the next computed net asset values
of each fund after requesting the exchange without any sales charge, subject to
certain limitations. Before effecting an exchange, shareholders seeking an
exchange in a Participating 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.
When Class B Shares and Class C Shares are exchanged among Participating
Funds, the holding period for purposes of computing the CDSC is based upon the
date of the initial purchase of such shares from a Participating Fund (the
"Original Fund"). Upon redemption from the Participating Funds' complex of
funds, Class B Shares and Class C Shares are subject to the CDSC schedule
imposed by the original fund 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.
37
<PAGE> 52
No sales charge is imposed upon the exchange of Class B Shares and Class C
Shares. The CDSC 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)
341-2911 ((800) 421-2833 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. Exchanges are effected at the net asset value per share next
calculated after the request is received in good order with adjustment for any
additional sales charge. 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 reinvest dividends from the new account
into another fund, an exchanging shareholder must file a specific written
request. The Fund reserves the right to reject any order to acquire its shares
through exchange. In addition, the Fund may modify, restrict or terminate the
exchange privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment.
A prospectus of any of these mutual funds may be obtained from any broker,
dealer or financial intermediary or the Distributor. An investor considering an
38
<PAGE> 53
exchange to one of such funds should refer to the prospectus for additional
information regarding such fund prior to investing.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. Any investor whose shares in a single account total $5,000 or
more at the offering price next computed after receipt of instructions may
establish a 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 at the time the election to
participate in the plan is made.
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 30 days' notice to its shareholders. Any gain or loss
realized by the shareholder upon the redemption of shares is a taxable event.
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 (the "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 the 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> 54
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 the 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. See the Statement of Additional Information for
further information regarding the establishment of the privilege.
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 ACH. 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.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instructions or by telephone, you may also perform certain
transactions through the Internet. Please refer to our Web Site at www.vkac.com
for further instructions. VKAC and the Fund employ procedures considered by them
to be reasonable to confirm that instructions communicated through the Internet
are genuine. Such procedures include requiring use of a personal identification
number prior to acting upon Internet instructions and providing written
confirmation of instructions communicated through the Internet. If reasonable
procedures are employed, neither VKAC nor the Fund will be liable for following
instructions through the Internet which it reasonably believes to be genuine. If
an account has multiple owners, ACCESS may rely on the instructions of any one
owner.
40
<PAGE> 55
- ------------------------------------------------------------------------------
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 120 days must accompany the redemption request.
In the case of redemption requests sent directly to ACCESS, 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) ordinarily will 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, which
may take 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
41
<PAGE> 56
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) 341-2911
((800) 421-2833 for the hearing impaired) to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Fund employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the Fund
will be liable for following instructions which it reasonably believes to be
genuine. VKAC and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if reasonable procedures are not followed. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Fund's other redemption
procedures previously described. Requests received by ACCESS prior to 4:00 p.m.,
New York time, on a regular business day will be processed at the net asset
value per share determined that day. These privileges are available for all
accounts other than retirement accounts. The telephone redemption privilege is
not available for shares represented by certificates. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check or wiring redemption proceeds until it confirms that the
purchase check has cleared, which may take 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 ordinarily will be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire ordinarily will 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.
42
<PAGE> 57
The Fund reserves the right at any time to terminate, limit or otherwise modify
this telephone redemption privilege.
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
involuntary redemption may only occur if the shareholder account is less than
the minimum investment due to shareholder redemption.
REDEMPTION UPON DEATH OR DISABILITY. The Fund will waive the CDSC on
redemptions following the death or 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
CDSC on Class B Shares and Class C Shares.
In cases of death or disability, the CDSCs on Class B Shares and Class C
Shares will be waived where the decedent or disabled person is either an
individual shareholder or owns the shares as a joint tenant with right of
survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the death or initial
determination of disability. This waiver of the CDSC 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 death or 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
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
43
<PAGE> 58
proceeds of such redemption in Class C Shares of the Fund with credit given for
any CDSC paid upon such redemption. Such reinstatement is made at the net asset
value (without sales charge except as described under "Shareholder Services --
Exchange Privilege") next determined after the order is received, which must be
within 180 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.
- ------------------------------------------------------------------------------
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, 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
44
<PAGE> 59
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 CDSC. 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, 1997, there were $8,558,992 and $125,120 of
unreimbursed distribution expenses with respect to Class B Shares and Class C
Shares, respectively, representing 3.73% and 0.32% 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 CDSCs.
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 CDSC applicable to a particular class of
shares to defray
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<PAGE> 60
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 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 ACCESS receives payments for such shares. However, shares
become entitled to dividends on the day ACCESS 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 automatically will
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,
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<PAGE> 61
without a sales charge. Unless a shareholder instructs otherwise the
reinvestment plan is automatic. This instruction may be made by telephone by
calling (800) 341-2911 ((800) 421-2833 for the hearing impaired) or in writing
to ACCESS. See "Shareholder Services -- Reinvestment Plan."
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TAX STATUS
- ------------------------------------------------------------------------------
FEDERAL INCOME TAXATION OF THE FUND. The Fund has elected and qualified and
intends to continue to qualify each year 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 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 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 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
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<PAGE> 62
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 recognize income or gain 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 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.
DISTRIBUTIONS. The Fund intends to invest in sufficient tax-exempt municipal
securities to permit payment of "exempt-interest dividends" (as defined in the
Code). Dividends paid by the Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable
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<PAGE> 63
year that qualify as exempt-interest dividends will be the same for all
shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Furthermore, per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
Exempt-interest dividends 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.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the Shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund, or by the Trust if it is required to qualify as a regulated
investment company as described below. "Substantial user" is defined under U.S.
Treasury regulations to include a non-exempt person who regularly uses in his
trade or business a part of any facilities financed with the tax-exempt
obligations and whose gross revenues derived from such facilities exceed 5% of
the total revenues derived from the facilities by all users, or who occupies
more than 5% of the useable area of the facilities or for whom the facilities or
a part thereof were specifically constructed, reconstructed or acquired.
Examples of "related persons" include certain related natural persons,
affiliated corporations, a partnership and its partners and an S corporation and
its shareholders.
While the Fund expects that a major portion of its net investment income will
constitute tax-exempt interest, a significant portion may consist of investment
company taxable income. Distributions of the Fund's net investment company
taxable income are taxable to shareholders as ordinary income to the extent of
the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains ("capital gain
dividends"), if any, are taxable to shareholders as 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). For a summary of a
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates Under the 1997 Tax Act" below. Interest on indebtedness
incurred or continued by a shareholder to purchase or carry shares of the Fund
is not deductible for federal income tax purposes if the Fund distributes
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<PAGE> 64
exempt-interest dividends during the shareholder's taxable year. Tax-exempt
shareholders not subject to federal income tax on their income generally will
not be taxed on distributions from the Fund.
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.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt-interest dividends cannot exceed, the
amount of interest exempt from tax under Section 103 of the Code received by the
Fund during the year over any amounts disallowed as deductions under Sections
265 and 171(a)(2) of the Code. Since the percentage of dividends which are
exempt-interest dividends is determined on an average annual method for the
fiscal year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax exempt during the period covered by the dividend.
Fund distributions will not qualify for the dividends received deduction for
corporations.
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 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.
The Fund is required, in certain circumstances, to withhold 31% of 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 for a summary of the tax rates
applicable to capital gain, see "Capital Gains Rates Under the 1997 Tax Act"
below. Any loss recognized upon a taxable disposition of shares held for six
months or less will be treated as a long-term capital loss to the extent of any
capital gain dividends received with respect to such shares. Any short-term
capital loss on the sale or exchange of shares held for
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<PAGE> 65
six months or less will be disallowed to the extent of any exempt-interest
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.
CAPITAL GAINS RATES UNDER THE 1997 TAX ACT. Under the Taxpayer Relief Act of
1997 (the "1997 Tax Act"), the maximum tax rate applicable to net capital gains
recognized by individuals and other non-corporate taxpayers is (i) the same as
the maximum ordinary income tax rate for capital assets held for one year or
less, (ii) 28% for capital assets held for more than one year but not more than
18 months and (iii) 20% for capital assets held for more than 18 months. The
1997 Tax Act did not affect the maximum net capital gains rate for corporations
which remains at 35%. The new tax rates for capital gains under the 1997 Tax Act
described above apply to distributions of capital dividends by regulated
investment companies such as the Fund as well as to sales and exchanges of
shares in regulated investment companies such as the Fund. With respect to
capital losses recognized on dispositions of shares held six months or less
where such losses are treated as long-term capital losses to the extent of prior
capital dividends received on such shares (see "Sales of Shares" above), it is
unclear how such capital losses offset the capital gains referred to above.
Shareholders should consult their own tax advisers as to the application of the
new capital gains rates to their particular circumstances.
STATE AND LOCAL TAXES. The exemption of interest income for federal income
tax purposes may not result in similar exemptions under the laws of a particular
state or local taxing authority. Income distributions may be taxable to
shareholders under state or local law as dividend income even though a portion
of such distributions may be derived from interest on tax-exempt obligations
which, if realized directly, would be exempt from such income taxes. It is
recommended that investors consult their tax advisers for information in this
regard. The Fund will report annually to its shareholders the percentage and
source, on a state-by-state basis, of interest income earned on municipal
securities received by the Fund during the preceding calendar year. Dividends
and distributions paid by the Fund from sources other than tax-exempt interest
are generally subject to taxation at the state and local levels.
GENERAL. The federal, state and local income tax discussion set forth above
is for general information only. Prospective investors should consult their own
tax advisers regarding the specific federal tax consequences of purchasing,
holding and disposing of shares, as well as the effects of state, local and
foreign tax law and any proposed tax law changes.
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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 one year, five year and ten year periods. 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.
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.
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.
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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 or 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 Semi-Annual Report and the Fund's Statement of Additional
Information, each of which can be obtained without charge by calling (800) 421-
5666 ((800) 421-2833 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.
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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 "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 certain 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 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.
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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 S&P 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, B, CCC, Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded,
CC, C on balance, as significantly speculative with respect to
capacity to pay interest and repay principal. 'BB'
indicates the least degree of speculation and 'C' the
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 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' is more vulnerable to default than debt
rated 'BB' 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' is currently vulnerable 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 Debt rated 'CC' is currently highly vulnerable to
nonpayment. The rating 'CC' also is used for debt
subordinated to senior debt that is assigned an actual
or implied 'CCC' rating.
C The 'C' rating may be used to cover a situation where a
bankruptcy petition has been filed, but debt service
payments are continued. The 'C' rating typically is
applied to debt subordinated to senior debt which is
assigned an actual or implied 'CCC-' debt rating.
</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 or the taking of similar
action 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, how-
ever, 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>
57
<PAGE> 72
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.
58
<PAGE> 73
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>
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+').
59
<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>
60
<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.
(P) (..) When applied to forward delivery bonds, indicates that
the rating is provisional pending the delivery of the
bonds. The rating may be revised prior to delivery if
changes occur in the legal documents or the underlying
credit quality of the bonds.
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.
61
<PAGE> 76
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.
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 promissory obligations not having an original maturity
in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933,
nor does it represent that any specific note is a valid obligation of a
rated issuer or issued in conformity with any applicable law.
62
<PAGE> 77
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 (for related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earning coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
63
<PAGE> 78
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 341-2911.
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) 421-2833.
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 847-2424.
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 West 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 (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
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 30, 1998
- ------ ------ 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 and 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
(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, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUNDS INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
Statements of Additional Information, each dated April 30, 1998, 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) 421-2833. The Statements of
Additional Information have been filed with the Securities and Exchange
Commission ("SEC") and are available along with other materials related to each
Fund at the SEC's internet web site (http://www.sec.gov).
------------------
VAN KAMPEN AMERICAN CAPITAL(SM)
------------------
THIS PROSPECTUS IS DATED APRIL 30, 1998.
<PAGE> 81
(Continued from previous page.)
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. 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. (the "Adviser") 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................................ 26
Alternative Sales Arrangements.............................. 27
Purchase of Shares.......................................... 29
Shareholder Services........................................ 40
Redemption of Shares........................................ 44
Distribution and Service Plans.............................. 48
Distributions from the Funds................................ 50
Tax Status.................................................. 51
Fund Performance............................................ 56
Additional Information...................................... 58
</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 offers 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, 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 contingent deferred sales charge ("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 after purchase. 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 each Fund automatically convert to Class A Shares of the
respective Fund eight years after the end of the calendar month in which the
investor's order to purchase was accepted.
Class C Shares. Class C Shares do not incur a sales charge when they are
purchased. Class C Shares are subject to a CDSC equal to 1.00% of the lesser of
the then current net asset value or the original purchase price on Class C
Shares redeemed during the first year after purchase. Class C Shares are subject
to ongoing distribution and service fees at an aggregate annual rate of up to
1.00% of the respective Fund's average daily net assets attributable to the
Class C Shares.
REDEMPTION. Class A Shares generally 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. (the
"Adviser") is the investment adviser for each Fund.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the "Distributor")
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 foregoing 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 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 CDSC 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 Share Purchases 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 by the Distributor on behalf of the investor. See "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).......................... 0.50% 0.50% 0.50%
12b-1 Fees(1) (as a percentage of average
daily net assets).......................... 0.23%(2) 1.00%(3) 1.00%(3)
Other Expenses (as a percentage of average
daily net assets).......................... 0.19% 0.19% 0.19%
Total Expenses (as a percentage of average
daily net assets).......................... 0.92% 1.69% 1.69%
</TABLE>
- ------------------------------------------------------------------------------
(1) 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.
(2) 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 "Distribution
and Service Plans."
(3) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted as a fund-level expense by the
rules of the National Association of Securities Dealers, Inc.
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, 1.69%
for Class B Shares and 1.69% 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 88 107 179*
Class C Shares.................... 27 53 92 200
</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 53 92 179*
Class C Shares.................... 17 53 92 200
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A Shares after eight years.
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 and is
included to provide a means for the investor to compare expense levels of funds
with different fee structures over varying investment periods. To facilitate
such comparison, all funds are required by the SEC to utilize a 5.00% annual
return assumption. 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 the 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 contingent 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 "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 Year
1--3.00% 1--1.00%
Year After--None
2--2.50%
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 Share Purchases
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 "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 (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)......................... 0.24% 1.00%(2) 1.00%(2)
Other Expenses (as a percentage of average
daily net assets)......................... 0.24% 0.24% 0.23%
Total Expenses (as a percentage of average
daily net assets)......................... 0.96% 1.72% 1.71%
</TABLE>
- ------------------------------------------------------------------------------
(1) 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.
(2) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted as a fund-level expense by the
rules of the National Association of Securities Dealers, Inc.
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 0.96% for Class A
Shares, 1.72% for Class B Shares and 1.71% for Class C Shares, (ii) a 5.00%
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.................... $42 $62 $84 $146
Class B Shares.................... 47 74 93 164*
Class C Shares.................... 17 54 93 202
</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.................... $42 $62 $84 $146
Class B Shares.................... 17 54 93 164*
Class C Shares.................... 27 54 93 202
</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 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 and is included to provide a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required by the SEC to utilize a
5.00% annual return assumption. 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 contingent
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 "Distribution and Service Plans."
12
<PAGE> 92
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- INSURED FUND (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 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 report thereon appears in the 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 Statement of Additional Information.
<TABLE>
<CAPTION>
INSURED FUND -- CLASS A SHARES
-----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................ $ 19.238 $ 19.549 $ 17.572 $19.587 $18.721 $18.478 $17.825 $17.798 $17.394 $16.700
-------- --------- -------- ------- ------- ------- ------- ------- ------- -------
Net Investment Income.... .974 .980 1.021 1.051 1.107 1.146 1.153 1.160 1.182 1.184
Net Realized and
Unrealized Gain/Loss... .551 (.304) 1.982 (2.280) 1.145 .561 .681 .037 .391 .682
-------- --------- -------- ------- ------- ------- ------- ------- ------- -------
Total from Investment
Operations............... 1.525 .676 3.003 (1.229) 2.252 1.707 1.834 1.197 1.573 1.866
-------- --------- -------- ------- ------- ------- ------- ------- ------- -------
Less:
Distributions from and in
Excess of Net
Investment Income...... .971 .987 1.026 1.056 1.116 1.140 1.160 1.170 1.169 1.172
Distributions from Net
Realized Gain.......... .161 -0- -0- -0- -0- .324 .021 -0- -0- -0-
-------- --------- -------- ------- ------- ------- ------- ------- ------- -------
Total Distributions....... 1.132 .987 1.026 1.056 1.116 1.464 1.181 1.170 1.169 1.172
-------- --------- -------- ------- ------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period............... $ 19.631 $ 19.238 $ 19.549 $17.572 $19.857 $18.721 $18.478 $17.825 $17.798 $17.394
======== ========= ======== ======= ======= ======= ======= ======= ======= =======
Total Return(1)........... 8.19% 3.65% 17.49% (6.31%) 12.32% 9.51% 10.62% 7.07% 9.37% 11.48%
Net Assets, End of the
Period (in millions)..... $1,283.5 $1,283.70 $1,365.4 $1,110.2 $1,230.0 $ 999.9 $ 833.2 $ 701.7 $ 634.0 $ 555.3
Ratio of Expenses to
Average Net Assets(2).... .92% .95% .88% .88% .84% .83% .88% .87% .88% .85%
Ratio of Net Investment
Income to Average Net
Assets(2)................ 5.07% 5.11% 5.44% 5.70% 5.69% 6.14% 6.39% 6.63% 6.73% 6.92%
Portfolio Turnover........ 82% 92% 70% 48% 78% 111% 113% 107% 81% 132%
</TABLE>
(1) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(2) For the years ended December 31, 1996 and 1995, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to the
Adviser's reimbursement of certain expenses was less than 0.01%.
(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 DISTRIBUTION)
TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993
------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................ $19.240 $19.549 $17.563 $19.824 $19.320
------- ------- ------- ------- -------
Net Investment Income............. .826 .832 .890 .899 .619
Net Realized and Unrealized
Gain/Loss....................... .551 (.304) 1.978 (2.276) .513
------- ------- ------- ------- -------
Total from Investment Operations... 1.377 .528 2.868 (1.377) 1.132
Less:
Distributions from and in Excess
of Net Investment Income........ .822 .837 .882 .884 .628
Distributions from Net Realized
Gain............................ .161 -0- -0- -0- -0-
------- ------- ------- ------- -------
Total Distributions................ .983 .837 .882 .884 .628
------- ------- ------- ------- -------
Net Asset Value, End of the
Period............................ $19.634 $19.240 $19.549 $17.563 $19.824
======= ======= ======= ======= =======
Total Return(1).................... 7.36% 2.83% 16.67% (7.03%) 5.92%(2)
Net Assets at End of Period (In
millions)(3)...................... $ 70.1 $ 71.6 $ 75.3 $ 30.0 $ 20.8
Ratio of Expenses to Average Net
Assets(3)......................... 1.69% 1.74% 1.67% 1.71% 1.68%
Ratio of Net Investment Income to
Average Net Assets................ 4.29% 4.38% 4.69% 4.88% 4.25%
Portfolio Turnover................. 82% 92% 70% 48% 78%
<CAPTION>
INSURED FUND
--------------------------------------------------------
CLASS C SHARES
--------------------------------------------------------
AUGUST 13, 1993
(COMMENCEMENT
OF DISTRIBUTION)
TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993
------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................ $19.239 $19.548 $17.568 $19.823 $19.650
------- ------- ------- ------- -------
Net Investment Income............. .822 .830 .883 .908 .350
Net Realized and Unrealized
Gain/Loss....................... .552 (.302) 1.979 (2.279) .181
------- ------- ------- ------- -------
Total from Investment Operations... 1.374 .528 2.862 (1.371) .531
Less:
Distributions from and in Excess
of Net Investment Income........ .822 .837 .882 .884 .358
Distributions from Net Realized
Gain............................ .161 -0- -0- -0- -0-
------- ------- ------- ------- -------
Total Distributions................ .983 .837 .882 .884 .358
------- ------- ------- ------- -------
Net Asset Value, End of the
Period............................ $19.630 $19.239 $19.548 $17.568 $19.823
======= ======= ======= ======= =======
Total Return(1).................... 7.36% 2.83% 16.60% (6.98%) 2.70%(2)
Net Assets at End of Period (In
millions)(3)...................... $ 5.6 $ 4.9 $ 5.1 $ 3.5 $ 5.0
Ratio of Expenses to Average Net
Assets(3)......................... 1.69% 1.74% 1.67% 1.70% 1.68%
Ratio of Net Investment Income to
Average Net Assets................ 4.29% 4.37% 4.68% 4.89% 4.21%
Portfolio Turnover................. 82% 92% 70% 48% 78%
</TABLE>
- ---------------
(1) Total Return does not reflect the effect of sales charges.
(2) Non-Annualized.
(3) For the years ended December 31, 1996 and 1995, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to the
Adviser's reimbursement of certain expenses was less than 0.01%.
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 accountants, for each of the periods indicated and
their report thereon appears in the 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
Statement of Additional Information.
<TABLE>
<CAPTION>
CALIFORNIA INSURED FUND -- CLASS A SHARES
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................... $17.605 $17.736 $15.802 $18.286 $16.858 $16.259
------- ------- ------- ------- ------- -------
Net Investment Income............ .880 .857 .884 .912 .967 1.004
Net Realized and Unrealized
Gain/Loss...................... .658 (.145) 1.938 (2.484) 1.441 .585
------- ------- ------- ------- ------- -------
Total from Investment
Operations....................... 1.538 .712 2.822 (1.572) 2.408 1.589
Less Distributions from Investment
Income........................... .849 .843 .888 .912 .980 .990
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period........................... $18.294 $17.605 $17.736 $15.802 $18.286 $16.858
======= ======= ======= ======= ======= =======
Total Return(1)(2)................ 8.93% 4.20% 18.28% (8.75%) 14.54% 10.08%
Net Assets at End of Period (in
millions)........................ $ 140.7 $ 142.5 $ 147.6 $ 130.3 $ 151.1 $ 74.2
Ratio of Expenses to Average Net
Assets(1) (Annualized)........... .96% 1.02% .89% .78% .69% .69%
Ratio of Net Investment Income to
Average Net Assets(1)
(Annualized)..................... 4.96% 4.94% 5.23% 5.46% 5.37% 6.07%
Portfolio Turnover................ 46% 35% 42.40% 56.38% 36.17% 60.70%
<CAPTION>
CALIFORNIA INSURED FUND -- CLASS A SHARES
----------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
1991 1990 1989 1988
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................... $15.730 $15.607 $15.227 $14.719
------- ------- ------- -------
Net Investment Income............ .990 .990 .988 .981
Net Realized and Unrealized
Gain/Loss...................... .529 .123 .381 .519
------- ------- ------- -------
Total from Investment
Operations....................... 1.519 1.113 1.369 1.500
Less Distributions from Investment
Income........................... .990 .990 .989 .992
------- ------- ------- -------
Net Asset Value, End of the
Period........................... $16.259 $15.730 $15.607 $15.227
======= ======= ======= =======
Total Return(1)(2)................ 9.98% 7.44% 9.22% 10.51%
Net Assets at End of Period (in
millions)........................ $ 60.2 $ 50.6 $ 46.6 $ 37.3
Ratio of Expenses to Average Net
Assets(1) (Annualized)........... .55% .69% .75% .65%
Ratio of Net Investment Income to
Average Net Assets(1)
(Annualized)..................... 6.20% 6.42% 6.38% 6.53%
Portfolio Turnover................ 69.85% 34.03% 32.18% 100.50%
</TABLE>
- ----------------
(1) If certain expenses had not been reimbursed 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......... N/A 1.03% 1.05% 1.08% 1.01% 1.08%
Ratio of net investment income to average net
assets......................................... N/A 4.94% 5.07% 5.16% 5.05% 5.68%
<CAPTION>
<S> <C> <C> <C> <C>
Ratio of expenses to average net assets......... 1.04% 1.06% 1.10% 1.11%
Ratio of net investment income to average net
assets......................................... 5.71% 6.05% 6.04% 6.08%
</TABLE>
(2) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
N/A = not applicable
(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 CLASS C SHARES
-------------------------------------------------------- ---------------------------
MAY 1, 1993
(COMMENCEMENT
YEAR ENDED OF DISTRIBUTION) YEAR ENDED
DECEMBER 31, TO DECEMBER 31,
----------------- DECEMBER 31, ---------------------------
1997 1996 1995 1994 1993 1997 1996 1995
---- ---- ---- ---- ---------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................ $17.603 $17.736 $15.805 $18.266 $17.570 $17.602 $17.736 $15.798
------- ------- ------- ------- ------- ------- ------- -------
Net Investment Income............. .741 .720 .766 .785 .549 .727 .722 .758
Net Realized and Unrealized
Gain/Loss....................... .662 (.142) 1.926 (2.482) .705 .674 (.145) 1.941
------- ------- ------- ------- ------- ------- ------- -------
Total from Investment Operations... 1.403 .578 2.692 (1.697) 1.254 1.401 .577 2.699
Less Distributions from Net
Investment Income................. .717 .711 .761 .764 .558 .717 .711 .761
------- ------- ------- ------- ------- ------- ------- -------
Net Asset Value, End of Period..... $18.289 $17.603 $17.736 $15.805 $18.266 $18.286 $17.602 $17.736
======= ======= ======= ======= ======= ======= ======= =======
Total Return(1)(2)................. 8.19% 3.35% 17.33% (9.39%) 7.25%(3) 8.19% 3.35% 17.40%
Net Assets at End of Period (in
millions)......................... $ 31.0 $ 28.6 $ 24.6 $ 17.1 $ 15.3 $ 3.8 $ 2.2 $ 1.80
Ratio of Expenses to Average Net
Assets(1)(Annualized)............. 1.72% 1.79% 1.61% 1.52% 1.45% 1.71% 1.79% 1.60%
Ratio of Net Investment Income to
Average Net Assets(1)
(Annualized)...................... 4.18% 4.17% 4.51% 4.71% 4.06% 4.15% 4.16% 4.50%
Portfolio Turnover................. 46% 35% 42.40% 56.38% 36.17% 46% 35% 42.40%
<CAPTION>
CALIFORNIA INSURED FUND
--------------------------
CLASS C SHARES
--------------------------
AUGUST 13, 1993
(COMMENCEMENT
OF DISTRIBUTION)
TO
DECEMBER 31,
1994 1993
---- ----------------
<S> <C> <C>
Net Asset Value, Beginning of
Period............................ $18.257 $18.010
------- -------
Net Investment Income............. .773 .307
Net Realized and Unrealized
Gain/Loss....................... (2.486) .258
------- -------
Total from Investment Operations... (1.695) .565
Less Distributions from Net
Investment Income................. .764 .318
------- -------
Net Asset Value, End of Period..... $15.798 $18.257
======= =======
Total Return(1)(2)................. (9.40%) 3.17%(3)
Net Assets at End of Period (in
millions)......................... $ 2.8 $ 4.0
Ratio of Expenses to Average Net
Assets(1)(Annualized)............. 1.51% 1.45%
Ratio of Net Investment Income to
Average Net Assets(1)
(Annualized)...................... 4.71% 3.82%
Portfolio Turnover................. 56.38% 36.17%
</TABLE>
- ----------------
(1) If certain expenses had not been reimbursed by the 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............. N/A 1.79% 1.77% 1.82%
Ratio of net investment income to average net
assets............................................. N/A 4.16% 4.35% 4.41%
<CAPTION>
<S> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets............. 1.77% N/A 1.80% 1.75% 1.82%
Ratio of net investment income to average net
assets............................................. 3.74% N/A 4.16% 4.34% 4.39%
<CAPTION>
<S> <C>
Ratio of expenses to average net assets............. 1.76%
Ratio of net investment income to average net
assets............................................. 3.52%
</TABLE>
(2) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(3) Non-Annualized
N/A = not applicable
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." 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 Insured Fund and
California Insured Fund (each a "Fund" and collectively the "Funds"). The
Adviser or 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 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,
17
<PAGE> 97
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 California Insured Fund will achieve its
objective. THE CALIFORNIA INSURED FUND IS AVAILABLE ONLY TO RESIDENTS OF
CALIFORNIA.
The California Insured Fund will generally invest all of its assets in
California municipal securities, the interest on which, in the opinion of bond
counsel or other counsel to the issuer of such securities, is exempt from
federal and California income tax. Distribution to corporations subject to the
California franchise tax will be included in such corporation's gross income for
purposes of determining the California franchise tax. In addition, 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.
Like other mutual funds, financial and business organizations and individuals
around the world, each Fund could be adversely affected if the computer systems
used by the Funds' Adviser and other service providers do not properly process
and calculate date-related information and data from and after January 1, 2000.
This is commonly known as the "Year 2000 Problem". The Adviser is taking steps
that it believes are reasonably designed to address the Year 2000 Problem with
respect to computer systems that it uses and to obtain reasonable assurances
that comparable steps are being taken by the Funds' other major service
providers. At this time, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Funds. In addition, the Year 2000
Problem may adversely affect the issuers of securities in which the Funds may
invest which, in turn, may adversely affect net asset values.
- ------------------------------------------------------------------------------
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 condi-
18
<PAGE> 98
tions, up to 100% but not less than 80%, of each of the Fund's assets will be
invested in such municipal securities. The foregoing is a fundamental policy of
each of the Funds and cannot be changed without approval of the shareholders of
the respective Fund.
The two principal classifications of municipal securities are "general
obligation" and "revenue" securities. "General obligation" securities are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. "Revenue" securities are usually payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source. Industrial development bonds are usually revenue securities, the
credit quality of which is normally directly related to the credit standing of
the industrial user involved.
Within these principal classifications of municipal securities there are a
variety of categories of municipal securities, including fixed and variable rate
securities, municipal bonds, municipal notes, municipal leases, custodial
receipts, participation certificates and derivative municipal securities the
terms of which include elements of, or are similar in effect to, certain
Strategic Transactions (as defined below) in which the Funds may engage.
Variable rate securities bear rates of interest that are adjusted periodically
according to formulae intended to reflect market rates of interest and include
securities whose rates vary inversely with changes in market rates of interest.
Neither Fund will invest more than 15% of its total assets in derivative
municipal securities such as inverse floaters, whose rates vary inversely with
changes in market rates of interest, or range floaters or capped floaters whose
rates are subject to periodic or lifetime caps. Such securities may also pay a
rate of interest determined by applying a multiple to the variable rate. The
extent of increases and decreases in the value of securities whose rates vary
inversely with market rates of interest generally will be larger than comparable
changes in the value of an equal principal amount of a fixed rate municipal
security having similar credit quality, redemption provisions and maturity.
Municipal notes include tax, revenue and bond anticipation notes of short
maturity, generally less than three years, which are 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
19
<PAGE> 99
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 securities. If any such proposal were to be enacted, the ability of
the Funds to pay tax exempt interest dividends might be adversely affected and
the Fund would re-evaluate its investment objective and policies and consider
changes in its structure.
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 and
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
20
<PAGE> 100
Fund, through popular initiative and legislative activity, the ability of the
State of California (the "State") and its local governments to raise money
through property taxes and to increase spending has been the subject of
considerable debate and change in recent years. Various State Constitutional
amendments, for example, have been adopted which have the effect of limiting
property tax and spending increases, while legislation has sometimes added to
these limitations and has at other times sought to reduce their impact. To date,
these Constitutional, legislative and budget developments do not appear to have
severely decreased the ability of the State and local governments to pay
principal and interest on their obligations. It can be expected that similar
types of State legislation or Constitutional proposals will continue to be
introduced. The impact of future developments in these areas is unclear.
From 1990 until 1994, the State experienced the worst economic, fiscal and
budget conditions since the 1930's. The recession seriously affected State tax
revenues and caused increased expenditures for health and welfare programs. As a
result, the State faced several budget imbalances and used up many of its
available cash resources. Accordingly, rating agencies have reduced the State's
credit ratings several times during recent years.
Although revenue obligations of the State of California or its political
subdivisions may be payable from a specific project or source, including lease
rentals, there can be no assurance that future economic difficulties and the
resulting impact on State and local government finances will not adversely
affect the market value of the portfolio of the Fund or the ability of the
respective obligors to make timely payments of principal and interest on such
obligations.
More detailed information concerning California municipal securities is
included in the California Insured Fund's Statement of Additional Information.
SELECTION OF INVESTMENTS. The Adviser will buy and sell securities for each
Fund's portfolio with a view to seeking a high level of current income exempt
from federal income tax and will select securities which the Adviser believes
entail reasonable credit risk considered in relation to the particular
investment policies of such Fund. As a result, the Funds will not necessarily
invest in the highest yielding tax-exempt municipal securities permitted by
their respective investment policies if the Adviser determines that market risks
or credit risks associated with such investments would subject a Fund's
portfolio to excessive risk. The potential for realization of capital gains
resulting from possible changes in interest rates will not be a major
consideration. There is no limitation as to the maturity of municipal securities
in which a Fund may invest. The Adviser may adjust the average 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
21
<PAGE> 101
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."
TEMPORARY DEFENSIVE STRATEGIES. At times conditions in the markets for tax-
exempt municipal securities may, in the Adviser's judgment, make pursuing a
Fund's basic investment strategy inconsistent with the best interests of its
shareholders. At such times, the Adviser may use alternative strategies
primarily designed to reduce fluctuations in the value of such Fund's assets. In
implementing these "defensive" strategies, a Fund may invest to a substantial
degree in high-quality, short-term municipal obligations. If these high-quality,
short-term municipal obligations are not available or, in the Adviser's
judgment, do not afford sufficient protection against adverse market conditions,
such Fund may invest in taxable obligations. Such taxable obligations may
include: obligations of the U.S. Government, its agencies or instrumentalities;
other debt securities rated within the four highest grades by either S&P or
Moody's; commercial paper rated in the highest grade by either rating service;
certificates of deposit and bankers' acceptances; repurchase agreements with
respect to any of the foregoing investments; or any other fixed-income
securities that the Adviser considers consistent with such strategy.
- ------------------------------------------------------------------------------
INVESTMENT PRACTICES
- ------------------------------------------------------------------------------
In connection with the investment policies described above, the Funds also may
engage in strategic transactions and purchase and sell securities on a "when
issued" and "delayed delivery" basis. These investments entail risks. Strategic
transactions generally will not be treated as investments in tax-exempt
municipal securities for purposes of the Funds' 80% investment policy with
respect thereto.
STRATEGIC TRANSACTIONS. The 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
22
<PAGE> 102
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 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
23
<PAGE> 103
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 liquid 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, it 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.
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
24
<PAGE> 104
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.
- ------------------------------------------------------------------------------
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 (e.g. AMBAC
Indemnity Corporation). 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 a municipal bond insurer 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.
25
<PAGE> 105
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 is included in
the respective Fund's Statement of Additional Information.
- ------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Funds. The Adviser is a
wholly-owned subsidiary of Van Kampen American Capital, Inc. ("Van Kampen
American Capital"). Van Kampen American Capital is a diversified asset
management company with more than two million retail investor accounts,
extensive capabilities for managing institutional portfolios, and more than $60
billion under management or supervision. Van Kampen American Capital's more than
50 open-end and 38 closed-end funds and more than 2,500 unit investment trusts
are professionally distributed by leading financial advisers nationwide. Van
Kampen American Capital Distributors, Inc.(the "Distributor"), 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 an
indirect wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The
Adviser's principal office is located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc. an investment
adviser, Morgan Stanley & Co. Incorporated, a registered broker-dealer and
investment adviser, and Morgan Stanley International, are engaged in a wide
range of financial services. Their principal businesses include securities
underwriting, distribution and trading; merger, acquisition, restructuring and
other corporate finance advisory activities; merchant banking; stock brokerage
and research services; credit services; asset management; trading of futures,
options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financial and
investing; and global custody, securities clearance services and securities
lending.
ADVISORY AGREEMENT. The business and affairs of each of the Funds are 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 supervise and implement the Funds' investment activities
and are responsible for overall management of the Funds' business affairs. Each
Fund pays
26
<PAGE> 106
the Adviser a fee based upon an annual rate applied to 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 1940 Act of the Adviser, Distributor,
ACCESS Investor Services, Inc. ("ACCESS"), Van Kampen American Capital or Morgan
Stanley Dean Witter & Co.), the charges and expenses of independent accountants,
legal counsel, transfer agent 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.
PERSONAL INVESTMENT 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 directors, trustees, officers
and employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to preclearance and other procedures designed to prevent conflicts of
interest.
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.
- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------
The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares, whether the investor wishes to receive dividends in cash or to reinvest
them in additional shares of the Funds, and other circumstances. Investors
should consider such factors together with the amount of sales charges and
accumulated distribution
27
<PAGE> 107
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 because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares or Class C Shares. It is presently the policy of the Distributor 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, 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
28
<PAGE> 108
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) ACCESS' 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 respective Fund's qualification
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code").
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
Shares of the Funds are continuously offered through 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
29
<PAGE> 109
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. 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 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. In some
instances additional compensation or promotional incentives may be offered to
brokers, dealers or financial intermediaries that have sold or may sell
significant amounts of shares during specified periods of time. 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. 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. 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 their net asset value plus an
initial sales charge. 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
30
<PAGE> 110
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 for purposes of the Securities Act of 1933, as amended.
SALES CHARGE TABLES
- ------------------------------------------------------------------------------
INSURED FUND
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
TOTAL SALES CHARGE COMMISSION
------------------------- -----------
PERCENTAGE PERCENTAGE PERCENTAGE
SIZE OF TRANSACTION OF OFFERING OF NET OF 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
TOTAL SALES CHARGE COMMISSION
------------------------- -----------
PERCENTAGE PERCENTAGE PERCENTAGE
SIZE OF TRANSACTION OF OFFERING OF NET OF 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 CDSC 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 $1 million and 0.50% on the
excess over $3 million. See "Purchase of Shares -- Deferred Sales Charge
Alternatives" for additional information with respect to CDSCs.
31
<PAGE> 111
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 authorized dealers, must notify the respective Fund at the
time of the purchase order whenever a quantity discount is applicable to
purchases. Upon such notification, an investor will receive the lowest
applicable sales charge. Quantity discounts may be modified or terminated at any
time. For more information about quantity discounts, investors should contact
their broker, dealer or financial intermediary or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or
her spouse and minor children under 21 years of age 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 trust or 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 certain open-end investment
companies advised by the Adviser or Van Kampen American Capital Asset
Management, Inc. and distributed by the Distributor as determined from time to
time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the preceding sales charge
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 any combination of shares of the
Fund and shares of other Participating Funds, although other Participating Funds
may have different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
sales charge 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 sales
charge tables. The size of investment shown in the preceding sales charge 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
32
<PAGE> 112
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 sales charge applicable to the purchases made and the sales 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 investment 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 ACCESS with appropriate
backup data for each participating investor in a computerized format fully
compatible with ACCESS' 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
33
<PAGE> 113
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NAV PURCHASE OPTIONS. Class A Shares of 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 or directors of funds advised by the Adviser
or Asset Management, Inc. and such persons' families and their beneficial
accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley
Group Inc. and any of its subsidiaries, 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, when permitted, registered
representatives of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21
years of age 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, provided that such
purchases are otherwise permitted by such institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay Participating Dealers
through which purchases are made an amount up to 0.50% of the amount
invested, over a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans
which invest in multiple fund families through broker-dealer retirement
plan alliance programs that have entered into agreements with the
Distributor and which are subject to certain minimum size and operational
requirements. Trustees and other fiduciaries should refer to the Statement
of Additional Information for further detail with respect to such alliance
programs.
(6) Beneficial owners of shares of a Participating Fund held by a retirement
plan or held in a tax-advantaged retirement account who purchase shares of
the Fund with proceeds from distributions from such a plan or retirement
account other than distributions taken to correct an excess contribution.
(7) 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.
(8) Trusts created under pension, profit sharing or other employee benefit
plans qualified under Section 401(a) of the Code, or custodial accounts
held by a bank created pursuant to Section 403(b) of the Code and
sponsored by non-
34
<PAGE> 114
profit organizations defined under Section 501(c)(3) of the Code and
assets held by an employer or trustee in connection with an eligible
deferred compensation plan under Section 457 of the Code. Such plans will
qualify for purchases at net asset value provided, for plans initially
establishing accounts with the Distributor in the Participating Funds
after February 1, 1997, that (1) the initial amount invested in the
Participating Funds is at least $500,000 or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have
received proposals from the Distributor prior to February 1, 1997 based on
net asset value purchase privileges previously in effect will be qualified
to purchase shares of the Participating Funds at net asset value for
accounts established on or before May 1, 1997. Section 403(b) and similar
accounts for which Van Kampen American Capital Trust Company served as
custodian will not be eligible for net asset value purchases based on the
aggregate investment made by the plan or the number of eligible employees,
except under certain uniform criteria established by the Distributor from
time to time. A commission will be paid on the foregoing purchases as
follows: 1.00% on sales to $2 million, plus 0.80% on the next $1 million,
plus 0.50% on the next $47 million and 0.25% on the excess over $50
million.
(9) Individuals who are members of a "qualified group". For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the
Fund and other Participating Funds, (iv) has a membership that the
authorized dealer can certify as to the group's members and (v) satisfies
other uniform criteria established by the Distributor for the purpose of
realizing economics of scale in distributing such shares. A qualified
group does not include one whose sole organizational nexus, for example,
is that its participants are credit card holders of the same institution,
policy holders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups.
Shares purchased in each group's participants account in connection with
this privilege will be subject to a CDSC of 1.00% in the event of
redemption within one year of purchase, and a commission will be paid to
authorized dealers who initiate and are responsible for such sales to each
individual as follows: 1.00% on sales to $2 million, plus 0.80% on the
next $1 million and 0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
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 ACCESS, the investment adviser, trust company or bank trust
department,
35
<PAGE> 115
provided that ACCESS 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. Authorized brokers,
dealers or financial intermediaries will be paid a service fee of described
herein under "Distribution and Service Plans" on purchases made as described in
(3) through (9) above. 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 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 $1 million and
0.50% on the excess over $3 million; (ii) 4.00% with respect to Class B Shares
of the Insured Fund; (iii) 3.00% with respect to Class B Shares of the
California Insured Fund; and (iv) 1.00% with respect to Class C Shares of each
Fund. Such compensation will not change the price an investor will pay for CDSC
Shares or the amount that the respective Fund will receive from such sale.
CDSC Shares redeemed within a specified period of time generally will be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. The amount of the CDSC 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
CDSC 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 CDSC 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
36
<PAGE> 116
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 CDSC 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 CDSC 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 CDSC 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 CDSC is
applicable to such CDSC Shares. The charge will not be applied to dollar amounts
representing an increase in the net asset value per share since the time of
purchase.
To provide an example, assume an investor purchased 100 Class B Shares of the
Insured Fund (as set forth below) at $10 per share (at a cost of $1,000) and in
the second year after purchase, the net asset value per share is $12 and, during
such time, the investor has acquired 10 additional Class B Shares upon dividend
reinvestment. If at such time the investor makes his first redemption of 50
shares (proceeds of $600), 10 shares will not be subject to charge because of
dividend reinvestment. With respect to the remaining 40 shares, the charge is
applied only to the original cost of $10 per share and not to the increase in
net asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds
will be charged at a rate of 3.75% (the applicable rate in the second year after
purchase).
CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments in Class A Shares of $1 million or more,
although for such investments the respective Fund may impose a CDSC 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 $1 million and
0.50% on the excess over $3 million.
37
<PAGE> 117
CLASS B SHARES. Class B Shares redeemed within the number of years of purchase
set forth below generally will be subject to a CDSC at the rates set forth
below, charged as a percentage of the dollar amount subject thereto:
- ------------------------------------------------------------------------------
INSURED FUND
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- ------------------- -------------------
<S> <C> <C>
First................................ 4.00%
Second............................... 3.75%
Third................................ 3.50%
Fourth............................... 2.50%
Fifth................................ 1.50%
Sixth................................ 1.00%
Seventh and after.................... 0.00%
</TABLE>
- ------------------------------------------------------------------------------
CALIFORNIA INSURED FUND
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- ------------------- -------------------
<S> <C> <C>
First................................ 3.0%
Second............................... 2.5%
Third................................ 2.0%
Fourth............................... 1.0%
Fifth and after...................... 0.0%
</TABLE>
The CDSC 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 CDSC of 1.00% of the dollar
amount subject thereto. Class C Shares redeemed thereafter will not be subject
to a CDSC.
CONVERSION FEATURE. Class B Shares of each Fund purchased on or after June 1,
1996 and any dividend reinvestment plan shares received thereon, automatically
convert to Class A Shares eight years after the end of the calendar month in
which the shares were purchased. Class B Shares of the Insured Fund purchased
before June 1, 1996, and any dividend reinvestment shares received thereon,
automatically convert to Class A Shares seven years after the end of the
calendar month in which
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the shares were purchased. Class B Shares of the California Insured Fund
purchased before June 1, 1996, and any dividend reinvestment plan shares
received thereon, automatically convert to Class A Shares six years after the
end of the calendar month in which the shares were purchased. Class C Shares of
each Fund purchased before January 1, 1997, and any dividend reinvestment plan
shares received thereon, automatically convert to Class A Shares ten years after
the end of the calendar month in which such shares were purchased. Such
conversion will be on the basis of the relative net asset values per share,
without the imposition of any sales load, fee or other charge. The conversion
schedule applicable to a share acquired through the exchange privilege is
determined by reference to the Participating Fund from which such share
originally was purchased. The conversion of such 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 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 Internal Revenue
Code of 1986, as amended (the "Code"), and (ii) that the conversion of such
shares does not constitute a taxable event under federal income tax law. The
conversion may be suspended if such an opinion is no longer available and such
shares might continue to be subject to the higher aggregate Fees applicable to
such class of shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The CDSC 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 required minimum
distributions from an IRA or another retirement plan; (iii) pursuant to the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account; (iv) in circumstances under which no commission or
transaction fee is paid to authorized dealers at the time of purchase of such
shares; and (v) effected pursuant to the right of the Fund to liquidate a
shareholder's account as described herein under "Redemption of Shares." The CDSC
also is waived on redemptions of Class C Shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 180 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, and 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
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value and to adjust the public offering price based thereon more frequently than
once a day if deemed desirable.
Fixed income securities are valued by using market quotations, prices provided
by market makers or estimates of market values obtained from yield data relating
to instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Trustees of the Trust, of which each
Fund is a separate series. Short-term securities with remaining maturities of
less than 60 days are valued at amortized cost when amortized cost is determined
in good faith by or under the direction of the Board of Trustees of the Trust to
be representative of the fair value at which it is expected such securities may
be resold. Other assets are valued at fair value as determined in good faith by
or under direction of the Trustees. The net asset values per share of the
different classes of shares are expected to be substantially the same; from time
to time, however, the per share net asset value of the different classes of
shares may differ.
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SHAREHOLDER SERVICES
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Each of the Funds offers a number of shareholder services designed to
facilitate investment in its shares at little or no extra cost to the investor.
Below is a description of such services. Unless otherwise described below, each
of these services may be modified or terminated by the respective Fund at any
time.
INVESTMENT ACCOUNT. 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 the investor's shares of
the Fund are held by ACCESS. Except as described in this Prospectus, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder who has an account in any of the
Participating Funds will receive quarterly statements 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,
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<PAGE> 120
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 per share
(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) 341-2911 ((800)
421-2833 for the hearing impaired) or in writing to ACCESS. The investor may, on
the initial application or prior to any declaration, instruct that dividends be
paid in cash and capital gains distributions be reinvested at net asset value,
or that both dividends and capital gains distributions be paid in cash. For
further information, see "Distributions from the Funds."
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to debit 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) 341-2911 ((800) 421-2833 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
Participating 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 for shares of the same
class of any Participating Fund based on the next computed net asset value of
each fund after requesting the exchange without any sales charge, subject to
certain limitations. Shareholders seeking an exchange into a Participating Fund
should obtain and read a current prospectus for such Participating Fund.
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. Shares of a Fund registered in a
shareholder's name for less than 30 days may only be exchanged upon receipt of
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prior approval of the Adviser. It is the policy of the Adviser under normal
circumstances 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.
When Class B Shares and Class C Shares are exchanged among Participating
Funds, the holding period for purposes of computing the CDSC is based upon the
date of the initial purchase of such shares from a Participating Fund. If such
Class B or Class C Shares are redeemed and not exchanged for shares of another
Participating Fund, such Class B or Class C Shares are subject to the CDSC
schedule imposed by the Participating Fund from which such shares were
originally purchased.
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 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)
341-2911 ((800) 421-2833 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. 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 reinvest dividends
from the new account into another fund, an exchanging shareholder must file a
specific written request. Each of the Funds reserves the right to reject any
order to acquire shares through exchange. In addition, each of the Funds may
modify, restrict or terminate the
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exchange privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment.
A prospectus of any of these mutual funds may be obtained from any broker,
dealer or financial intermediary or the Distributor. An investor considering an
exchange to one of such funds should refer to the prospectus for additional
information regarding such fund prior to investing.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. Any investor whose shares in a single account total $5,000 or
more at the offering price next computed after receipt of instructions may
establish a 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 at the time the election to
participate in the plan is made.
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 the purchase of additional shares ordinarily will be
disadvantageous to the shareholder because of the duplication of sales charges.
Any gain or loss realized by the shareholders upon the redemption of shares is a
taxable event.
CHECK WRITING PRIVILEGE. A Class A shareholder holding 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 (the "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 the 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
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<PAGE> 123
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 the 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. See the Statements of Additional
Information for further information regarding the establishment of the
privilege.
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 ACH. 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.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at www.vkac.com
for further instruction. VKAC and the Funds employ procedures considered by them
to be reasonable to confirm that instructions communicated through the internet
are genuine. Such procedures include requiring use of a personal identification
number prior to acting upon internet instructions and providing written
confirmation of instructions communicated through the internet. If reasonable
procedures are employed, neither VKAC nor the Funds will be liable for following
instructions through the internet which it reasonably believes to be genuine. If
an account has multiple owners, ACCESS may rely on the instructions of any one
owner.
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REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
Shareholders may redeem for cash some or all of their shares without charge by
the respective Fund (other than, with respect to CDSC Shares, the applicable
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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 120 days must accompany the redemption request.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received. 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, which may take 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
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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)
341-2911 ((800) 421-2833 for the hearing impaired) to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Funds employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the
respective Fund will be liable for following instructions which it reasonably
believes to be genuine. VKAC and the respective Fund may be liable for any
losses due to unauthorized or fraudulent instructions if reasonable procedures
are not followed. Telephone redemptions may not be available if the shareholder
cannot reach ACCESS by telephone, whether because all telephone lines are busy
or for any other reason; in such case, a shareholder would have to use the
respective Fund's other redemption procedures previously described. Requests
received by ACCESS prior to 4:00 p.m., New York time, on a regular business day
will be processed at the net asset value per share determined that day. These
privileges are available for all accounts other than retirement accounts. The
telephone redemption privilege is not available for shares represented by
certificates. If the shares to be redeemed have been recently purchased by
check, ACCESS may delay mailing a redemption check or wiring redemption proceeds
until it confirms that the purchase check has cleared, usually a period of up to
15 days. If an account has multiple owners, ACCESS may rely on the instructions
of any one owner.
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 ordinarily will be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire ordinarily will 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.
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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 will be given and the
shareholder will be given an opportunity to purchase the required value of
additional shares at the next determined net asset value without sales charge.
Any involuntary redemption may only occur if the shareholder account is less
than the minimum investment due to shareholder redemptions.
REDEMPTION UPON DEATH OR DISABILITY. The Funds will waive the CDSC on
redemptions following the death or 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
CDSC on Class B Shares and Class C Shares.
In cases of death or disability, the CDSCs on Class B Shares and Class C
Shares will be waived where the decedent or disabled person is either an
individual shareholder or owns the shares as a joint tenant with right of
survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the death or initial
determination of disability. This waiver of the CDSC 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 death or initial determination of disability.
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 CDSC paid upon such redemption. Such
reinstatement is made at the net asset value (without sales charge except as
described under "Shareholder Services -- Exchange Privilege") next determined
after the order is received, which must be within 180 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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DISTRIBUTION AND SERVICE PLANS
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Each of the Funds has adopted a distribution plan (the "Distribution Plan")
with respect to each class of its shares pursuant to Rule 12b-1 under the 1940
Act. Each of the Funds also has adopted a service plan (the "Service Plan") with
respect to each class of shares. The Distribution Plan and Service Plan of each
Fund provide that the respective Fund may spend a portion of such Fund's average
daily net assets attributable to each class of its shares in connection with the
distribution of respective class of shares and in connection with the provision
of ongoing services to shareholders of each class. Each Distribution Plan and
Service Plan is being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers and financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. Each of the Funds may spend an aggregate amount up to 0.25%
per year of the average daily net assets attributable to the Class A Shares of
the respective Fund pursuant to its Distribution Plan and Service Plan. From
such amount, the respective Fund may spend up to 0.25% per year of the average
daily net assets attributable to its Class A Shares pursuant to its Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. Each of the
Funds pays the Distributor the lesser of the balance of the 0.25% not paid to
such brokers, dealers or financial intermediaries or the amount of the
Distributor's actual distribution-related expense.
CLASS B SHARES. Each of the Funds may spend up to 0.75% per year of the
average daily net assets attributable to the Class B Shares of the respective
Fund pursuant to the Distribution Plan. In addition, each of the Funds may spend
up to 0.25% per year of such Fund's average daily net assets attributable to the
Class B Shares of the respective Fund pursuant to its Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor 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
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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 CDSC. 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, 1997, there were $946,949
and $6,586 of unreimbursed distribution expenses with respect to Class B Shares
and Class C Shares, respectively of the Insured Fund, representing 1.35% and
less than 0.12% of the Insured Fund's net assets attributable to Class B Shares
and Class C Shares, respectively. As of December 31, 1997, there were $549,045
and $9,976 of unreimbursed distribution expenses with respect to Class B Shares
and Class C Shares, respectively of the California Insured Fund, representing
1.77% and less than 0.26% 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 CDSCs.
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 CDSC
applicable to a particular class of shares to defray distribution-related
expenses attributable to any other class of
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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 expect
that shareholders would not experience any disadvantage.
- ------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUNDS
- ------------------------------------------------------------------------------
Each Fund's policy is to declare daily and pay monthly distributions of all or
substantially all net investment income of 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.
Investors will be entitled to begin receiving dividends on their shares on the
business day after ACCESS receives payments for such shares. However, shares
become entitled to dividends on the day ACCESS 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 automatically
will credit dividend distributions and any net long-term capital gain
distributions to
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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) 341-2911 ((800) 421-2833 for the hearing impaired) or
in writing to ACCESS. See "Shareholder Services -- Reinvestment Plan."
- ------------------------------------------------------------------------------
TAX STATUS
- ------------------------------------------------------------------------------
FEDERAL INCOME TAXATION OF THE FUNDS. Each fund has elected and qualified and
intends to continue to qualify each year to be treated as a regulated investment
company 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 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 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. Each Fund intends to distribute at least the minimum amount of net
investment income necessary to satisfy the 90% distribution requirement. Neither
fund will be subject to federal income tax on any net capital gains distributed
to 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 (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 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 Funds will be treated as having been distributed.
If either Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, such 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, such 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
a 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, such Fund would be required to recognize any net built-in gains (the
excess of aggregate gains, including
51
<PAGE> 131
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.
Certain of each Fund's investment practices are subject to special provisions
of the Code that, among other things, may defer the use of certain losses of
such Fund and affect the holding period of the securities held by such Fund and
the character of the gains or losses realized by the Fund. These provisions may
also require each Fund to recognize income or gain 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. Each Fund will monitor their transactions and may make certain tax
elections in order to mitigate the effect of these rules and prevent its
disqualification as a regulated investment company.
Investments of a 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, a
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, a Fund may have
to dispose of securities that they 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.
DISTRIBUTIONS. Each Fund intends to invest in sufficient tax-exempt municipal
securities to permit payment of "exempt-interest dividends" (as defined in the
Code). Dividends paid by a Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of its total assets
consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax
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<PAGE> 132
purposes. The percentage of the total dividends paid by a Fund during any
taxable year that qualify as exempt-interest dividends will be the same for all
shareholders of such Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. Each
Fund invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in either Fund could cause such
Fund's shareholders to be subject to (or result in an increased liability under)
the alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by each Fund.
Exempt-interest dividends 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.
Although exempt-interest dividends generally may be treated by shareholders as
items of interest excluded from their gross income, each shareholder is advised
to consult his tax adviser with respect to whether exempt-interest dividends
retain this exclusion if the shareholder would be treated as a "substantial
user" (or a "related person" of a substantial user) of the facilities financed
with respect to any of the tax-exempt obligations held by either Fund, or by the
Trust if it is required to qualify as a regulated investment company as
described below. "Substantial user" is defined under U.S. Treasury regulations
to include a non-exempt person who regularly uses in his trade or business a
part of any facilities financed with the tax-exempt obligations and whose gross
revenues derived from such facilities exceed 5% of the total revenues derived
from the facilities by all users, or who occupies more than 5% of the useable
area of the facilities or for whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
While each Fund expects that a major portion of its net investment income will
constitute tax-exempt interest, a significant portion may consist of investment
company taxable income. Distributions of each Fund's net investment company
taxable income are taxable to shareholders as ordinary income to the extent of
such Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of each Fund's net capital gains ("capital gain
dividends"), if any, are taxable to shareholders as long-term capital gains
regardless of the length of time shares of such Fund have been held by such
shareholders. Distributions in excess of each 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). For a summary of the
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates Under the 1997 Tax Act" below. Interest on
53
<PAGE> 133
indebtedness incurred or continued by a shareholder to purchase or carry shares
of the Fund is not deductible for federal income tax purposes if the Fund
distributes exempt-interest dividends during the shareholder's taxable year.
Tax-exempt shareholders not subject to federal income tax on their income
generally will not be taxed on distributions from the Funds.
Shareholders receiving distributions in the form of additional shares issued
by a 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.
Each Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt-interest dividends cannot exceed the
amount of interest exempt from tax under Section 103 of the Code received by
either Fund during the year over any amounts disallowed as deductions under
Sections 265 and 171(a)(2) of the Code. Since the percentage of dividends which
are exempt-interest dividends is determined on an average annual method for the
fiscal year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of each
Fund's income that was tax exempt during the period covered by the dividend.
Fund distributions generally will not qualify for the dividends received
deduction for corporations.
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 month and paid during January of the
following year will be treated as having been distributed by a 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
a Fund may be "spilled back" and treated as paid by such 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.
Each Fund is required, in certain circumstances, to withhold 31% of dividends
and certain other payments, including redemptions, paid to shareholders who do
not furnish to such 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. For a summary of the tax rates applicable
to capital gains, see
54
<PAGE> 134
"Capital Gains Rates Under the 1997 Tax Act" below. Any loss recognized upon a
taxable disposition of shares held for six months or less will be treated as a
long-term capital loss to the extent of any capital gain dividends received with
respect to such shares. Any short-term capital loss on the sale or exchange 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. 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.
CAPITAL GAINS RATES UNDER THE 1997 TAX ACT. Under the Taxpayer Relief Act of
1997 (the "1997 Tax Act"), the maximum tax rate applicable to net capital gains
recognized by individuals and other non-corporate taxpayers is (i) the same as
the maximum ordinary income tax rate for capital assets held for one year or
less, (ii) 28% for capital assets held for more than one year but not more than
18 months and (iii) 20% for capital assets held for more than 18 months. The
maximum net capital gains tax rate for corporations remains at 35%. The tax
rates for capital gains described above will apply to distributions of capital
gain dividends by the Fund (if, as expected, the Fund designates capital gain
dividends as 28% rate gain distributions or 20% rate gain distributions, in
accordance with its holding periods for the securities sold that generated such
capital gain dividends) as well as to sales and exchanges of shares in the Fund.
With respect to capital losses recognized on dispositions of shares held six
months or less where such losses are treated as long-term capital losses to the
extent of prior distributions of capital gain dividends received on such shares
(see "Sale of Shares" above), it is unclear how such capital losses offset the
capital gains referred to above. Shareholders should consult their own tax
advisers as to the application of the new capital gains rates to their
particular circumstances.
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 that, when held by
individuals, pay interest that is exempt from tax under California law,
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.
55
<PAGE> 135
Any proceeds paid to the California Insured Fund under the insurance policy
which represents matured interest on defaulted obligations should be exempt from
California personal income tax if, and to the same extent as, such interest
would have been exempt if paid by the issuer of such defaulted obligations.
Recent amendments to California tax laws substantially incorporate those
provisions of the Code governing the treatment of regulated investment
companies.
GENERAL. The federal and California income tax discussions set forth above are
for general information only. Prospective investors should consult their tax
advisers regarding the specific federal and California tax consequences of
purchasing, 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. or nationally recognized financial 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
56
<PAGE> 136
and adding the result to that portion of such Fund's yield, if any, that is not
tax-exempt.
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
such Fund. Such characteristics may include, but are not limited to, tax
features,
57
<PAGE> 137
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.
Further information about the respective Fund's performance is contained in
its Annual Report and Semi-Annual Report each of which can be obtained without
charge by calling (800) 421-5666 ((800) 421-2833 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 and adopted
its current name at that time. 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.
58
<PAGE> 138
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 341-2911.
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) 421-2833
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 847-2424.
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 West 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 (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 139
------------------------------------------------------------------------------
INSURED TAX FREE
INCOME FUND
------------------------------------------------------------------------------
CALIFORNIA INSURED
TAX FREE FUND
------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 30, 1998
- ------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 140
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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 and 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. (the "Adviser"). 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, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated April 30, 1998, 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) 421-2833. The Statement of Additional Information
has been filed with the Securities and Exchange Commission ("SEC") and is
available along with other related Fund materials at the SEC's internet web site
(http://www.sec.gov).
------------------
VAN KAMPEN AMERICAN CAPITAL SM
------------------
THIS PROSPECTUS IS DATED APRIL 30, 1998.
<PAGE> 141
- ------------------------------------------------------------------------------
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........................................ 13
Investment Practices........................................ 16
Special Considerations Regarding the Fund................... 19
Investment Advisory Services................................ 21
Alternative Sales Arrangements.............................. 22
Purchase of Shares.......................................... 24
Shareholder Services........................................ 34
Redemption of Shares........................................ 39
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.
2
<PAGE> 142
- ------------------------------------------------------------------------------
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 and
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 or 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> 143
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, 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 contingent deferred sales charge ("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 eight 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> 144
Class C Shares. Class C Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within the first year
after purchase. Class C Shares are subject to a CDSC equal to 1.00% of the
lesser of the then current net asset value or the original purchase price on
Class C Shares redeemed within the first year after purchase. Class C Shares are
subject to ongoing distribution and service fees at an aggregate annual rate of
up to 1.00% of the Fund's aggregate average daily net assets attributable to the
Class C Shares.
REDEMPTION. Class A Shares may be redeemed at net asset value, without charge,
subject to conditions set forth herein. CDSC Shares may be redeemed at net asset
value less a deferred sales charge which will vary among each class of CDSC
Shares and with the length of time a redeeming shareholder has owned such
shares. CDSC Shares redeemed after the expiration of the CDSC period applicable
to the respective class of CDSC Shares will not be subject to a deferred sales
charge. See "Redemption of Shares."
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the Fund's investment adviser.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the "Distributor")
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 foregoing is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
5
<PAGE> 145
- ------------------------------------------------------------------------------
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 CDSC 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 Share Purchases 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 by the Distributor on behalf of the investor. See "Distribution and
Service Plans."
6
<PAGE> 146
- ------------------------------------------------------------------------------
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).................. 0.24% 1.00%(2) 1.00%(2)
Other Expenses (as a percentage of
average daily net assets)............. 0.17% 0.17% 0.18%
Total Expenses (as a percentage of
average daily net assets)............. 0.89% 1.65% 1.66%
</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.
(2) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted as a fund-level expense by the
rules of the National Association of Securities Dealers, Inc. ("NASD").
7
<PAGE> 147
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 0.89% for Class
A Shares, 1.65% for Class B Shares and
1.65% for Class C Shares, (ii) 5.00%
annual return and (iii) redemption at the
end of each time period:
Class A Shares............................ $56 $75 $ 94 $152
Class B Shares............................ $57 $87 $105 $175*
Class C Shares............................ $27 $52 $ 90 $197
You would pay the following expenses on the
same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares............................ $56 $75 $ 94 $152
Class B Shares............................ $17 $52 $ 90 $175*
Class C Shares............................ $17 $52 $ 90 $197
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A Shares after eight 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 and is
included to provide a means for the investor to compare expense levels of funds
with different fee structures over varying investment periods. To facilitate
such comparison, all funds are required by the SEC to utilize a 5.00% annual
return assumption. 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 of Class A Shares. Class
B shares acquired through the exchange privilege are subject to the CDSC
schedule relating to the Class B Shares of the Fund from which the purpose of
Class B was originally made. 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 "Distribution and Service Plans."
8
<PAGE> 148
- --------------------------------------------------------------------------------
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 ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $15.267 $15.549 $14.261 $16.164 $15.310 $15.071
Net Investment Income............. .852 .898 .874 .886 .964 1.041
Net Realized and Unrealized
Gain/Loss....................... .500 (.298) 1.296 (1.907) .862 .374
------- ------- ------- ------- ------- -------
Total from Investment Operations... 1.352 .600 2.170 (1.021) 1.826 1.415
------- ------- ------- ------- ------- -------
Less Distributions from Net
Investment Income(1)............ .852 .882 .882 .882 .972 1.044
Distributions from and in Excess
of Net Realized Gains(1)........ 0 0 0 .000 .000 .132
------- ------- ------- ------- ------- -------
Total Distributions................ .852 .882 .882 .882 .972 1.176
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period............................ $15.767 $15.267 $15.549 $14.261 $16.164 $15.310
======= ======= ======= ======= ======= =======
Total Return(2).................... 9.14% 4.07% 15.61% (6.37%) 12.20% 9.69%
Net Assets at End of Period (In
millions)......................... $ 766.2 $ 792.3 $ 839.7 $ 495.8 $ 597.6 $ 463.6
Ratio of Expenses to Average Net
Assets (annualized)(2)............ .89% .94% .99% .99% .87% .86%
Ratio of Net Investment Income to
Average Net Assets(2)
(annualized)...................... 5.54% 5.93% 5.86% 5.93% 6.08% 6.76%
Portfolio Turnover................. 104% 73% 61% 75% 82% 92%
<CAPTION>
CLASS A SHARES
----------------------------------------
AUGUST 1, 1990
(COMMENCEMENT OF
YEAR ENDED INVESTMENT OPERATIONS) TO
DECEMBER 31, DECEMBER 31,
1991 1990
------------ -------------------------
<S> <C> <C>
Net Asset Value, Beginning of the
Period............................ $14.250 $14.263
Net Investment Income............. 1.066 .406
Net Realized and Unrealized
Gain/Loss....................... .853 (.049)
------- -------
Total from Investment Operations... 1.919 .357
------- -------
Less Distributions from Net
Investment Income(1)............ 1.098 .370
Distributions from and in Excess
of Net Realized Gains(1)........ .000 .000
------- -------
Total Distributions................ 1.098 .370
------- -------
Net Asset Value, End of the
Period............................ $15.071 $14.250
======= =======
Total Return(2).................... 13.98% 2.57%*
Net Assets at End of Period (In
millions)......................... $ 293.7 $ 146.6
Ratio of Expenses to Average Net
Assets (annualized)(2)............ .59% .89%
Ratio of Net Investment Income to
Average Net Assets(2)
(annualized)...................... 7.29% 7.11%
Portfolio Turnover................. 106% 109%
</TABLE>
- ----------------
(1) 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.
(2) Total Return does not reflect the effect of sales charges. If certain
expenses had not been waived or assumed by the 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)....... -- .94% .99% .99%
Ratio of Net Investment Income to Average Net Assets
(annualized)............................................. -- 5.93% 5.86% 5.93%
<CAPTION>
<S> <C> <C> <C>
Ratio of Expenses to Average Net Assets (annualized)....... .98% 1.00% 1.07%
Ratio of Net Investment Income to Average Net Assets
(annualized)............................................. 5.97% 6.62% 6.81%
<CAPTION>
<S> <C>
Ratio of Expenses to Average Net Assets (annualized)....... 1.19%
Ratio of Net Investment Income to Average Net Assets
(annualized)............................................. 6.81%
</TABLE>
* Non-Annualized.
See Financial Statements and Notes Thereto
9
<PAGE> 149
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CONTINUED (for a share outstanding throughout the
periods)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES
-------------------------------------------------------------------------------------------
AUGUST 24, 1992
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DISTRIBUTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.............................. $15.267 $15.549 $14.261 $16.139 $15.308 $15.481
Net Investment Income............... .734 .783 .762 .780 .852 .320
Net Realized and Unrealized
Gain/Loss......................... .501 (.297) 1.294 (1.890) .845 (.033)
------- ------- ------- ------- ------- -------
Total from Investment Operations..... 1.235 .486 2.056 (1.110) 1.697 .287
------- ------- ------- ------- ------- -------
Less Distributions from Net
Investment Income(1).............. .738 .768 .768 .768 .866 .328
Distributions from and in Excess of
Net Realized Gains(1)............. 0 0 .000 0 .000 .132
------- ------- ------- ------- ------- -------
Total Distributions.................. .738 .768 .768 .768 .866 .460
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period... $15.764 $15.267 $15.549 $14.261 $16.139 $15.308
======= ======= ======= ======= ======= =======
Total Return(2)...................... 8.27% 3.29% 14.74% (6.96%) 11.33% 1.90%*
Net Assets at End of Period (In
millions)........................... $ 211.2 $ 211.0 $ 216.6 $ 158.7 $ 168.2 $ 48.4
Ratio of Expenses to Average Net
Assets (annualized)(2).............. 1.65% 1.70% 1.73% 1.70% 1.65% 1.66%
Ratio of Net Investment Income to
Average Net Assets(2)(annualized)... 4.78% 5.17% 5.09% 5.22% 5.19% 5.23%
Portfolio Turnover................... 104% 73% 61% 75% 82% 92%
<CAPTION>
CLASS C SHARES
----------------------------------------------------------------------------
AUGUST 13, 1993
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DISTRIBUTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.............................. $15.254 $15.545 $14.262 $16.141 $15.990
Net Investment Income............... .730 .782 .771 .783 .300
Net Realized and Unrealized
Gain/Loss......................... .501 (.305) 1.280 (1.894) .171
------- ------- ------- ------- -------
Total from Investment Operations..... 1.231 .477 2.051 (1.111) .471
------- ------- ------- ------- -------
Less Distributions from Net
Investment Income(1).............. .738 .768 .768 .768 .320
Distributions from and in Excess of
Net Realized Gains(1)............. 0 0 0 .000 .000
------- ------- ------- ------- -------
Total Distributions.................. .738 .768 .768 .768 .320
------- ------- ------- ------- -------
Net Asset Value, End of the Period... $15.747 $15.254 $15.545 $14.262 $16.141
======= ======= ======= ======= =======
Total Return(2)...................... 8.34% 3.16% 14.74% (6.97%) 2.96%*
Net Assets at End of Period (In
millions)........................... $ 15.3 $ 12.9 $ 11.2 $ 3.9 $ 4.1
Ratio of Expenses to Average Net
Assets (annualized)(2).............. 1.66% 1.70% 1.72% 1.74% 1.85%
Ratio of Net Investment Income to
Average Net Assets(2)(annualized)... 4.75% 5.17% 5.24% 5.19% 3.95%
Portfolio Turnover................... 104% 73% 61% 75% 82%
</TABLE>
- ----------------
(1) 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.
(2) Total Return does not reflect the effect of contingent deferred sales
charges. During the time period noted for Class C Shares, no expenses were
assumed by the Adviser. If certain expenses had not been waived or assumed
by the Adviser for Class B Shares, total return would have been lower and
the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of Expenses to Average Net
Assets (annualized)............... -- 1.70% 1.73% 1.20% 1.73% 2.42%
Ratio of Net Investment Income to
Average Net Assets (annualized)... -- 5.17% 5.09% 5.22% 5.11% 4.48%
<CAPTION>
<S> <C> <C> <C> <C> <C>
Ratio of Expenses to Average Net
Assets (annualized)............... -- -- -- -- --
Ratio of Net Investment Income to
Average Net Assets (annualized)... -- -- -- -- --
</TABLE>
* Non-Annualized.
See Financial Statements and Notes Thereto
10
<PAGE> 150
- ------------------------------------------------------------------------------
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." 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 or 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 and 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 protective elements
may be lacking or may be character-
11
<PAGE> 151
istically 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.
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by the Fund's Adviser and other service providers do not properly process
and calculate date-related information and data from and after January 1, 2000.
This is commonly known as the "Year 2000 Problem." The Adviser is taking steps
that it believes are reasonably designed to address the Year 2000 Problem with
respect to computer systems that it uses and to obtain reasonable assurances
that comparable steps are being taken by the Fund's other major service
providers. At this time, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund. In addition, the Year 2000
Problem may adversely affect issuers of securities in which the Fund may invest
which, in turn, may adversely affect the net asset value of the Fund.
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<PAGE> 152
- ------------------------------------------------------------------------------
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 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
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<PAGE> 153
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 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."
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<PAGE> 154
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."
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"
15
<PAGE> 155
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 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
16
<PAGE> 156
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale of
portfolio securities at inopportune times or for prices other than at current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and some of their risks are described more fully in the Fund's Statement of
Additional Information.
Income earned or deemed to be earned, if any, by the Fund from its Strategic
Transactions will 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 liquid 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
17
<PAGE> 157
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.
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
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<PAGE> 158
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
- ------------------------------------------------------------------------------
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
19
<PAGE> 159
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.
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, 1997 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 1997
fiscal year, computed on a monthly basis.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
--------------------------------------------------
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............................ 40.19% 0.49%
AA/Aa.............................. 8.75 0.79
A/A................................ 12.42 0.72
BBB/Baa............................ 15.82 6.12
BB/Ba.............................. 0.94 10.20
B/B................................ 0.18 2.13
CCC/Caa............................ 0.00 0.40
CC/Ca.............................. 0.00 0.28
C/C................................ 0.00 0.57
D.................................. 0.00 0.00
----- -----
Percentage of Rated and Unrated
Securities....................... 78.30% 21.70%
===== =====
</TABLE>
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<PAGE> 160
Securities rated D are in default, and payment of interest or repayment of
principal is in arrears. Securities that are in default or with respect to which
payment of interest 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--Lower Grade
Municipal Securities."
The percentage of the Fund's assets invested in securities of various grades
may from time to time vary 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 $60 billion under management or
supervision. Van Kampen American Capital's more than 50 open-end and 38
closed-end funds and more than 2,500 unit investment trusts are professionally
distributed by leading financial advisers nationwide. Van Kampen American
Capital Distributors, Inc. (the "Distributor"), 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 an indirect wholly-owned subsidiary of Morgan
Stanley Dean Witter & Co. The Adviser's principal office is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financial and investing; and global custody, securities clearance services and
securities lending.
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 respective officers of
the Fund supervise and implement the Fund's investment activities and are
responsible for
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<PAGE> 161
overall management of the Fund's business affairs. The Fund pays 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, ACCESS Investor Services,
Inc. ("ACCESS"), Van Kampen American Capital or Morgan Stanley Dean Witter &
Co.), the charges and expenses of independent accountants, legal counsel,
transfer agent, 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 INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors, trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to preclearance and other procedures designed to prevent conflicts of
interest.
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.
22
<PAGE> 162
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 because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares or Class C Shares. It is presently the policy of the Distributor 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
23
<PAGE> 163
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) ACCESS' 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 for sale to the public on a continuous
basis through the Distributor, as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares are also offered
through members of the National Association of Securities Dealers, Inc. ("NASD")
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
24
<PAGE> 164
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. In some instances
additional compensation or promotional incentives may be offered to brokers,
dealers or financial intermediaries that have sold or may sell significant
amounts of shares during specified periods of time. 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. 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. 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
25
<PAGE> 165
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 CDSC
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 $1 million
and 0.50% on the excess over $3 million. See "Purchase of Shares --
Deferred Sales Charge Alternatives" for additional information with
respect to CDSCs.
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 at the time of the purchase order whenever a quantity discount is
applicable to purchases. Upon such notification, an investor will receive the
lowest applicable sales charge. Quantity discounts may be modified or terminated
at any time. For more information about quantity discounts, investors should
contact their broker, dealer or financial intermediary or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or
her spouse and children under 21 years of age 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 of a single trust
or for a single fiduciary account; or a "company" as defined is section 2(a)(8)
of the 1940 Act.
26
<PAGE> 166
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by the Adviser or Van Kampen American Capital Asset
Management, Inc. ("Asset Management") and distributed by the Distributor as
determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the preceding sales charge
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 any combination of shares of the Fund
and shares of other Participating Funds, although other Participating Funds may
have different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
sales charge 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 sales
charge table. The size of investment shown in the preceding sales charge 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 sales charge applicable to the purchases made and the
sales 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 investment trust reinvestment programs and purchases by
registered representatives of selling firms or purchases by persons affiliated
with the
27
<PAGE> 167
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 ACCESS with appropriate backup data
for each participating investor in a computerized format fully compatible with
ACCESS' processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NAV PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired trustees or directors of funds advised by the Adviser
or Asset Management and such persons' families and their beneficial
accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley
Group Inc. and any of its subsidiaries, 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 when permitted registered
representatives of financial institutions that have a selling group
agreement with the
28
<PAGE> 168
Distributor and their spouses and children under 21 years of age 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; provided that such purchases are otherwise
permitted by such institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay Participating Dealers
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
which invest in multiple fund families through broker-dealer retirement
plan alliance programs that have entered into agreements with the
Distributor and which are subject to certain minimum size and operational
requirements. Trustees and other fiduciaries should refer to the Statement
of Additional Information for further detail with respect to such
programs.
(6) Beneficial owners of shares of a Participating Fund held by a retirement
plan or held in a tax-advantaged retirement account who purchase shares of
the Fund with proceeds from distributions from such a plan or retirement
account other than distributions taken to correct an excess contribution.
(7) 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.
(8) Trusts created under pension, profit sharing or other employee benefit
plans qualified under Section 401(a) of the Code, or custodial accounts
held by a bank created pursuant to Section 403(b) of the Code and
sponsored by non-profit organizations defined under Section 501(c)(3) of
the Code and assets held by an employer or trustee in connection with an
eligible deferred compensation plan under Section 457 of the Code. Such
plans will qualify for purchases at net asset value provided, for plans
initially establishing accounts with the Distributor in the Participating
Funds after February 1, 1997, that (1) the initial amount invested in the
Participating Funds is at least $500,000 or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have
received proposals from the Distributor prior to February 1, 1997 based on
net asset value purchase privileges previously in effect will be qualified
to purchase shares of the Participating Funds at net asset value for
accounts established on or before May 1, 1997. Section 403(b) and similar
accounts for which Van Kampen American Capital Trust Company served as
custodian will not be eligible for net asset value purchases based on the
aggregate investment made by the plan or the number of eligible employees,
except under certain uniform
29
<PAGE> 169
criteria established by the Distributor from time to time. A commission
will be paid on the foregoing purchases as follows: 1.00% on sales to $2
million, plus 0.80% on the next $1 million, plus 0.50% on the next $47
million and 0.25% on the excess over $50 million.
(9) Individuals who are members of a "qualified group". For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the
Fund and Participating Funds, (iv) has a membership that the authorized
dealer can certify as to the group's members and (v) satisfies other
uniform criteria established by the Distributor for the purpose of
realizing economics of scale in distributing such shares. A qualified
group does not include one whose sole organizational nexus, for example,
is that its participants are credit card holders of the same institution,
policy holders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups.
Shares purchased in each group's participants account in connection with
this privilege will be subject to a CDSC of 1.00% in the event of
redemption within one year of purchase, and a commission will be paid to
authorized dealers who initiate and are responsible for such sales to each
individual as follows: 1.00% on sales to $2 million, plus 0.80% on the
next $1 million and 0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
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 ACCESS, the investment adviser, trust company or bank trust
department, provided that ACCESS receives federal funds for the purchase by the
close of business on the next business day 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. Authorized brokers,
dealers or financial intermediaries will be paid a service fee as described
herein under "Distribution and Service Plans" on purchases made as described in
(3) through (9) above. The Fund may terminate, or amend the terms of, offering
shares of the Fund at net asset value to such groups at any time.
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
30
<PAGE> 170
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, 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 $1 million and 0.50% on the excess over $3
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 CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. The amount of the CDSC 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
CDSC 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 CDSC 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 CDSC 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 CDSC 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 CDSC 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 CDSC 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
31
<PAGE> 171
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 CDSC 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 $1 million and 0.50% on the
excess over $3 million.
CLASS B SHARES. Class B Shares redeemed within six years of purchase generally
will be subject to a CDSC 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 CDSC 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 CDSC of 1.00% of the dollar amount subject
thereto. Class C Shares redeemed thereafter will not be subject to a CDSC.
CONVERSION FEATURE. Class B Shares purchased on or after June 1, 1996 and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares eight years after the end of the calendar month in which the
shares were purchased. Class B Shares purchased before June 1, 1996, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares six years after the end of the calendar month in which the shares
were purchased. Class C Shares purchased before January 1, 1997, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares ten years
32
<PAGE> 172
after the end of the calendar month in which such shares were purchased. Such
conversion will be on the basis of the relative net asset values per share,
without the imposition of any sales load, fee or other charge. The conversion
schedule applicable to a share acquired through the exchange privilege is
determined by reference to the Participating Fund from which such share
originally was purchased. The conversion of such 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 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 may be suspended if such an opinion is no
longer available and such shares might continue to be subject to the higher
aggregate fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The CDSC 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 required minimum
distributions from an IRA or another retirement plan; (iii) pursuant to the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account; (iv) in circumstances under which no commission or
transaction fee is paid to authorized dealers at the time of purchase of such
shares; and (v) effected pursuant to the right of the Fund to liquidate a
shareholder's account as described herein under "Redemption of Shares." The CDSC
also is waived on redemptions of Class C Shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 180 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.
33
<PAGE> 173
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, 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 the investor's shares of
the Fund are held by ACCESS. Except as described in this Prospectus, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder who has an account in any of the
Participating Funds will receive quarterly statements 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
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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 per share (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) 341-2911 ((800) 421-2833
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 debit 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) 341-2911 ((800) 421-2833 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
Participating Fund so long as the shareholder has 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 for shares of the same
class of any Participating Fund based on the next computed net asset values of
each Fund after requesting the exchange without any sales charge, subject to
certain limitations. Shares of the Fund may be exchanged with shares of another
Participating Fund subject to certain limitations. Before effecting an exchange,
shareholders seeking an exchange into a Participating 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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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.
When Class B Shares and Class C Shares are exchanged among Participating
Funds, the holding period for purposes of computing the CDSC is based upon the
date of the initial purchase of such shares from a Participating Fund (the
"Original Fund"). Upon redemption from the Participating Funds' complex of
Funds, Class B Shares and Class C Shares are subject to the CDSC schedule to the
CDSC schedule imposed by the Original 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)
341-2911 ((800) 421-2833 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. Exchanges are effected at the net asset value per share next
calculated after the request is received in good order with adjustment for any
additional sales charge. 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 reinvest dividends from the new
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account into another fund, an exchanging shareholder must file a specific
written request. The Fund reserves the right to reject any order to acquire
shares through exchange. In addition, the Fund may modify, restrict or terminate
the exchange privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment.
A prospectus of any of these mutual funds may be obtained from any broker,
dealer, financial intermediary or the Distributor. An investor considering an
exchange to one of such funds should refer to the prospectus for additional
information regarding such fund prior to investing.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. Any investor whose shares in a single account total $5,000 or
more at the offering price next computed after receipt of instructions may
establish a 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 CDSC. Initial account balance means the amount of the
shareholder's investment at the time the election to participate in the plan is
made.
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. Any gain or loss realized by the Shareholder upon redemption of shares
is a taxable event. 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 (the "Bank") will be sent to such shareholder. These checks may be made
payable
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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 the Bank for payment, full and fractional Class A
Shares required to cover the amount of the check are redeemed from the
shareholder's account by ACCESS at the next determined net asset value. Check
writing redemptions represent the sale of Class A Shares. Any gain or loss
realized on the sale of Class A Shares is a taxable event. See "Redemption of
Shares."
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges.
Holders of Class A Shares may not liquidate the entire account by means of a
check. The check writing privilege may be terminated or suspended at any time by
the Fund or the 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. See the Statement of Additional Information for
further information regarding the establishment of the privilege.
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 ACH. 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.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at www.vkac.com
for further instruction. VKAC and the Fund employ procedures considered by them
to be reasonable to confirm that instructions communicated through the internet
are genuine. Such procedures include requiring use of a personal identification
number prior to acting upon internet instructions and providing written
confirmation of instructions communicated through the internet. If reasonable
procedures are employed, neither VKAC nor the Fund will be liable for following
instructions through the internet which it reasonably believes to be genuine. If
an account has multiple owners, ACCESS may rely on the instructions of any one
owner.
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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 120 days must accompany the redemption request.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received. Payment for shares redeemed (less any sales charge, if applicable)
ordinarily will 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, which may take 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
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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) 341-2911
((800) 421-2833 for the hearing impaired) to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Fund employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the Fund
will be liable for following instructions which it reasonably believes to be
genuine. VKAC and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if reasonable procedures are not followed. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Fund's other redemption
procedures previously described. Requests received by ACCESS prior to 4:00 p.m.,
New York time, on a regular business day will be processed at the net asset
value per share determined that day. These privileges are available for all
accounts other than retirement accounts. The telephone redemption privilege is
not available for shares represented by certificates. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check or wiring redemption proceeds until it confirms that the
purchase check has cleared, usually a period of up to 15 days. If an account has
multiple owners, ACCESS may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check ordinarily will be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire ordinarily will be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address of record has been changed within 30 days prior to a telephone
redemption request.
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The Fund reserves the right at any time to terminate, limit or otherwise modify
this telephone redemption privilege.
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
involuntary redemption may only occur if the shareholder account is less than
the minimum investment due to shareholder redemptions.
REDEMPTION UPON DEATH OR DISABILITY. The Fund will waive the CDSC on
redemptions following the death or 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
CDSC on Class B Shares and Class C Shares.
In cases of death or disability, the CDSCs on Class B Shares and Class C
Shares will be waived where the decedent or disabled person is either an
individual shareholder or owns the shares as a joint tenant with right of
survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the death or initial
determination of disability. This waiver of the CDSC 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 death or the initial determination of disability.
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 CDSC paid upon such redemption. Such reinstatement is made at the net asset
value (without sales charge except as described under "Shareholder Services --
Exchange Privilege") next determined after the order is received, which must be
within 180 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
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American Capital Trust Company for repayment of principal (and interest) on
their borrowings on such plans.
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DISTRIBUTION AND SERVICE PLANS
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The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan provide
that the Fund may spend a portion of the Fund's average daily net assets
attributable to each class of shares in connection with distribution of the
respective class of shares and in connection with the provision of ongoing
services to shareholders of each class. The Distribution Plan and the Service
Plan are being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers and financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. The Fund may spend an aggregate amount up to 0.25% per year of
the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and Service Plan. From such amount, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A Shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. The Fund pays
the Distributor the lesser of the balance of the 0.25% not paid to such brokers,
dealers or financial intermediaries or the amount of the Distributor's actual
distribution-related expense.
CLASS B SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class B Shares of the Fund pursuant to the
Distribution Plan. In addition, the Fund may spend up to 0.25% per year of the
Fund's average daily net assets attributable to the Class B Shares pursuant to
the Service Plan in connection with the ongoing provision of services to holders
of such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.
CLASS C SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C Shares of the Fund pursuant to the
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the Fund, pays brokers, dealers or financial intermediaries in connection with
the distribution of the Class C Shares up to 0.75% of the Fund's average daily
net assets attributable to Class C Shares maintained in the Fund more than one
year by such broker's, dealer's or financial intermediary's customers. The Fund
pays the Distributor the lesser of the balance of 0.75% not paid to such
brokers, dealers or financial intermediaries or the amount of the Distributor's
actual distribution-related expense attributable to the Class C Shares. In
addition, the Fund may spend up to 0.25% per
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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 CDSC. 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, 1997, there were $3,309,295 and $29,472 of
unreimbursed distribution expenses with respect to Class B Shares and Class C
Shares, respectively, representing 1.57% and 0.19% 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 CDSCs.
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 CDSC 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
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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, 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 ACCESS receives payments for such shares. However, shares
become entitled to dividends on the day ACCESS 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 automatically will
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) 341-2911 ((800) 421-2833 for the hearing impaired) or
in writing to ACCESS. See "Shareholder Services -- Reinvestment Plan."
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TAX STATUS
- ------------------------------------------------------------------------------
FEDERAL INCOME TAXATION OF THE FUND. The Fund has elected and qualified and
intends to continue 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 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 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 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
45
<PAGE> 185
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 recognize income or gain 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 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.
DISTRIBUTIONS. The Fund intends to invest in sufficient tax-exempt municipal
securities to permit payment of "exempt-interest dividends" (as defined in the
Code). Dividends paid by the Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a
46
<PAGE> 186
portion of its assets in municipal securities subject to this provision so that
a portion of its exempt-interest dividends is an item of tax preference to the
extent such dividends represent interest received from these private-activity
bonds. Accordingly, investment in the Fund could cause shareholders to be
subject to (or result in an increased liability under) the alternative minimum
tax. Per capita volume limitations on certain private-activity bonds could limit
the amount of such bonds available for investment by the Fund.
Exempt-interest dividends 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.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund, or by the Trust if it is required to qualify as a regulated
investment company as described below. "Substantial user" is defined under U.S.
Treasury regulations to include a non-exempt person who regularly uses in his
trade or business a part of any facilities financed with the tax-exempt
obligations and whose gross revenues derived from such facilities exceed 5% of
the total revenues derived from the facilities by all users, or who occupies
more than 5% of the useable area of the facilities or for whom the facilities or
a part thereof were specifically constructed, reconstructed or acquired.
Examples of "related persons" include certain related natural persons,
affiliated corporations, a partnership and its partners and an S corporation and
its shareholders.
While the Fund expects that a major portion of its net investment income will
constitute tax-exempt interest, a significant portion may consist of investment
company taxable income. Distributions of the Fund's net investment company
taxable income are taxable to shareholders as ordinary income to the extent of
the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains ("capital gain
dividends"), if any, are taxable to shareholders as 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). For a summary of the
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates Under the 1997 Tax Act" below. Interest on indebtedness
incurred or continued by a shareholder to purchase or carry shares of the Fund
is not deductible for federal income tax purposes if the Fund distributes
exempt-interest dividends during the shareholder's taxable year. Tax-exempt
shareholders not subject to federal income tax on their income generally will
not be taxed on distributions from the Fund.
47
<PAGE> 187
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.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt-interest dividends cannot exceed the
amount of interest exempt from tax under Section 103 of the Code received by the
Fund during the year over any amounts disallowed as deductions under Sections
265 and 171(a)(2) of the Code. Since the percentage of dividends which are
exempt-interest dividends is determined on an average annual method for the
fiscal year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax exempt during the period covered by the dividend.
Fund distributions generally will not qualify for the dividends received
deduction for corporations.
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 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.
The Fund is required, in certain circumstances, to withhold 31% of 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. For a summary of the tax rates applicable
to capital gains, see "Capital Gains Rates Under the 1997 Tax Act" below. Any
loss recognized upon a taxable disposition of shares held for six months or less
will be treated as a long-term capital loss to the extent of any capital gains
dividends received with respect to such shares. Any short-term capital loss on
the sale or exchange 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. For purposes of determining whether shares
48
<PAGE> 188
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.
CAPITAL GAINS RATES UNDER THE 1997 TAX ACT. Under the Taxpayer Relief Act of
1997 (the "1997 Tax Act"), the maximum tax rate applicable to net capital gains
recognized by individuals and other non-corporate taxpayers is (i) the same as
the maximum ordinary income tax rate for capital assets held for one year or
less, (ii) 28% for capital assets held for more than one year but not more than
18 months and (iii) 20% for capital assets held for more than 18 months. The
maximum net capital gains tax rate for corporations remains at 35%. The tax
rates for capital gains described above will apply to distributions of capital
gain dividends by the Fund (if, as expected, the Fund designates capital gain
dividends as 28% rate gain distributions or 20% rate gain distributions, in
accordance with its holding periods for the securities sold that generated such
capital gain dividends) as well as to sales and exchanges of shares in the Fund.
With respect to capital losses recognized on dispositions of shares held six
months or less where such losses are treated as long-term capital losses to the
extent of prior distributions of capital gain dividends received on such shares
(see "Sale of Shares" above), it is unclear how such capital losses offset the
capital gains referred to above. Shareholders should consult their own tax
advisers as to the application of the new capital gains rates to their
particular circumstances.
STATE AND LOCAL TAXES. The exemption of interest income for federal income
tax purposes may not result in similar exemptions under the laws of a particular
state or local taxing authority. Income distributions may be taxable to
shareholders under state or local law as dividend income even though a portion
of such distributions may be derived from interest on tax-exempt obligations
which, if realized directly, would be exempt from such income taxes. It is
recommended that investors consult their tax advisers for information in this
regard. The Fund will report annually to its shareholders the percentage and
source, on a state-by-state basis, of interest income earned on municipal
securities received by the Fund during the preceding calendar year. Dividends
and distributions paid by the Fund from sources other than tax-exempt interest
are generally subject to taxation at the state and local levels.
GENERAL. The federal, state and local income tax discussion set forth above
is for general information only. Prospective investors should consult their
advisers regarding the specific federal tax consequences of purchasing, holding
and disposing of shares, as well as the effects of state, local and foreign tax
law and any proposed tax law changes.
49
<PAGE> 189
- ------------------------------------------------------------------------------
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. or nationally recognized financial 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 or 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 Semi-Annual Report and the Fund's Statement of Additional
Information, each of which can be obtained without charge by calling (800)
421-5666 ((800) 421-2833 for the hearing impaired).
50
<PAGE> 190
- ------------------------------------------------------------------------------
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
"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 certain 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 fees and transfer agency
costs, the liquidation proceeds to Class B Shareholders and Class C Shareholders
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.
The Funds Declaration of Trust provides that the Trustee, officer or
shareholders of the Fund shall not be held to any personal liability, nor shall
resort be had to their private property for the satisfaction of any obligation
or liability of the Fund but the assets of the Fund only shall be liable.
51
<PAGE> 191
- ------------------------------------------------------------------------------
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.
52
<PAGE> 192
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 341-2911.
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) 421-2833.
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 847-2424.
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 West 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 (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 193
------------------------------------------------------------------------------
MUNICIPAL INCOME
FUND
------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 30, 1998
- ------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 194
- ------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
INTERMEDIATE TERM MUNICIPAL INCOME 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, 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 and 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, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated April 30, 1998, 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) 421-2833. The Statement of Additional Information
has been filed with the Securities and Exchange Commission ("SEC") and is
available along with other related Fund materials at the SEC's internet web site
(http://www.sec.gov).
------------------
VAN KAMPEN AMERICAN CAPITAL SM
------------------
THIS PROSPECTUS IS DATED APRIL 30, 1998.
<PAGE> 195
(Continued from previous page.)
Under current market conditions, the Fund anticipates that it will maintain
the dollar-weighted average life of its portfolio 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. (the "Adviser"). 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> 196
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Shareholder Transaction Expenses............................ 7
Annual Fund Operating Expenses and Example.................. 8
Financial Highlights........................................ 10
The Fund.................................................... 12
Investment Objective and Policies........................... 12
Municipal Securities........................................ 14
Investment Practices........................................ 19
Investment Advisory Services................................ 23
Alternative Sales Arrangements.............................. 24
Purchase of Shares.......................................... 26
Shareholder Services........................................ 36
Redemption of Shares........................................ 40
Distribution and Service Plans.............................. 43
Distributions from the Fund................................. 45
Tax Status.................................................. 46
Fund Performance............................................ 51
Description of Shares of the Fund........................... 52
Additional Information...................................... 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> 197
- ------------------------------------------------------------------------------
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 and
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> 198
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, 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 contingent deferred sales charge ("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 initially 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 after purchase. 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 eight years after the end of the
calendar month in which the investor's order to purchase was accepted.
5
<PAGE> 199
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.
REDEMPTION. Class A Shares generally 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. (the
"Adviser"), is the Fund's investment adviser.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor"), 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 foregoing is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
6
<PAGE> 200
- ------------------------------------------------------------------------------
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 Year
1--3.00% 1--1.00%
Year After--None
2--2.50%
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 CDSC 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 Share Purchases 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 by the Distributor on behalf of the investor. See "Distribution and
Service Plans."
7
<PAGE> 201
- ------------------------------------------------------------------------------
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)................. 0.50% 0.50% 0.50%
12b-1 fees (as a percentage of average daily
net assets)(2)............................ 0.25% 1.00%(3) 1.00%(3)
Other expenses(1) (as a percentage of
average daily net assets)................. 0.77% 0.78% 0.79%
Total expenses(1) (as a percentage of
average daily net assets)................. 1.52% 2.28% 2.29%
</TABLE>
- ------------------------------------------------------------------------------
(1) Expenses include reimbursement of certain "Other expenses" by the Adviser.
If the Adviser did not reimburse expenses for the fiscal year ending December
31, 1997, the "Other expenses" would have been 0.92% for Class A Shares,
0.92% for Class B Shares and 0.93% for Class C Shares and "Total expenses"
would have been 1.67% for Class A Shares, 2.42% for Class B Shares and 2.43%
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.
(3) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted as a fund-level expense by the rules
of the National Association of Securities Dealers, Inc.
8
<PAGE> 202
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 1.52% for Class
A Shares, 2.28% for Class B Shares and
2.29% for Class C Shares (ii) 5% annual
return and (iii) redemption at the end of
each time period:
Class A Shares............................. $48 $79 $113 $208
Class B Shares............................. $53 $91 $122 $225*
Class C Shares............................. $33 $71 $122 $262
You would pay the following expenses on the
same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares............................. $48 $79 $113 $208
Class B Shares............................. $23 $71 $122 $225*
Class C Shares............................. $23 $71 $122 $262
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A Shares after eight 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 and is
included to provide a means for the investor to compare expense levels of funds
with different fee structures over varying investment periods. To facilitate
such comparison, all funds are required by the SEC to utilize a 5.00% annual
return assumption. 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 contingent
deferred sales charge schedule relating to the Class B Shares of the Fund from
which the purchase of Class B Shares was originally made. 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 "Distribution and Service Plans."
9
<PAGE> 203
- --------------------------------------------------------------------------------
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 A SHARES
------------------------------------------------------
MAY 28, 1993
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED DECEMBER 31, OPERATIONS) TO
------------------------------------- DECEMBER 31,
1997 1996 1995 1994 1993
------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $10.213 $10.264 $ 9.330 $10.145 $ 9.700
------- ------- ------- ------- ----------
Net Investment Income..................................... .480 0.455 0.508 0.489 0.278
Net Realized and Unrealized Gain/Loss..................... .317 (0.032) 0.900 (0.815) 0.462
------- ------- ------- ------- ----------
Total from Investment Operations............................ .797 0.423 1.408 (0.326) 0.740
------- ------- ------- ------- ----------
Less:
Distributions from Net Investment Income.................. .474 0.474 0.474 0.489 0.273
Distributions from Net Realized Gain...................... -0- -0- -0- -0- 0.022
------- ------- ------- ------- ----------
Total Distributions......................................... .474 0.474 0.474 0.489 0.295
------- ------- ------- ------- ----------
Net Asset Value, End of the Period.......................... $10.536 $10.213 $10.264 $ 9.330 $ 10.145
======= ======= ======= ======= ==========
Total Return (Non-annualized)(1)(2)......................... 8.08% 4.27% 15.31% (3.32%) 7.75%(3)
Net Assets at End of the Period (In millions)............... $ 12.9 $ 12.5 $ 15.6 $ 15.7 $ 14.0
Ratio of Expenses to Average Net Assets(1) (annualized)..... 1.52% 1.56% 1.00% .67% .14%
Ratio of Net Investment Income to Average Net Assets(1)
(annualized).............................................. 4.67% 4.45% 5.10% 5.07% 4.78%
Portfolio Turnover.......................................... 37% 45% 75% 274% 86%(3)
- ----------------
(1) If certain expenses had not been reimbursed by the Adviser, total return would have been lower
and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets (annualized)...... 1.67% 1.74% 1.61% 1.75% 2.21%
Ratio of Net Investment Income to Average Net Assets
(annualized)............................................ 4.52% 4.27% 4.49% 3.99% 2.70%
(2) Total Return is based upon net asset value which does not include payment of the maximum sales
charge or contingent deferred sales charge.
(3) Non-Annualized.
</TABLE>
See Financial Statements and Notes Thereto
10
<PAGE> 204
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CONTINUED (for a share outstanding throughout the
periods)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES
------------------------------------------------------
MAY 28, 1993
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED DECEMBER 31, OPERATIONS) TO
------------------------------------- DECEMBER 31,
1997 1996 1995 1994 1993
------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................. $10.209 $10.263 $ 9.319 $10.137 $ 9.700
------- ------- ------- ------- -------
Net Investment Income.............. .402 0.375 0.430 0.417 0.233
Net Realized and Unrealized
Gain/Loss........................ .317 (0.027) 0.916 (0.818) 0.460
------- ------- ------- ------- -------
Total from Investment Operations..... .719 0.348 1.346 (0.401) 0.693
------- ------- ------- ------- -------
Less:
Distributions from Net Investment
Income........................... .402 0.402 0.402 0.417 0.234
Distributions from Net Realized
Gain............................. -0- -0- -0- -0- 0.022
------- ------- ------- ------- -------
Total Distributions.................. .402 0.402 0.402 0.417 0.256
------- ------- ------- ------- -------
Net Asset Value, End of the Period... $10.526 $10.209 $10.263 $ 9.319 $10.137
======= ======= ======= ======= =======
Total Return
(Non-annualized)(1)(2)............. 7.23% 3.54% 14.62% (4.04%) 7.23%(3)
Net Assets at End of the Period (In
millions).......................... $ 16.4 $ 16.4 $ 17.5 $ 17.7 $ 13.9
Ratio of Expenses to Average Net
Assets(1) (annualized)............. 2.28% 2.32% 1.75% 1.43% .92%
Ratio of Net Investment Income to
Average Net Assets(1)
(annualized)....................... 3.91% 3.69% 4.33% 4.30% 3.95%
Portfolio Turnover................... 37% 45% 75% 274% 86%(3)
<CAPTION>
CLASS C SHARES
--------------------------------------------------------
OCTOBER 19, 1993
(COMMENCEMENT
OF DISTRIBUTION)
YEAR ENDED DECEMBER 31, TO
------------------------------------- DECEMBER 31,
1997 1996 1995 1994 1993
------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................. $10.206 $10.260 $ 9.314 $10.134 $10.250
------- ------- ------- ------- -------
Net Investment Income.............. .402 0.374 0.430 0.419 0.091
Net Realized and Unrealized
Gain/Loss........................ .319 (0.026) 0.918 (0.822) (0.098)
------- ------- ------- ------- -------
Total from Investment Operations..... .721 0.348 1.348 (0.403) (0.007)
------- ------- ------- ------- -------
Less:
Distributions from Net Investment
Income........................... .402 0.402 0.402 0.417 0.087
Distributions from Net Realized
Gain............................. -0- -0- -0- -0- 0.022
------- ------- ------- ------- -------
Total Distributions.................. .402 0.402 0.402 0.417 0.109
------- ------- ------- ------- -------
Net Asset Value, End of the Period... $10.525 $10.206 $10.260 $ 9.314 $10.134
======= ======= ======= ======= =======
Total Return
(Non-annualized)(1)(2)............. 7.23% 3.54% 14.74% (4.04%) (.10%)(3)
Net Assets at End of the Period (In
millions).......................... $ 3.1 $ 5.8 $ 4.9 $ 4.7 $ 0.3
Ratio of Expenses to Average Net
Assets(1) (annualized)............. 2.29% 2.32% 1.74% 1.43% .97%
Ratio of Net Investment Income to
Average Net Assets(1)
(annualized)....................... 3.88% 3.70% 4.36% 4.34% 4.05%
Portfolio Turnover................... 37% 45% 75% 274% 86%(3)
</TABLE>
- ----------------
(1) If certain expenses had not been reimbursed by the Adviser, total return
would have been lower and the ratios would have been as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Expenses to Average Net
Assets (annualized).............. 2.42% 2.50% 2.36% 2.50% 2.98% 2.43% 2.50% 2.34%
Ratio of Net Investment Income to
Average Net Assets
(annualized)..................... 3.77% 3.51% 3.72% 3.24% 1.89% 3.74% 3.52% 3.75%
<CAPTION>
<S> <C> <C>
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 is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(3) Non-Annualized.
See Financial Statements and Notes Thereto
11
<PAGE> 205
- ------------------------------------------------------------------------------
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 or its
affiliates also act as investment advisers 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 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 current market conditions, the Fund anticipates that it will
maintain the dollar-weighted average life of its portfolio 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 and 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
12
<PAGE> 206
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 maintain
the dollar-weighted average life of its portfolio 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 securities
13
<PAGE> 207
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.
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by the Fund's Adviser and other service providers do not properly process
and calculate date-related information and data from and after January 1, 2000.
This is commonly known as the "Year 2000 Problem". The Adviser is taking steps
that it believes are reasonably designed to address the Year 2000 Problem with
respect to computer systems that it uses and to obtain reasonable assurances
that comparable steps are being taken by the Fund's other major service
providers. At this time, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund. In addition, the Year 2000
Problem may adversely affect the issuers of securities in which the Fund may
invest which, in turn, may adversely affect the net asset value of the Fund.
- ------------------------------------------------------------------------------
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
14
<PAGE> 208
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 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
15
<PAGE> 209
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, 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
16
<PAGE> 210
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 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, 1997 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 1997 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........................... 37.79% 0.00%
AA/Aa............................. 7.36% 0.00%
A/A............................... 6.23% 0.00%
BBB/Baa........................... 23.47% 5.41%
BB/Ba............................. 4.07% 10.11%
B/B............................... 0.00% 5.56%
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................. 78.92% 21.08%
===== =====
</TABLE>
17
<PAGE> 211
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 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 any such proposal were to be enacted, the ability of
the Fund to pay tax "exempt-interest" dividends might be adversely affected and
the Fund would re-evaluate its investment objective and policies and consider
changes in its structure.
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.
18
<PAGE> 212
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 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,
19
<PAGE> 213
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 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 liquid 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.
20
<PAGE> 214
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. 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
21
<PAGE> 215
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.
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,
22
<PAGE> 216
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.
- ------------------------------------------------------------------------------
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 $60 billion under management or
supervision. Van Kampen American Capital's more than 50 open-end and 38
closed-end funds and more than 2,500 unit investment trusts are professionally
distributed by leading financial advisers nationwide. Van Kampen American
Capital Distributors, Inc. (the "Distributor"), 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 an indirect wholly-owned
subsidiary of Morgan Stanley Dean Witter & Co. The Adviser's principal office is
located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign
exchange, commodities and swaps (involving foreign exchange, commodities,
indices and interest rates); real estate advice, financial and investing; and
global custody, securities clearance services and securities lending.
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 respective
officers of the Fund supervise and implement the Fund's investment activities
and are responsible for overall management of the Fund's business affairs. The
Fund pays the Adviser a monthly fee computed based upon an annual rate applied
to 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>
23
<PAGE> 217
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,
ACCESS Investor Services, Inc. ("ACCESS"), Van Kampen American Capital or Morgan
Stanley Dean Witter & Co.), the charges and expenses of independent accountants,
legal counsel, transfer agent, 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 INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors, trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to preclearance and other procedures designed to prevent conflicts of
interest.
PORTFOLIO MANAGEMENT. Timothy D. Haney, a Vice President of the Adviser, has
been primarily responsible for the day-to-day management of the Fund's portfolio
since January 1997. Mr. Haney has been employed by the Adviser since August
1988.
- ------------------------------------------------------------------------------
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.
24
<PAGE> 218
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 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 because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares or Class C Shares. It is presently the policy of the Distributor 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
25
<PAGE> 219
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) ACCESS' 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 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
26
<PAGE> 220
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. 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. In some
instances, additional compensation or promotional incentives may be offered to
brokers, dealers or financial intermediaries that have sold or may sell
significant amounts of shares during specified periods of time. 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. 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. 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 their net asset value plus an
initial sales charge. 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
27
<PAGE> 221
may be deemed to be underwriters for purposes of the Securities Act of 1933, as
amended.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
TOTAL SALES CHARGE COMMISSION
---------------------------- -----------
PERCENTAGE PERCENTAGE PERCENTAGE
SIZE OF TRANSACTION OF OFFERING OF NET OF 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 CDSC
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 $1
million and 0.50% on the excess over $3 million. See "Purchase of
Shares -- Deferred Sales Charge Alternatives" for additional
information with respect to CDSCs.
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 at the time of the purchase order whenever a quantity discount is
applicable to purchases. Upon such notification, an investor will receive the
lowest applicable sales charge. Quantity discounts may be modified or terminated
at any time. For more information about quantity discounts, investors should
contact their broker, dealer or financial intermediary or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or
her spouse and children under 21 years of age 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 trust
or 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 certain open-end investment
companies advised by the Adviser or Van Kampen American Capital Asset
Management, Inc. ("Asset Management") and distributed by the Distributor as
determined from time to time by the Fund's Board of Trustees.
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VOLUME DISCOUNTS. The size of investment shown in the preceding sales charge
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 any combination of shares of the Fund
and shares of other Participating Funds, although other Participating Funds may
have different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
sales charge 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 sales
charge table. The size of investment shown in the preceding sales charge 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 sales charge applicable to the purchases made and the
sales 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 investment 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
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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 ACCESS with appropriate backup data
for each participating investor in a computerized format fully compatible with
ACCESS' processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NAV PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired trustees or directors of funds advised by the Adviser
or Van Kampen American Capital Asset Management, Inc. and such persons'
families and their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley
Group Inc. and any of its subsidiaries, 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 children under 21 years of age 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
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employees: provided that such purchases are otherwise permitted by such
institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay Participating Dealers
through which purchases are made an amount up to 0.50% of the amount
invested, over a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans
which invest in multiple fund families through broker-dealer retirement
plan alliance programs that have entered into agreements with the
Distributor and which are subject to certain minimum size and operational
requirements. Trustees and other fiduciaries should refer to the Statement
of Additional Information for further detail with respect to such alliance
programs.
(6) Beneficial owners of shares of a Participating Fund held by a retirement
plan or held in a tax-advantaged retirement account who purchase shares of
the Fund with proceeds from distributions from such a plan or retirement
account other than distributions taken to correct an excess contribution.
(7) 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.
(8) Trusts created under pension, profit sharing or other employee benefit
plans qualified under Section 401(a) of the Code, or custodial accounts
held by a bank created pursuant to Section 403(b) of the Code and
sponsored by non-profit organizations defined under Section 501(c)(3) of
the Code and assets held by an employer or trustee in connection with an
eligible deferred compensation plan under Section 457 of the Code. Such
plans will qualify for purchases at net asset value provided, for plans
initially establishing accounts with the Distributor in the Participating
Funds after February 1, 1997, that (1) the initial amount invested in the
Participating Funds is at least $500,000 or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have
received proposals from the Distributor prior to February 1, 1997 based on
net asset value purchase privileges previously in effect will be qualified
to purchase shares of the Participating Funds at net asset value for
accounts established on or before May 1, 1997. Section 403(b) and similar
accounts for which Van Kampen American Capital Trust Company served as
custodian will not be eligible for net asset value purchases based on the
aggregate investment made by the plan or the number of eligible employees,
except under certain uniform criteria established by the Distributor from
time to time. A commission will be paid on the foregoing purchases as
follows: 1.00% on sales to $2 million,
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plus 0.80% on the next $1 million, plus 0.50% on the next $47 million and
0.25% on the excess over $50 million.
(9) Individuals who are members of a "qualified group". For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the
Fund and Participating Funds, (iv) has a membership that the authorized
dealer can certify as to the group's members and (v) satisfies other
uniform criteria established by the Distributor for the purpose of
realizing economics of scale in distributing such shares. A qualified
group does not include one whose sole organizational nexus, for example,
is that its participants are credit card holders of the same institution,
policy holders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups.
Shares purchased in each group's participants account in connection with
this privilege will be subject to a CDSC of 1.00% in the event of
redemption within one year of purchase, and a commission will be paid to
authorized dealers who initiate and are responsible for such sales to each
individual as follows: 1.00% on sales to $2 million, plus 0.80% on the
next $1 million and 0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
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 ACCESS, the investment adviser, trust company or bank trust
department, provided that ACCESS receives federal funds for the purchase by the
close of business on the next business day 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. Authorized brokers,
dealers or financial intermediaries will be paid a service fee as described
herein under "Distribution and Service Plans" on purchases made as described in
(3) through (9) above. The Fund may terminate, or amend the terms of, offering
shares of the Fund at net asset value to such groups at any time.
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
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<PAGE> 226
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 $1 million and 0.50% on the excess over $3
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 CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. The amount of the CDSC 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 CDSC 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 CDSC 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 CDSC 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 CDSC 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 CDSC 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 CDSC 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
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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 CDSC 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 $1 million and 0.50% on the
excess over $3 million.
CLASS B SHARES. Class B Shares redeemed within four years of purchase
generally will be subject to a CDSC 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 CDSC 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 CDSC of 1.00% of the dollar amount subject
thereto. Class C Shares redeemed thereafter will not be subject to a CDSC.
CONVERSION FEATURE. Class B Shares purchased on or after June 1, 1996 and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares eight years after the end of the calendar month in which the
shares were purchased. Class B Shares purchased before June 1, 1996, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares six years after the end of the calendar month in which the shares
were purchased. Class C Shares purchased before January 1, 1997, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares ten years after the end of the calendar month in which such
shares were purchased. Such conversion will be on the basis of the relative net
asset values per share, without the imposition of any sales load, fee or other
charge. The conversion schedule applicable to a share acquired through the
exchange privilege is determined by reference to
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<PAGE> 228
the Participating Fund from which such share originally was purchased. The
conversion of such 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 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 Internal Revenue Code of 1986, as amended
(the "Code"), and (ii) the conversion of such shares does not constitute a
taxable event under federal income tax law. The conversion may be suspended if
such an opinion is no longer available and such shares might continue to be
subject to the higher aggregate fees applicable to such shares for an indefinite
period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The CDSC 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 required minimum
distributions from an IRA or another retirement plan; (iii) pursuant to the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account; (iv) in circumstances under which no commission or
transaction fee is paid to authorized dealers at the time of purchase of such
shares; and (v) effected pursuant to the right of the Fund to liquidate a
shareholder's account as described herein under "Redemption of Shares." The CDSC
also is waived on redemptions of Class C Shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 180 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, and 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
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
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<PAGE> 229
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, 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 the investor's shares of
the Fund are held by ACCESS. Except as described in this Prospectus, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder who has an account in any of the
Participating Funds will receive quarterly statements 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 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
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<PAGE> 230
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 341-2911 ((800) 421-2833 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 debit a bank account on a regular
basis to invest predetermined 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) 341-2911 ((800) 421-2833 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
Participating 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 for shares of the same
class of any Participating Fund based on the next computed net asset value of
each fund after requesting the exchange without any sales charge, subject to
certain limitations. Shareholders seeking an exchange into a Participating Fund
should obtain and read a current prospectus for such Participating Fund.
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.
When Class B shares and Class C shares are exchanged among Participating
Funds, the holding period for purposes of computing the CDSC is based upon the
date of the initial purchase of such shares from a Participating Fund (the
"Original Fund"). Upon redemption shares from the Participating Funds' complex
of funds,
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<PAGE> 231
Class B shares and Class C shares are subject to the CDSC schedule imposed by
the Original 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 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)
341-2911 ((800) 421-2833 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. 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 reinvest dividends from the
new account into another fund, an exchanging shareholder must file a specific
written request. The Fund reserves the right to reject any order to acquire
shares through exchange. In addition, the Fund may modify restrict or terminate
the exchange privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment.
A prospectus of any of these mutual funds may be obtained from any broker,
dealer or financial intermediary or the Distributor. An investor considering an
exchange to one of such funds should refer to the prospectus for additional
information regarding such fund prior to investing.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. Any investor whose shares in a single account total $5,000 or
more at the offering price next computed after receipt of instructions may
establish a 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
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<PAGE> 232
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 CDSC. Initial account balance means the amount of the
shareholder's investment at the time the election to participate in the plan is
made.
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 the purchase of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. Any gain or loss realized by the shareholder upon the redemption of
shares is a taxable event.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the Authorization for Redemption by Check
Form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company (the "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 the Bank for payment, full and fractional Class A
Shares required to cover the amount of the check are redeemed from the
shareholder's account by ACCESS at the next determined net asset value. Check
writing redemptions represent the sale of Class A Shares. Any gain or loss
realized on the sale of Class A Shares is a taxable event. See "Redemption of
Shares."
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges.
Holders of Class A Shares may not liquidate the entire account by means of a
check. The check writing privilege may be terminated or suspended at any time by
the Fund or the 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. See the Statement of Additional Information for
further information regarding the establishment of the privilege.
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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 ACH. 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.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at www.vkac.com
for further instruction. VKAC and the Fund employ procedures considered by them
to be reasonable to confirm that instructions communicated through the internet
are genuine. Such procedures include requiring use of a personal identification
number prior to acting upon internet instruction and providing written
confirmation of instructions communicated through the internet. If reasonable
procedures are employed, neither VKAC nor the Fund will be liable for following
instructions through the internet which it reasonably believes to be genuine. If
an account has multiple owners, ACCESS may rely on the instructions of any one
owner.
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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
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redemption request. In the event a 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 120 days must
accompany the redemption request.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received. Payment for shares redeemed (less any sales charge, if applicable)
ordinarily will 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, which may take 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) 341-2911
((800) 421-2833 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
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instructions which it reasonably believes to be genuine. VKAC and the Fund may
be liable for any losses due to unauthorized or fraudulent instructions if
reasonable procedures are not followed. Telephone redemptions may not be
available if the shareholder cannot reach ACCESS by telephone, whether because
all telephone lines are busy or for any other reason; in such case, a
shareholder would have to use the Fund's other redemption procedures previously
described. Requests received by ACCESS prior to 4:00 p.m., New York time, on a
regular business day will be processed at the net asset value per share
determined that day. These privileges are available for all accounts other than
retirement accounts. The telephone redemption privilege is not available for
shares represented by certificates. If the shares to be redeemed have been
recently purchased by check, ACCESS may delay mailing a redemption check or
wiring redemption proceeds until it confirms that the purchase check has
cleared, usually a period of up to 15 days. If an account has multiple owners,
ACCESS may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check ordinarily will be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire ordinarily will 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.
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
involuntary redemption may only occur if the shareholder account is less than
the minimum investment due to shareholder redemptions.
REDEMPTION UPON DEATH OR DISABILITY. The Fund will waive the CDSC on
redemptions following the death or 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
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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 CDSC
on Class B Shares and Class C Shares.
In cases of death or disability, the CDSCs on Class B Shares and Class C
Shares will be waived where the decedent or disabled person is either an
individual shareholder or owns the shares as a joint tenant with right of
survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the death or initial
determination of disability. This waiver of the CDSC 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 death or initial determination of disability.
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 CDSC paid upon such redemption. Such reinstatement is made at the net asset
value (without sales charge except as described under "Shareholder Services --
Exchange Privilege") next determined after the order is received, which must be
within 180 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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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.
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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 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 CDSC. In such event, with respect to the CDSC
Shares, any unreimbursed expenses will be carried forward and paid by the Fund
(up to the
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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, 1997, there were $28,000 and $2,258 of unreimbursed distribution
related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 0.17% and 0.07% 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 CDSCs.
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 CDSC 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
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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, 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.
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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 ACCESS receives payments for such shares. However, shares
become entitled to dividends on the day ACCESS 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) 341-2911 ((800) 421-2833 for the hearing impaired) or
in writing to ACCESS. See "Shareholder Services -- Reinvestment Plan."
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TAX STATUS
- ------------------------------------------------------------------------------
FEDERAL INCOME TAXATION OF THE FUND. The Fund has elected and qualified and
intends to continue to qualify each year 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 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 necessary to
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<PAGE> 240
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 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 recognize income or gain 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
47
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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.
DISTRIBUTIONS. The Fund intends to invest in sufficient tax-exempt municipal
securities to permit payment of "exempt-interest dividends" (as defined in the
Code). Dividends paid by the Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
Exempt-interest dividends 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.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any
48
<PAGE> 242
of the tax-exempt obligations held by the Fund, or by the Trust if it is
required to qualify as a regulated investment company as described below.
"Substantial user" is defined under U.S. Treasury regulations to include a
non-exempt person who regularly uses in his trade or business a part of any
facilities financed with the tax-exempt obligations and whose gross revenues
derived from such facilities exceed 5% of the total revenues derived from the
facilities by all users, or who occupies more than 5% of the useable area of the
facilities or for whom the facilities or a part thereof were specifically
constructed, reconstructed or acquired. Examples of "related persons" include
certain related natural persons, affiliated corporations, a partnership and its
partners and an S corporation and its shareholders.
While the Fund expects that a major portion of its net investment income will
constitute tax-exempt interest, a significant portion may consist of investment
company taxable income. Distributions of the Fund's net investment company
taxable income are taxable to shareholders as ordinary income to the extent of
the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains ("capital gain
dividends"), if any, are taxable to shareholders as 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). For a summary of the
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates Under the 1997 Tax Act" below. Interest on indebtedness
incurred or continued by a shareholder to purchase or carry shares of the Fund
is not deductible for federal income tax purposes if the Fund distributes
exempt-interest dividends during the shareholder's taxable year. Tax-exempt
shareholders not subject to federal income tax on their income generally will
not be taxed on distributions from the Fund.
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.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt-interest dividends cannot exceed the
amount of interest exempt from tax under Section 103 of the Code received by the
Fund during the year over any amounts disallowed as deductions under Sections
265 and 171(a)(2) of the Code. Since the percentage of dividends which are
exempt-interest dividends is determined on an average annual method for the
fiscal year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax exempt during the
49
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period covered by the dividend. Fund distributions generally will not qualify
for the dividends received deduction for corporations.
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 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.
The Fund is required, in certain circumstances, to withhold 31% of 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. For a summary of the tax rates applicable
to capital gains, see "Capital Gains Rates Under the 1997 Tax Act" below. Any
loss recognized upon a taxable disposition of shares held for six months or less
will be treated as a long-term capital loss to the extent of any capital gain
dividends received with respect to such shares. Any short-term capital loss on
the sale or exchange 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. 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.
CAPITAL GAINS RATES UNDER THE 1997 TAX ACT. Under the Taxpayer Relief Act of
1997 (the "1997 Tax Act"), the maximum tax rate applicable to net capital gains
recognized by individuals and other non-corporate taxpayers is (i) the same as
the maximum ordinary income tax rate for capital assets held for one year or
less, (ii) 28% for capital assets held for more than one year but not more than
18 months and (iii) 20% for capital assets held for more than 18 months. The
maximum net capital gains tax rate for corporations remains at 35%. The tax
rates for capital gains described above will apply to distributions of capital
gain dividends by the Fund (if, as expected, the Fund designates capital gain
dividends as 28% rate gain distributions or 20% rate gain distributions, in
accordance with its holding periods for the
50
<PAGE> 244
securities sold that generated such capital gain dividends) as well as to sales
and exchanges of shares in the Fund. With respect to capital losses recognized
on dispositions of shares held six months or less where such losses are treated
as long-term capital losses to the extent of prior distributions of capital gain
dividends received on such shares (see "Sale of Shares" above), it is unclear
how such capital losses offset the capital gains referred to above. Shareholders
should consult their own tax advisers as to the application of the new capital
gains rates to their particular circumstances.
STATE AND LOCAL TAXES. The exemption of interest income for federal income
tax purposes may not result in similar exemptions under the laws of a particular
state or local taxing authority. Income distributions may be taxable to
shareholders under state or local law as dividend income even though a portion
of such distributions may be derived from interest on tax-exempt obligations
which, if realized directly, would be exempt from such income taxes. It is
recommended that investors consult their tax advisers for information in this
regard. The Fund will report annually to its shareholders the percentage and
source, on a state-by-state basis, of interest income earned on municipal
securities received by the Fund during the preceding calendar year. Dividends
and distributions paid by the Fund from sources other than tax-exempt interest
are generally subject to taxation at the state and local levels.
GENERAL. The federal, state and local income tax discussion set forth above
is for general information only. Prospective investors should consult their
advisers regarding the specific federal tax consequences of purchasing, holding
and disposing of shares, as well as the effects of state, local and foreign tax
law 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. or nationally recognized financial 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 or
51
<PAGE> 245
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 Semi-Annual Report, each of which can be obtained without
charge by calling (800) 421-5666 ((800) 421-2833 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 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 and adopted its current name at that time. 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 "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
52
<PAGE> 246
respect to the conversion of Class B Shares and certain 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 each year, shareholders will receive federal income tax information
regarding dividends and capital gains distributions.
53
<PAGE> 247
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 341-2911.
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) 421-2833.
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 847-2424.
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 West 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 (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 248
------------------------------------------------------------------------------
INTERMEDIATE TERM
MUNICIPAL INCOME
FUND
------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 30, 1998
- ------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 249
- ------------------------------------------------------------------------------
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 and 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.
The investment adviser for the Fund is Van Kampen American Capital
Investment Advisory Corp. (the "Adviser"). 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, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated April 30, 1998, 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) 421-2833. The Statement of Additional Information
has been filed with the Securities and Exchange Commission ("SEC") and is
available along with other related Fund materials at the SEC's Internet web site
(http://www.sec.gov).
------------------
VAN KAMPEN AMERICAN CAPITAL SM
------------------
THIS PROSPECTUS IS DATED APRIL 30, 1998.
<PAGE> 250
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Shareholder Transaction Expenses............................ 5
Annual Fund Operating Expenses and Example.................. 6
Financial Highlights........................................ 8
The Fund.................................................... 10
Investment Objective and Policies........................... 10
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........................................ 34
Redemption of Shares........................................ 38
Distribution and Service Plans.............................. 41
Distributions from the Fund................................. 43
Tax Status.................................................. 44
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.
2
<PAGE> 251
- ------------------------------------------------------------------------------
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 and 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 investor's order to purchase
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. (the
"Adviser") is the Fund's investment adviser.
3
<PAGE> 252
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 foregoing is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
4
<PAGE> 253
- ------------------------------------------------------------------------------
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 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 CDSC 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 Share Purchases 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 by the Distributor on behalf of the investor. See "Distribution and
Service Plans."
5
<PAGE> 254
- ------------------------------------------------------------------------------
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%(3) 1.00%(3)
Other expenses(1) (as a percentage
of average daily net assets).... 0.34% 0.33% 0.37%
Total expenses(1) (as a percentage
of average daily net assets).... 0.59% 1.33% 1.37%
</TABLE>
- ------------------------------------------------------------------------------
(1) Expenses include a reimbursement of $223,516 of "Management fees" and
assumption of $88,936 of "Other expenses" by the Adviser. If the Adviser did
not reimburse fees for the fiscal year ending December 31, 1997, the
"Management fees" would have been 0.50% for each class of shares, "Other
expenses" would have been 0.54% for Class A Shares, 0.53% for Class B Shares
and 0.56% for Class C Shares and "Total expenses" would have been 1.29% for
Class A Shares, 2.03% for Class B Shares and 2.06% 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.
(3) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted as a fund-level expense by the
rules of the National Association of Securities Dealers, Inc.
6
<PAGE> 255
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 0.59%
for Class A Shares, 1.33% for Class
B Shares and 1.37% for Class C
Shares, (ii) 5.00% annual return and
(iii) redemption at the end of each
time period:
Class A Shares...................... $53 $66 $79 $118
Class B Shares...................... $54 $77 $88 $140*
Class C Shares...................... $24 $43 $75 $165
You would pay the following expenses
on the same $1,000 investment
assuming no
redemption at the end of each
period:
Class A Shares...................... $53 $66 $79 $118
Class B Shares...................... $14 $42 $73 $140*
Class C Shares...................... $14 $43 $75 $165
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A Shares after eight 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 and is
included to provide a means for the investor to compare expense levels of funds
with different fee structures over varying investment periods. To facilitate
such comparison, all funds are required by the SEC to utilize a 5.00% annual
return assumption. 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. Class B shares acquired
through the exchange privilege are subject to the CDSC schedule relating to the
Class B Shares of the fund from which the purpose of Class B was originally
made. 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 "Distribution and Service Plans."
7
<PAGE> 256
- --------------------------------------------------------------------------------
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
-----------------------------------------------------------
JULY 29, 1994
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED DECEMBER 31, OPERATIONS) TO
------------------------------------------ DECEMBER 31,
1997 1996 1995 1994
---- ---- ---- --------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $15.060 $15.203 $13.796 $14.300
------- ------- ------- -------
Net Investment Income...................................... .766 .784 .789 .291
Net Realized and Unrealized Gain/Loss...................... .508 (.153) 1.416 (.507)
------- ------- ------- -------
Total from Investment Operations............................ 1.274 .631 2.205 (.216)
Less:
Distributions from and in Excess of Net Investment
Income................................................... .774 .774 .798 .288
Distributions from Net Realized Gain....................... .010 -0- -0- -0-
------- ------- ------- -------
Total Distributions......................................... .784 .774 .798 .288
Net Asset Value, End of the Period.......................... $15.550 $15.060 $15.203 $13.796
======= ======= ======= =======
Total Return*(a)............................................ 8.72% 4.37% 16.29% (1.47%)**
Net Assets at End of Period (in millions)................... $ 29.3 $ 22.2 $ 16.2 $ 9.0
Ratio of Expenses to Average Net Assets(*).................. .59% .28% .44% .49%
Ratio of Net Investment Income to Average Net Assets(*)..... 5.05% 5.31% 5.33% 5.13%
Portfolio Turnover.......................................... 48% 73% 41% 19%**
</TABLE>
- ----------------
* If certain expenses had not been reimbursed by the 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..................... 1.29% 1.47% 1.70% 1.99%
Ratio of Net Investment Income to Average Net Assets........ 4.35% 4.13% 4.07% 3.64%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
** Non-Annualized.
See Financial Statements and Notes Thereto
8
<PAGE> 257
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CONTINUED (for a share outstanding throughout the
periods)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES
-----------------------------------------------------------
JULY 29, 1994
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED DECEMBER 31, OPERATIONS) TO
------------------------------------------ DECEMBER 31,
1997 1996 1995 1994
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $15.064 $15.201 $13.792 $14.300
------- ------- ------- -------
Net Investment Income............. .650 .677 .685 .251
Net Realized and Unrealized
Gain/Loss....................... .510 (.154) 1.415 (.509)
------- ------- ------- -------
Total from Investment Operations... 1.160 .523 2.100 (.258)
Less:
Distributions from and in Excess
of Net Investment Income........ .660 .660 .691 .250
Distributions from Net Realized
Gain............................ .010 -0- -0- -0-
------- ------- ------- -------
Total Distributions................ .670 .660 .691 .250
Net Asset Value, End of the
Period............................ $15.554 $15.064 $15.201 $13.792
======= ======= ======= =======
Total Return*(a)................... 7.91% 3.58% 15.53% (1.81%)**
Net Assets at End of Period (in
millions) (Class C is in
thousands)........................ $ 22.5 $ 18.9 $ 16.9 $ 10.9
Ratio of Expenses to Average Net
Assets*........................... 1.33% 1.03% 1.12% 1.26%
Ratio of Net Investment Income to
Average Net Assets*............... 4.30% 4.56% 4.66% 4.31%
Portfolio Turnover................. 48% 73% 41% 19%**
<CAPTION>
CLASS C SHARES
-----------------------------------------------------------
JULY 29, 1994
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED DECEMBER 31, OPERATIONS) TO
------------------------------------------ DECEMBER 31,
1997 1996 1995 1994
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $ 15.081 $15.213 $13.786 $14.300
--------- ------- ------- -------
Net Investment Income............. .666 .668 .690 .249
Net Realized and Unrealized
Gain/Loss....................... .504 (.140) 1.428 (.513)
--------- ------- ------- -------
Total from Investment Operations... 1.170 .528 2.118 (.264)
Less:
Distributions from and in Excess
of Net Investment Income........ .660 .660 .691 .250
Distributions from Net Realized
Gain............................ .010 -0- -0- -0-
--------- ------- ------- -------
Total Distributions................ .670 .660 .691 .250
Net Asset Value, End of the
Period............................ $ 15.581 $15.081 $15.213 $13.786
========= ======= ======= =======
Total Return*(a)................... 7.97% 3.65% 15.61% (1.81%)**
Net Assets at End of Period (in
millions) (Class C is in
thousands)........................ $ 1,195.1 $ 849.2 $ 461.8 $ 11.4
Ratio of Expenses to Average Net
Assets*........................... 1.37% 1.03% 1.13% 1.26%
Ratio of Net Investment Income to
Average Net Assets*............... 4.38% 4.56% 4.51% 4.28%
Portfolio Turnover................. 48% 73% 41% 19%**
</TABLE>
- ----------------
* If certain expenses had not been reimbursed by the 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()................... 2.03% 2.22% 2.38% 2.75%
Ratio of Net Investment Income to Average Net Assets........ 3.60% 3.38% 3.40% 2.81%
Ratio of Expenses to Average Net Assets()................... 2.06% 2.22% 2.39% 2.74%
Ratio of Net Investment Income to Average Net Assets........ 3.68% 3.38% 3.25% 2.87%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
** Non-Annualized.
See Financial Statements and Notes Thereto
9
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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." 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 or its
affiliates act as investment advisers 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
- ------------------------------------------------------------------------------
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 and 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.
10
<PAGE> 259
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
11
<PAGE> 260
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.
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by the Fund's Adviser and other service providers do not properly process
and calculate date-related information and data from and after January 1, 2000.
This is commonly known as the "Year 2000 Problem." The Advisers is taking steps
that it believes are reasonably designed to address the Year 2000 Problem with
respect to computer systems that it uses and to obtain reasonable assurances
that comparable steps are being taken by the Fund's other major service
providers. At this time, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund. In addition, the Year 2000
Problem may adversely affect the issuers of securities in which the Fund may
invest which, in turn, may adversely affect the net asset value of the Fund.
- ------------------------------------------------------------------------------
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.
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
12
<PAGE> 261
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 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
13
<PAGE> 262
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 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.
14
<PAGE> 263
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 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.
- ------------------------------------------------------------------------------
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.
15
<PAGE> 264
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale of portfolio securities at inopportune times or for prices
other than at current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of the Fund creates the possibility that losses on the hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and some of their risks are described more fully in the Fund's Statement of
Additional Information.
Income earned or deemed to be earned by the Fund from, 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 liquid securities having an aggregate value equal to
the amount of such purchase commitments until payment is made. The Fund will
make commitments to
16
<PAGE> 265
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 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
17
<PAGE> 266
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 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.
18
<PAGE> 267
- ------------------------------------------------------------------------------
SPECIAL CONSIDERATIONS REGARDING THE FUND
- ------------------------------------------------------------------------------
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 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 and is expected to experience steady if unspectacular growth
over the next couple of years. Historically, Florida's unemployment rate has
generally tracked below that of the nation; however, beginning with the
recession in the early 1990's, the trend reversed. Since 1995, the state's
unemployment rate has again been below or about the same as the nation's. The
unemployment rate for Florida in 1997 was 4.8% while the national rate in 1997
was 4.9%. Florida's unemployment rate is forecasted at 4.6% for fiscal year
1997-98 and fiscal 4.8% in year 1998-99.
19
<PAGE> 268
For the State fiscal year which ended June 30, 1997, receipts from the sales
and use tax, the greatest single source of tax revenue to the State of Florida,
were $12,089 million, an increase of 5.5% from fiscal year 1995-96.
Tourism is one of Florida's most important industries. Approximately 47
million people visited the State in 1997. By the end of fiscal year 1998-99,
49.7 million domestic and international tourists are expected to have visited
the state. In 1999-2000, tourist arrivals should approximate 50.6 million.
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 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.
- ------------------------------------------------------------------------------
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 $60 billion under management or
supervision. Van Kampen American Capital's more than 50 open-end and 38
closed-end funds and more than 2,500 unit investment trusts are professionally
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distributed by leading financial advisers nationwide. Van Kampen American
Capital Distributors, Inc. (the "Distributor"), 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 an indirect wholly-owned
subsidiary of Morgan Stanley Dean Witter & Co. The Adviser's principal office is
located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financial and investing; and global custody, securities clearance services and
securities lending.
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 respective
officers of the Fund supervise and implement the Fund's investment activities
and are responsible for overall management of the Fund's business affairs. The
Fund pays 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,
ACCESS Investor Services, Inc. ("ACCESS"), Van Kampen American Capital or Morgan
Stanley Dean Witter & Co.), the charges and expenses of independent accountants,
legal counsel, transfer agent 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.
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PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors, trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to preclearance and other procedures designed to prevent conflicts of
interest.
PORTFOLIO MANAGEMENT. Thomas M. Byron, Vice President of the Adviser, has been
primarily responsible for the day-to-day management of the Fund's portfolio
since January of 1997. Prior to January of 1997, Mr. Byron was manager of the
Unit Investment Trust Purchasing Desk and assumed buying responsibilities for
all national tax-free and taxable unit trusts for the Adviser since April of
1994. Prior to April of 1994, Mr. Byron was responsible for buying the state
unit investment trusts for the Adviser. Mr. Byron has been employed by the
Adviser since 1981.
- ------------------------------------------------------------------------------
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 because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares or Class C Shares. It is presently the policy of the Distributor 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.
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<PAGE> 271
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) ACCESS' 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
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<PAGE> 272
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 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
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<PAGE> 273
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. In some instances additional compensation or promotional
incentives may be offered to brokers, dealers or financial intermediaries that
have sold or may sell significant amounts of shares during specified periods of
time. 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. 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. 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 the net asset value plus sales
charge. 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 for purposes of 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 CDSC 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
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<PAGE> 274
sales to $2 million, plus 0.80% on the next $1 million and 0.50% on the
excess over $3 million. See "Purchase of Shares--Deferred Sales Charge
Alternatives" for additional information with respect to CDSCs.
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 at the time of the purchase order whenever a quantity discount is
applicable to purchases. Upon such notification, an investor will receive the
lowest applicable sales charge. Quantity discounts may be modified or terminated
at any time. For more information about quantity discounts, investors should
contact their broker, dealer or financial intermediary or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or
her spouse and children under 21 years of age 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 of a single trust
or 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 certain open-end investment
companies advised by the Adviser or Van Kampen American Capital Asset
Management, Inc. ("Asset Management") and distributed by the Distributor as
determined from time to time by the Fund's Board of Trustees. Additional funds
may be added from time to time as determined by the Fund's Board of Trustees as
Participating Funds.
VOLUME DISCOUNTS. The size of investment shown in the preceding sales charge
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 any combination of shares of the Fund
and shares of other Participating Funds, although other Participating Funds may
have different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
sales charge 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 sales
charge table. The size of investment shown in the preceding sales charge table
includes the amount of intended purchases of Class A Shares of the Fund with
26
<PAGE> 275
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 sales charge applicable to the purchases made and the
sales 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 investment 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 ACCESS with appropriate backup data
for
27
<PAGE> 276
each participating investor in a computerized format fully compatible with
ACCESS' processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NAV PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired trustees or directors of funds advised by the Adviser
or Van Kampen American Capital Asset Management Inc. and such persons'
families and their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley
Group Inc. and any of its subsidiaries, 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 when permitted, registered
representatives of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21
years of age 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; provided that such
purchases are otherwise permitted by such institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay Participating Dealers
through which purchases are made an amount up to 0.50% of the amount
invested over a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans
which invest in multiple fund families through broker-dealer retirement
plan alliance programs that have entered into agreements with the
Distributor and which are subject to certain minimum size and operational
requirements. Trustees and other fiduciaries should refer to the Statement
of Additional Information for further detail with respect to such
programs.
(6) Beneficial owners of shares of a Participating Funds held by a retirement
plan or held in a tax-advantaged retirement account who purchase shares of
28
<PAGE> 277
the Fund with proceeds from distributions from such a plan or retirement
account other than distributions taken to correct an excess contribution.
(7) 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.
(8) Trusts created under pension, profit sharing or other employee benefit
plans qualified under Section 401(a) of the Code, or custodial accounts
held by a bank created pursuant to Section 403(b) of the Code and
sponsored by non-profit organizations defined under Section 501(c)(3) of
the Code and assets held by an employer or trustee in connection with an
eligible deferred compensation plan under Section 457 of the Code. Such
plans will qualify for purchases at net asset value provided, for plans
initially establishing accounts with the Distributor in the Participating
Funds after February 1, 1997, that (1) the initial amount invested in the
Participating Funds is at least $500,000 or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have
received proposals from the Distributor prior to February 1, 1997 based on
net asset value purchase privileges previously in effect will be qualified
to purchase shares of the Participating Funds at net asset value for
accounts established on or before May 1, 1997. Section 403(b) and similar
accounts for which Van Kampen American Capital Trust Company served as
custodian will not be eligible for net asset value purchases based on the
aggregate investment made by the plan or the number of eligible employees,
except under certain uniform criteria established by the Distributor from
time to time. A commission will be paid on the foregoing purchases as
follows: 1.00% on sales to $2 million, plus 0.80% on the next $1 million,
plus 0.50% on the next $47 million and 0.25% on the excess over $50
million.
(9) Individuals who are members of a "qualified group". For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the
Fund and Participating funds, (iv) has a membership that the authorized
dealer can certify as to the group's members and (v) satisfies other
uniform criteria established by the Distributor for the purpose of
realizing economics of scale in distributing such shares. A qualified
group does not include one whose sole organizational nexus, for example,
is that its participants are credit card holders of the same institution,
policy holders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups.
Shares purchased in each group's participants account in connection with
this privilege will be subject to a CDSC of 1.00% in the event of
redemption within one year of purchase, and a commission will be
29
<PAGE> 278
paid to authorized dealers who initiate and are responsible for such sales
to each individual as follows: 1.00% on sales to $2 million, plus 0.80% on
the next $1 million and 0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
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 ACCESS, the investment adviser, trust company or bank trust
department, provided that ACCESS receives federal funds for the purchase by the
close of business on the next business day 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. Authorized brokers,
dealers or financial intermediaries will be paid a service fee as described
herein under "Distribution and Service Plans" on purchases made as described in
(3) through (9) above. The Fund may terminate, or amend the terms of, offering
shares of the Fund at net asset value to such groups at any time.
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, 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 $1 million and 0.50% on the
excess over $3 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 CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. The amount of the CDSC 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
CDSC will be assessed
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<PAGE> 279
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 CDSC 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 CDSC 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 CDSC 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 CDSC 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 CDSC 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 CDSC 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 $1 million, and 0.50% on
the excess over $3 million.
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CLASS B SHARES. Class B Shares redeemed within seven years of purchase
generally will be subject to a CDSC 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 CDSC 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 CDSC of 1.00% of the dollar amount subject
thereto. Class C Shares redeemed thereafter will not be subject to a CDSC.
CONVERSION FEATURE. Class B Shares purchased on or after June 1, 1996 and any
dividend reinvestment plan shares received thereon automatically convert to
Class A Shares eight years after the end of the calendar month in which the
shares were purchased. Class B Shares purchased before June 1, 1996, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A shares seven years after the end of the calendar month in which the
shares were purchased. Class C Shares purchased before January 1, 1997, and any
dividend reinvestment plan shares received thereon automatically convert to
Class A Shares ten years after the end of the calendar month in which such
shares were purchased. Such conversion will be on the basis of the relative net
asset values per share, without the imposition of any sales load, fee or other
charge. The conversion schedule applicable to a share acquired through the
exchange privilege is determined by reference to the Participating Fund from
which such share originally was purchased. The conversion of such 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 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 may be suspended if such an opinion
is no longer available and such shares might continue to be subject to the
higher aggregate fees applicable to such shares for an indefinite period.
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WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The CDSC 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 required minimum
distributions from an IRA or another retirement plan; (iii) pursuant to the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account; (iv) in circumstances under which no commission or
transaction fee is paid to authorized dealers at the time of purchase of such
shares; and (v) effected pursuant to the right of the Fund to liquidate a
shareholder's account as described herein under "Redemption of Shares." The CDSC
also is waived on redemptions of Class C Shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 180 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
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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<PAGE> 282
- ------------------------------------------------------------------------------
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, 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 the investor's shares of
the Fund are held by ACCESS. Except as described in this Prospectus, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder who has an account in any of the
Participating Funds will receive quarterly statements 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 Fund. Such shares are acquired at net asset value per share (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) 341-2911 ((800) 421-2833
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."
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<PAGE> 283
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to debit 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) 341-2911 ((800) 421-2833 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
Participating Fund so long as the shareholder has 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 for shares of the same
class of any Participating Fund based on the next computed net asset values of
each fund after requesting the exchange without any sales charge, subject to
certain limitations. Shares of the Fund may be exchanged with shares of another
Participating Fund, subject to certain limitations. Shareholders seeking an
exchange into a Participating Fund should obtain and read a current prospectus
for such Participating Fund. 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.
When Class B Shares and Class C Shares are exchanged among Participating
Funds, the holding period for purposes of computing the CDSC is based upon the
date of the initial purchase of such Shares from a Participating Fund (the
"Original Fund"). Upon redemption from the Participating Funds' complex of
Funds, Class B Shares and Class C Shares are subject to the CDSC schedule
imposed by the Original Fund.
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<PAGE> 284
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 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) 341-
2911 ((800) 421-2833 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 reinvest dividends from the new account
into another fund, an exchanging shareholder must file a specific written
request. The Fund reserves the right to reject any order to acquire shares
through exchange. In addition, the Fund may modify, restrict or terminate the
exchange privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment.
A prospectus of any of these mutual funds may be obtained from any broker,
dealer or financial intermediary or the Distributor. An investor considering an
exchange to one of such funds should refer to the prospectus for additional
information regarding such fund prior to investing.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
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<PAGE> 285
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. Any investor whose shares in a single account total $5,000 or
more at the offering price next computed after receipt of instructions may
establish a 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 CDSC. Initial account balance means the amount of the
shareholder's investment at the time the election to participate in the plan is
made.
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. Any gain or loss realized by the Shareholder upon redemption of shares
is a taxable event. 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 (the "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 the 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
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<PAGE> 286
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 the
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. See the Statement of Additional Information for further
information regarding the establishment of the privilege.
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 ACH. 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.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at www.vkac.com
for further instruction. VKAC and the Fund employ procedures considered by them
to be reasonable to confirm that instructions communicated through the internet
are genuine. Such procedures include requiring use of a personal identification
number prior to acting upon internet instructions and providing written
confirmation of instructions communicated through the internet. If reasonable
procedures are employed, neither VKAC nor the Fund will be liable for following
instructions through the internet which it reasonably believes to be genuine. If
an account has multiple owners, ACCESS may rely on the instructions of any one
owner.
- ------------------------------------------------------------------------------
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
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<PAGE> 287
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
120 days must accompany the redemption request.
In the case of redemption requests sent directly to ACCESS, 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) ordinarily will 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, which
may take 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) 341-2911
((800) 421-2833
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<PAGE> 288
for the hearing impaired) to request that a copy of the Telephone Redemption
Authorization form be sent to them for completion. To redeem shares, contact the
telephone transaction line at (800) 421-5684. VKAC and the Fund employ
procedures considered by them to be reasonable to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring certain
personal identification information prior to acting upon telephone instructions,
tape recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed, a
shareholder agrees that neither VKAC nor the Fund will be liable for following
instructions which it reasonably believes to be genuine. VKAC and the Fund may
be liable for any losses due to unauthorized or fraudulent instructions if
reasonable procedures are not followed. Telephone redemptions may not be
available if the shareholder cannot reach ACCESS by telephone, whether because
all telephone lines are busy or for any other reason; in such case, a
shareholder would have to use the Fund's other redemption procedures previously
described. Requests received by ACCESS prior to 4:00 p.m., New York time, on a
regular business day will be processed at the net asset value per share
determined that day. These privileges are available for all accounts other than
retirement accounts. The telephone redemption privilege is not available for
shares represented by certificates. If the shares to be redeemed have been
recently purchased by check, ACCESS may delay mailing a redemption check or
wiring redemption proceeds until it confirms that the purchase check has
cleared, usually a period of up to 15 days. If an account has multiple owners,
ACCESS may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check ordinarily will be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire ordinarily will 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.
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
involuntary redemption may only occur if the shareholder account is less than
the minimum investment due to shareholder redemptions.
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<PAGE> 289
REDEMPTION UPON DEATH OR DISABILITY. The Fund will waive the CDSC on
redemptions following the death or 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
CDSC on Class B Shares and Class C Shares.
In cases of death or disability, the CDSCs on Class B Shares and Class C
Shares will be waived where the decedent or disabled person is either an
individual shareholder or owns the shares as a joint tenant with right of
survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the death or initial
determination of disability. This waiver of the CDSC 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.
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 CDSC paid upon such redemption. Such reinstatement is made at the net asset
value (without sales charge except as described under "Shareholder
Services -- Exchange Privilege") next determined after the order is received,
which must be within 180 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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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
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<PAGE> 290
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
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.
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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 CDSC. 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, 1997, there were $872,421 and $11,946 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 3.88% and 1.00% 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 CDSCs.
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 CDSC 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 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
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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 ACCESS receives payments for such shares. However, shares
become entitled to dividends on the day ACCESS 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 automatically will
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) 341-2911 ((800) 421-2833 for the hearing impaired) or
in writing to ACCESS. See "Shareholder Services -- Reinvestment Plan."
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TAX STATUS
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FLORIDA TAXATION
The following Florida tax discussion is based on the advice of Squire, Sanders
& Dempsey L.L.P., special counsel to the Fund for Florida tax matters.
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
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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.
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 $2.00 per $1,000 of taxable intangible property. 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 (Illinois).
FEDERAL INCOME TAXATION. The Fund has qualified and intends to continue 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 gain, but not net capital gains, which are the
excess of net long-
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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
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 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 sold for fair market value at the end of the
tax-year), 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.
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%
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<PAGE> 295
of the Fund's annual gross income be derived from the disposition of securities
held for less than three months.
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 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.
DISTRIBUTIONS. The Fund intends to invest in sufficient tax-exempt municipal
securities to permit payment of "exempt-interest dividends" (as defined in the
Code). Dividends paid by the Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Fund consists of municipal securities.
The Tax Reform Act of 1986 (the "Tax Reform Act") may have an adverse impact
upon the Fund and its shareholders. The Tax Reform Act imposed new limitations
on the use and investment of the proceeds of state and local government bonds
and other funds, which limitations must be satisfied in order to maintain the
exclusion from gross income for interest on such bonds. The provisions of the
Tax Reform Act generally apply to bonds issued after August 15, 1986. In light
of these requirements, bond counsel qualify their opinions as to the federal tax
status of bonds issued after August 15, 1986 by making them contingent on the
issuer's future compliance with these limitations. Any failure on the part of an
issuer to comply could cause the interest on its bonds to become taxable to
investors retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
The Tax Reform Act also makes interest on certain "private-activity bonds" an
item of tax preference subject to the alternative minimum tax on individuals and
corporations. The Fund invests a portion of its assets in municipal securities
subject to this provision so that a portion of its exempt-interest dividends is
an item of tax preference to the extent such dividends represent interest
received from these private-activity bonds. Accordingly, investment in the Fund
could cause sharehold-
47
<PAGE> 296
ers to be subject to (or result in an increased liability under) the alternative
minimum tax. The Tax Reform Act also imposed per capita volume limitations on
certain private-activity bonds which could limit the amount of such bonds
available for investment by the Fund.
Exempt-interest dividends 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.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the purchaser would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund, or by the Trust if it is required to qualify as a regulated
investment company as described below. "Substantial user" is defined under U.S.
Treasury Regulations to include a non-exempt person who regularly uses in his
trade or business a part of any facilities financed with the tax-exempt
obligations and whose gross revenues derived from such facilities exceed five
percent of the total revenues derived from the facilities by all users, or who
occupies more than 5% of the useable area of the facilities or for whom the
facilities or a part thereof were specifically constructed, reconstructed or
acquired. Examples of "related persons" include certain related natural persons,
affiliated corporations, a partnership and its partners and an S corporation and
its shareholders.
The Omnibus Budget Reconciliation Act of 1993 included certain provisions that
requires gains on dispositions of tax-exempt securities purchased at a market
discount be treated as ordinary income to the extent of the accrued market
discount, if the securities are acquired after April 30, 1993. Such securities
were exempt from the market discount rules under prior law. Interest on
indebtedness incurred or continued by a shareholder to purchase or carry shares
of the Fund is not deductible for federal income tax purposes if the Fund
distributes exempt-interest dividends during the shareholder's taxable year. If
a shareholder receives an exempt-interest dividend with respect to any shares
and such shares are held for six months or less, any short-term capital loss on
the sale or exchange of the shares will be disallowed to the extent of the
amount of such exempt-interest dividend.
While the Fund expects that a major portion of its net investment income will
constitute tax-exempt interest, a significant portion may consist of investment
company taxable income. Distributions of the Fund's net investment company
taxable income are taxable to shareholders as ordinary income to the extent of
the Fund's earnings and profits, 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 as long-term capital gains
regardless of the length of time shares of the Fund have been held by such
shareholders. Interest on indebtedness which is incurred to purchase or carry
shares of a mutual fund which distributes exempt-interest dividends during the
year is not deductible for federal income tax
48
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purposes. 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). Tax-exempt shareholders not subject to
federal income tax on their income generally will not be taxed on distributions
from the Fund.
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.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends so designated cannot exceed, however, the amount of interest
exempt from tax under Section 103 of the Code received by the Fund during the
year over any amounts disallowed as deductions under Sections 265 and 171(a)(2)
of the Code. Since the percentage of dividends which are "exempt-interest"
dividends is determined on an average annual method for the fiscal year, the
percentage of income designated as tax-exempt for any particular dividend may be
substantially different from the percentage of the Fund's income that was tax
exempt during the period covered by the dividend, Fund distributions generally
will not qualify for the dividends received deduction for corporations.
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 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.
The Fund is required, in certain circumstances, to withhold 31% of 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
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<PAGE> 298
months or less will be treated as a long-term capital loss to the extent of any
capital gains 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, state and local 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 law
and any proposed tax law changes.
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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. or nationally recognized financial 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 or reward characteristics
than the Fund. Such characteristics may include, but are not limited to, tax
features,
50
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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 Semi-Annual Report and the Fund's Statement of Additional
Information, each of which can be obtained without charge by calling (800)
421-5666 ((800) 421-2833 for the hearing impaired).
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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 and adapted its current name at that time. 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
"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 certain 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 fees and transfer agency
costs, the liquidation proceeds to Class B Shareholders and Class C Shareholders
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.
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<PAGE> 300
The Fund's Declaration of Trust provides that no Trustee, officer or
shareholder of the Fund shall be held to any personal liability, nor shall
resort be had to their private property for the satisfaction of any obligation
or liability of the Fund but the assets of the Fund only shall be liable.
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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, 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.
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EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 341-2911.
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) 421-2833.
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 847-2424.
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 West 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 (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 302
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FLORIDA INSURED
TAX FREE
INCOME FUND
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P R O S P E C T U S
APRIL 30, 1998
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 303
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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 and 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, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated April 30, 1998, 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) 421-2833. The Statement of Additional Information
has been filed with the Securities and Exchange Commission ("SEC") and is
available along with other related Fund materials at the SEC's internet web site
(http://www.sec.gov).
------------------
VAN KAMPEN AMERICAN CAPITAL SM
------------------
THIS PROSPECTUS IS DATED APRIL 30, 1998.
<PAGE> 304
(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. (the "Adviser"). 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> 305
- ------------------------------------------------------------------------------
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.................................................... 11
Investment Objective and Policies........................... 11
Municipal Securities........................................ 15
Investment Practices........................................ 18
Special Considerations Regarding the Fund................... 21
Investment Advisory Services................................ 23
Alternative Sales Arrangements.............................. 25
Purchase of Shares.......................................... 26
Shareholder Services........................................ 36
Redemption of Shares........................................ 40
Distribution and Service Plans.............................. 44
Distributions from the Fund................................. 46
Tax Status.................................................. 47
Description of Shares of the Fund........................... 52
Additional Information...................................... 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> 306
- ------------------------------------------------------------------------------
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 and 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 of an investor's order to purchase
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. (the
"Adviser") is the Fund's investment adviser.
4
<PAGE> 307
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 foregoing is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
5
<PAGE> 308
- ------------------------------------------------------------------------------
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 CDSC 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 Share Purchases 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 by the Distributor on behalf of the investor. See "Distribution and
Service Plans."
6
<PAGE> 309
- ------------------------------------------------------------------------------
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)........................... 0.25% 1.00%(3) 1.00%(3)
Other Expenses (as a percentage of average
daily net assets)(1)........................ 0.39% 0.36% 0.41%
Total Expenses (as a percentage of average
daily net assets)(1)........................ 0.64% 1.36% 1.41%
</TABLE>
- ------------------------------------------------------------------------------
(1) Expenses include reimbursement of $139,021 of "Management Fees" and
assumption of $52,808 of "Other Expenses" by the Adviser. If the Adviser did
not reimburse fees for the fiscal year ending December 31, 1997, the
"Management Fees" would have been 0.60% for each class of shares "Other
Expenses" would have been 0.62% for Class A Shares, 0.58% for Class B Shares
and 0.63% for Class C Shares and "Total Expenses" would have been 1.47% for
Class A Shares, 2.18% for Class B Shares and 2.23% 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.
(3) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted as a fund-level expense by the
rules of the National Association of Securities Dealers, Inc.
7
<PAGE> 310
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 0.64% for
Class A Shares, 1.36% for Class B
Shares and 1.41% for Class C Shares,
(ii) 5% annual return and (iii)
redemption at the end of each time
period:
Class A Shares......................... $54 $67 $81 $124
Class B Shares......................... $54 $78 $89 $144*
Class C Shares......................... $24 $45 $77 $169
You would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares......................... $54 $67 $81 $124
Class B Shares......................... $14 $43 $74 $144*
Class C Shares......................... $14 $45 $77 $169
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A Shares after eight 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 and is
included to provide a means for the investor to compare expense levels of funds
with different fee structures over varying investment periods. As Fund assets
increase, the fees waived or expenses reimbursed by the Adviser are expected to
decrease. To facilitate such comparison, all funds are required by the SEC to
utilize a 5.00% annual return assumption. Class B Shares acquired through the
exchange privilege are subject to the contingent 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, 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. 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 "Distribution and Service Plans."
8
<PAGE> 311
- --------------------------------------------------------------------------------
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
-----------------------------------------------------------
JULY 29, 1994
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED YEAR ENDED YEAR ENDED OPERATIONS) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........................ $14.992 $15.048 $13.579 $14.300
------- ------- ------- -------
Net Investment Income...................................... .786 .816 .821 .302
Net Realized and Unrealized Gain/Loss...................... .795 (.074) 1.476 (.722)
------- ------- ------- -------
Total from Investment Operations............................ 1.581 .742 2.297 (.420)
Less:
Distributions from and in Excess of Net Investment
Income................................................... .798 .798 .828 .301
Distributions from Net Realized Gain....................... .041 -0- -0- -0-
------- ------- ------- -------
Total Distributions......................................... .839 .798 .828 .301
------- ------- ------- -------
Net Asset Value, End of Period.............................. $15.734 $14.992 $15.048 $13.579
======= ======= ======= =======
Total Return(a)(b).......................................... 10.92% 5.14% 17.33% (2.93%)(c)
Net Assets at End of Period (in millions)................... $ 18.0 $ 7.7 $ 5.4 $ 2.9
Ratio of Expenses to Average Net Assets(a).................. .64% .31% .21% .26%
Ratio of Net Investment Income to Average Net Assets(a)..... 5.16% 5.56% 5.63% 5.27%
Portfolio Turnover.......................................... 60% 126% 51% 68%(c)
</TABLE>
- -------------------
(a) 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>
Ratio of Expenses to Average Net Assets..................... 1.47% 1.82% 2.10% 2.73%
Ratio of Net Investment Income to Average Net Assets........ 4.33% 4.04% 3.74% 2.81%
</TABLE>
(b) Total return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(c) Non-Annualized
9
<PAGE> 312
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CONTINUED (for a share outstanding throughout the
periods)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES
----------------------------------------------------------- ---------------------------
JULY 29, 1994
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED YEAR ENDED YEAR ENDED OPERATIONS) TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1997 1996
------------ ------------ ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................ $14.992 $15.046 $13.578 $14.300 $14.992 $15.041
------- ------- ------- ------- ------- -------
Net Investment Income............. .684 .704 .713 .263 .676 .701
Net Realized and Unrealized
Gain/Loss....................... .782 (.068) 1.476 (.722) .789 (.060)
------- ------- ------- ------- ------- -------
Total from Investment Operations... 1.466 .636 2.189 (.459) 1.465 .641
Less:
Distributions from and in Excess
of Net Investment Income........ .690 .690 .721 .263 .690 .690
Distributions from Net Realized
Gain............................ .041 -0- -0- -0- .041 -0-
------- ------- ------- ------- ------- -------
Total Distributions................ .731 .690 .721 .263 .731 .690
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period..... $15.727 $14.992 $15.046 $13.578 $15.726 $14.992
======= ======= ======= ======= ======= =======
Total Return(a)(b)................. 10.07% 4.37% 16.47% (3.20%)(c) 10.07% 4.44%
Net Assets at End of Period (in
millions)......................... $ 13.1 $ 10.1 $ 9.7 $ 8.1 $ 1.0 $ .4
Ratio of Expenses to Average Net
Assets(a)......................... 1.36% 1.07% .93% .96% 1.41% 1.08%
Ratio of Net Investment Income to
Average Net Assets(a)............. 4.49% 4.79% 4.93% 4.58% 4.37% 4.78%
Portfolio Turnover................. 60% 126% 51% 68%(c) 60% 126%
- -------------------
(a) If certain expenses had not been assumed by the Adviser, total return would have been lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net
Assets............................ 2.18% 2.60% 2.82% 3.42% 2.23% 2.61%
Ratio of Net Investment Income to
Average Net Assets................ 3.67% 3.26% 3.04% 2.12% 3.55% 3.25%
<CAPTION>
CLASS C SHARES
-----------------------------
JULY 29, 1994
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED OPERATIONS) 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....................... 1.472 (.725)
------- -------
Total from Investment Operations... 2.183 (.458)
Less:
Distributions from and in Excess
of Net Investment Income........ .721 .263
Distributions from Net Realized
Gain............................ -0- -0-
------- -------
Total Distributions................ .721 .263
------- -------
Net Asset Value, End of Period..... $15.041 $13.579
======= =======
Total Return(a)(b)................. 16.39% (3.20%)(c)
Net Assets at End of Period (in
millions)......................... $ .4 $ .2
Ratio of Expenses to Average Net
Assets(a)......................... .98% .96%
Ratio of Net Investment Income to
Average Net Assets(a)............. 4.81% 4.58%
Portfolio Turnover................. 51% 68%(c)
- -------------------
(a) If certain expenses had not bee
been as follows:
Ratio of Expenses to Average Net
Assets............................ 2.86% 3.42%
Ratio of Net Investment Income to
Average Net Assets................ 2.93% 2.12%
</TABLE>
(b) Total return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(c) Non-Annualized
10
<PAGE> 313
- ------------------------------------------------------------------------------
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." 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 or its
affiliates also act as investment advisers 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 and 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
11
<PAGE> 314
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
12
<PAGE> 315
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.
The following table sets forth the percentages of the Fund's assets invested
during the fiscal year ended December 31, 1997 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
13
<PAGE> 316
of all Municipal Securities held by the Fund during the fiscal year ended
December 31, 1997, computed on a monthly basis.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
------------------------------------------
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.......................... 35.0% 0.0%
AA/Aa............................ 8.0% 0.0%
A/A.............................. 8.1% 0.0%
BBB/Baa.......................... 36.3% 3.9%
BB/Ba............................ 0.0% 8.4%
B/B.............................. 0.0% 0.3%
CCC/Caa.......................... 0.0% 0.0%
CC/Ca............................ 0.0% 0.0%
C/C.............................. 0.0% 0.0%
D................................ 0.0% 0.0%
----- -----
Percentage of Rated and Unrated
Securities..................... 87.4% 12.6%
===== =====
</TABLE>
Securities rated D are in default, and payment of interest or repayment of
principal is in arrears. Securities that are in default or with respect to which
payment of interest 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 Regarding Medium and Lower Grade Municipal Securities."
The percentage of the Fund's assets invested in securities of various grades
may from time to time vary from those set forth above.
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by the Fund's Adviser and other service providers do not properly process
and calculate date-related information and data from and after January 1, 2000.
This is commonly known as the "Year 2000 Problem". The Adviser is taking steps
that it believes are reasonably designed to address the Year 2000 Problem with
respect to computer systems that it uses and to obtain reasonable assurances
that comparable steps are being taken by the Fund's other major service
providers. At this time, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund. In addition, the Year 2000
Problem may adversely affect the issuers of securities in which the Fund may
invest which, in turn, may adversely affect the net asset value of the Fund.
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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 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
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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.
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.
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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 any such proposal were to be enacted, the ability of
the Fund to pay "exempt-interest" dividends might be adversely affected and the
Fund would re-evaluate its investment objective and policies and consider
changes in its structure.
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
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<PAGE> 320
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."
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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,
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
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<PAGE> 321
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 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 liquid 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
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<PAGE> 322
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 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 commis-
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sions. The income 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.
- ------------------------------------------------------------------------------
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
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<PAGE> 324
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 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
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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 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 $60 billion under management or
supervision. Van Kampen American Capital's more than 50 open-end and 38
closed-end funds and more than 2,500 unit investment trusts are professionally
distributed by leading financial advisers nationwide. Van Kampen American
Capital Distributors, Inc. (the "Distributor"), 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 an indirect wholly-owned
subsidiary of Morgan Stanley Dean Witter & Co. The Adviser's principal office is
located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities,
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indices and interest rates); real estate advice, financial and investing; and
global custody, securities clearance services and securities lending.
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 respective
officers of the Fund supervise and implement the Fund's investment activities
and are responsible for the overall management of the Fund's business affairs.
The Fund pays the Adviser a monthly fee computed based upon an annual rate
applied to 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,
ACCESS Investor Services, Inc. ("ACCESS"), Van Kampen American Capital or Morgan
Stanley Dean Witter & Co.), the charges and expenses of independent accountants,
legal counsel, transfer agent, 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 INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors, trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to 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.
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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 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 because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares or Class C Shares. It is presently the policy of the Distributor 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
25
<PAGE> 328
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) ACCESS' 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 the Distributor, as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares also are offered
through members
26
<PAGE> 329
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. 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. In some
instances, additional compensation or promotional incentives may be offered to
brokers, dealers or financial intermediaries that have sold or may sell
significant amounts of shares during specified periods of time. 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. 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. These programs will not
change the price an investor pays for shares or the amount that the Fund will
receive from such sale.
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<PAGE> 330
CLASS A SHARES
The public offering price of Class A Shares is the net asset value plus a
sales charge. 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 for purposes of 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 CDSC 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 $1 million and 0.50% on the
excess over $3 million. See "Purchase of Shares--Deferred Sales Charge
Alternatives" for additional information with respect to CDSCs.
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 at the time of the purchase order whenever a quantity discount is
applicable to purchases. Upon such notification, an investor will receive the
lowest applicable sales charge. Quantity discounts may be modified or terminated
at any time. For more information about quantity discounts, investors should
contact their broker, dealer or financial intermediary or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or
her spouse and children under 21 years of age and any corporation, partnership
or sole
28
<PAGE> 331
proprietorship which is 100% owned, either alone or in combination, by any of
the foregoing; a trustee or other fiduciary purchasing for a single trust or 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 certain open-end investment
companies advised by the Adviser or Van Kampen American Capital Asset
Management, Inc. ("Asset Management") and distributed by the Distributor as
determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the preceding sales charge
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 any combination of shares of the Fund
and shares of other Participating Funds, although other Participating Funds may
have different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
sales charge 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 sales
charge table. The size of investment shown in the preceding sales charge 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 sales charge applicable to the purchases made and the
sales 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.
29
<PAGE> 332
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges
in connection with unit investment 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 ACCESS with appropriate backup data
for each participating investor in a computerized format fully compatible with
ACCESS' processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NAV PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired trustees or directors of funds advised by the Adviser
or Van Kampen American Capital Asset Management, Inc. and such persons'
families and their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley
Group Inc. and any of its subsidiaries, employees of an investment
30
<PAGE> 333
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 children under 21 years of age 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: provided that such purchases are otherwise permitted by such
institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay Participating Dealers
through which purchases are made an amount up to 0.50% of the amount
invested, over a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans
which invest in multiple fund families through broker-dealer retirement
plan alliance programs that have entered into agreements with the
Distributor and which are subject to certain minimum size and operational
requirements. Trustees and other fiduciaries should refer to the Statement
of Additional Information for further detail with respect to such alliance
programs.
(6) Beneficial owners of shares of a Participating Fund held by a retirement
plan or held in a tax-advantaged retirement account who purchase shares of
the Fund with proceeds from distributions from such a plan or retirement
account other than distributions taken to correct an excess contribution.
(7) 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.
(8) Trusts created under pension, profit sharing or other employee benefit
plans qualified under Section 401(a) of the Code, or custodial accounts
held by a bank created pursuant to Section 403(b) of the Code and
sponsored by non-profit organizations defined under Section 501(c)(3) of
the Code and assets held by an employer or trustee in connection with an
eligible deferred compensation plan under Section 457 of the Code. Such
plans will qualify for purchases at net asset value provided, for plans
initially establishing accounts with the Distributor in the Participating
Funds after February 1, 1997, that (1) the initial amount invested in the
Participating Funds is at least $500,000 or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have
received proposals from the Distributor prior to February 1, 1997 based on
net asset value purchase privileges previously in effect will be qualified
to purchase shares of the Participating Funds at net asset value for
accounts established on or before
31
<PAGE> 334
May 1, 1997. Section 403(b) and similar accounts for which Van Kampen
American Capital Trust Company served as custodian will not be eligible
for net asset value purchases based on the aggregate investment made by
the plan or the number of eligible employees, except under certain uniform
criteria established by the Distributor from time to time. A commission
will be paid on the foregoing purchases as follows: 1.00% on sales to $2
million, plus 0.80% on the next $1 million, plus 0.50% on the next $47
million and 0.25% on the excess over $50 million.
(9) Individuals who are members of a "qualified group". For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the
Fund and Participating Funds, (iv) has a membership that the authorized
dealer can certify as to the group's members and (v) satisfies other
uniform criteria established by the Distributor for the purpose of
realizing economics of scale in distributing such shares. A qualified
group does not include one whose sole organizational nexus, for example,
is that its participants are credit card holders of the same institution,
policy holders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups.
Shares purchased in each group's participants account in connection with
this privilege will be subject to a CDSC of 1.00% in the event of
redemption within one year of purchase, and a commission will be paid to
authorized dealers who initiate and are responsible for such sales to each
individual as follows: 1.00% on sales to $2 million, plus 0.80% on the
next $1 million and 0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
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 ACCESS, the investment adviser, trust company or bank trust
department, provided that ACCESS receives federal funds for the purchase by the
close of business on the next business day 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. Authorized brokers,
dealers or financial intermediaries will be paid a service fee as described
herein under "Distribution and Service Plans" on purchases made as described in
(3) through (9) above. The Fund may terminate, or amend the terms of, offering
shares of the Fund at net asset value to such groups at any time.
32
<PAGE> 335
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, at 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 $1 million and
0.50% on the excess over $3 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 CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. The amount of the CDSC 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
CDSC 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 CDSC 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 CDSC 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 CDSC 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 CDSC 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
33
<PAGE> 336
CDSC Shares held longest during the period of time that a CDSC 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 CDSC 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 $1 million and 0.50% on the
excess over $3 million.
CLASS B SHARES. Class B Shares redeemed within seven years of purchase
generally will be subject to a CDSC 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 CDSC 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 CDSC of 1.00% of the dollar amount subject
thereto. Class C Shares redeemed thereafter will not be subject to a CDSC.
34
<PAGE> 337
CONVERSION FEATURE. Class B Shares purchased on or after June 1, 1996 and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares eight years after the end of the calendar month in which the
shares were purchased. Class B Shares purchased before June 1, 1996, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares seven years after the end of the calendar month in which the
shares were purchased. Class C Shares purchased before January 1, 1997, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A Shares ten years after the end of the calendar month in which such
shares were purchased. Such conversion will be on the basis of the relative net
asset values per share, without the imposition of any sales load, fee or other
charge. The conversion schedule applicable to a share acquired through the
exchange privilege is determined by reference to the Participating Fund from
which such share originally was purchased. The conversion of such 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 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
Internal Revenue Code of 1986, as amended (the "Code"), and (ii) that the
conversion of such shares does not constitute a taxable event under federal
income tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The CDSC 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 required minimum
distributions from an IRA or another retirement plan; (iii) pursuant to the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account; (iv) in circumstances under which no commission a
transaction fee is paid to authorized dealers at the time of purchase of such
shares; and (v) effected pursuant to the right of the Fund to liquidate a
shareholder's account as described herein under "Redemption of Shares." The CDSC
also is waived on redemptions of Class C Shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 8 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
35
<PAGE> 338
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
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, 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 the Investor's shares of
the Fund are held by ACCESS. Except as described in this Prospectus, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder who has an account in any of the
Participating Funds will receive quarterly statements from ACCESS showing any
reinvestments of dividends and capital gains distributions and any other
activity in the account since the preceding statement. Such shareholders also
will receive separate confirmations for each purchase or sale transaction other
than reinvestment of dividends and capital gains distributions and systematic
purchases or redemptions. Additions to an investment account may be made at any
time by purchasing shares through authorized brokers, dealers or financial
intermediaries or by mailing a check directly to ACCESS.
SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof.
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In addition, if such certificates are lost the shareholder must write to Van
Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256, Kansas City, MO
64141-9256, requesting an "affidavit of loss" and to obtain a Surety Bond in a
form acceptable to ACCESS. On the date the letter is received ACCESS will
calculate a fee for replacing the lost certificate equal to no more than 2.00%
of the net asset value of the issued shares and bill the party to whom the
replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date of such dividend or distribution. Unless the shareholder
instructs otherwise, the reinvestment plan is automatic. This instruction may be
made by telephone by calling (800) 341-2911 ((800) 421-2833 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 debit a bank account on a regular
basis to invest predetermined 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) 341-2911 ((800) 421-2833 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
Participating 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 for shares of the same
class of any Participating Fund based upon the next computed net asset value of
each fund after requesting the exchange without any sales charge, subject to
certain limitations. Shareholders seeking an exchange into a Participating Fund
should obtain and read a current prospectus for such Participating Fund.
SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE LEGALLY AVAILABLE
FOR SALE IN THEIR STATE.
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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.
When Class B shares and Class C shares are exchanged among Participating
Funds, the holding period for purposes of computing the CDSC is based upon the
date of the initial purchase of such shares from a Participating Fund (the
"Original Fund"). Upon redemption shares from the Participating Funds' complex
of funds, Class B shares and Class C shares are subject to the CDSC schedule
imposed by the Original 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 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)
341-2911 ((800) 421-2833 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. 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 reinvest dividends from the
new account into another fund an exchanging shareholder must file a specific
written request. The Fund reserves the right to reject any order to acquire
shares through exchange. In addition, the Fund may
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modify, restrict or terminate the exchange privilege at any time on 60 days'
notice to its shareholders of any termination or material amendment.
A prospectus of any of these mutual funds may be obtained from any broker,
dealer or financial intermediary or the Distributor. An investor considering an
exchange to one of such funds should refer to the prospectus for additional
information regarding such fund prior to investing.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. Any investor whose shares in a single account total $5,000 or
more at the offering price next computed after receipt of instructions may
establish a 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 at the time the election to
participate in the plan is made.
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 the purchase of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. Any gain or loss realized by the shareholder upon the redemption of
shares is a taxable event.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the Authorization for Redemption by Check
Form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company (the "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 the 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
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<PAGE> 342
writing redemptions represent the sale of Class A Shares. Any gain or loss
realized on the sale of Class A Shares is a taxable event. See "Redemption of
Shares."
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges.
Holders of Class A Shares may not liquidate the entire account by means of a
check. The check writing privilege may be terminated or suspended at any time by
the Fund or the 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. See the Statement of Additional Information for
further information regarding the establishment of the privilege.
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 ACH. 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.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at www.vkac.com
for further instruction. VKAC and the Fund employ procedures considered by them
to be reasonable to confirm that instructions communicated through the internet
are genuine. Such procedures include requiring use of a personal identification
number prior to acting upon internet instruction and providing written
confirmation of instructions communicated through the internet. If reasonable
procedures are employed, neither VKAC nor the Fund will be liable for following
instructions through the internet which it reasonably believes to be genuine. If
an account has multiple owners, ACCESS may rely on the instructions of any one
owner.
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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
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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 120 days must accompany the redemption request.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received. Payment for shares redeemed (less any sales charge, if applicable)
ordinarily will 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, which may take 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.
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<PAGE> 344
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) 341-2911
((800) 421-2833 for the hearing impaired) to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Fund employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the Fund
will be liable for following instructions which it reasonably believes to be
genuine. VKAC and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if reasonable procedures are not followed. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Fund's other redemption
procedures previously described. Requests received by ACCESS prior to 4:00 p.m.,
New York time, on a regular business day will be processed at the net asset
value per share determined that day. These privileges are available for all
accounts other than retirement accounts. The telephone redemption privilege is
not available for shares represented by certificates. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check or wiring redemption proceeds until it confirms that the
purchase check has cleared, usually a period of up to 15 days. If an account has
multiple owners, ACCESS may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check ordinarily will be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire ordinarily will 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.
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<PAGE> 345
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
involuntary redemption may only occur if the shareholder account is less than
the minimum investment due to shareholder redemptions.
REDEMPTION UPON DEATH OR DISABILITY. The Fund will waive the CDSC on
redemptions following the death or 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
CDSC on Class B Shares and Class C Shares.
In cases of death or disability, the CDSCs on Class B Shares and Class C
Shares will be waived where the decedent or disabled person is either an
individual shareholder or owns the shares as a joint tenant with right of
survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the death or initial
determination of disability. This waiver of the CDSC 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 death or initial determination of disability.
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 CDSC paid upon such redemption. Such reinstatement is made at the net asset
value (without sales charge except as described under "Shareholder Services --
Exchange Privilege") next determined after the order is received, which must be
within 180 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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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
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
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<PAGE> 347
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 CDSC. 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, 1997, there were $524,578 and $9,982 of unreimbursed
distribution related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 4.00% and 0.97% 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 CDSCs.
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 CDSC 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 ACCESS receives payments for such shares. However, shares
become entitled to dividends on the day ACCESS 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 automatically will
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) 341-2911 ((800) 421-2833 for the hearing impaired) or
in writing to ACCESS. See "Shareholder Services -- Reinvestment Plan."
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TAX STATUS
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NEW YORK TAXATION. The discussion under this heading applies only to
shareholders of the Fund that are residents of New York for New York tax
purposes. 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 after
1996 is 6.85%. The highest marginal New York City income tax rate currently
imposed on individuals is 4.46%. 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. 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.
FEDERAL INCOME TAXATION. The Fund has elected and qualified and intends to
continue to qualify each year of the Fund 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 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 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 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.
47
<PAGE> 350
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 recognize income or gain 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 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.
DISTRIBUTIONS. The Fund intends to invest in sufficient tax-exempt municipal
securities to permit payment of "exempt-interest dividends" (as defined in the
Code). Dividends paid by the Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each
48
<PAGE> 351
quarter of its taxable year, at least 50% of the value of the total assets of
the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
Exempt-interest dividends 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.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund, or by the Trust if it is required to qualify as a regulated
investment company as described below. "Substantial user" is defined under U.S.
Treasury regulations to include a non-exempt person who regularly uses in his
trade or business a part of any facilities financed with the tax-exempt
obligations and whose gross revenues derived from such facilities exceed 5% of
the total revenues derived from the facilities by all users, or who occupies
more than 5% of the useable area of the facilities or for whom the facilities or
a part thereof were specifically constructed, reconstructed or acquired.
Examples of
49
<PAGE> 352
"related persons" include certain related natural persons, affiliated
corporations, a partnership and its partners and an S corporation and its
shareholders.
While the Fund expects that a major portion of its net investment income will
constitute tax-exempt interest, a significant portion may consist of investment
company taxable income. Distributions of the Fund's net investment company
taxable income are taxable to shareholders as ordinary income to the extent of
the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains ("capital gain
dividends"), if any, are taxable to shareholders as 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). For a summary of the
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates Under the 1997 Tax Act" below. Interest on indebtedness
incurred or continued by a shareholder to purchase or carry shares of the Fund
is not deductible for federal income tax purposes if the Fund distributes
exempt-interest dividends during the shareholder's taxable year. Tax-exempt
shareholders not subject to federal income tax on their income generally will
not be taxed on distributions from the Fund.
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.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt-interest dividends cannot exceed, the
amount of interest exempt from tax under Section 103 of the Code received by the
Fund during the year over any amounts disallowed as deductions under Sections
265 and 171(a)(2) of the Code. Since the percentage of dividends which are
exempt-interest dividends is determined on an average annual method for the
fiscal year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax exempt during the period covered by the dividend.
Fund distributions generally will not qualify for the dividends received
deduction for corporations.
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 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
50
<PAGE> 353
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.
The Fund is required, in certain circumstances, to withhold 31% of 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. For a summary of the tax rates applicable
to capital gains, see "Capital Gains Rates Under the 1997 Tax Act" below. Any
loss recognized upon a taxable disposition of shares held for six months or less
will be treated as a long-term capital loss to the extent of any capital gains
dividends received with respect to such shares. Any short-term capital loss on
the sale or exchange 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. 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.
CAPITAL GAINS RATES UNDER THE 1997 TAX ACT. Under the Taxpayer Relief Act of
1997 (the "1997 Tax Act"), the maximum tax rate applicable to net capital gains
recognized by individuals and other non-corporate taxpayers is (i) the same as
the maximum ordinary income tax rate for capital assets held for one year or
less, (ii) 28% for capital assets held for more than one year but not more than
18 months and (iii) 20% for capital assets held for more than 18 months. The
maximum net capital gains tax rate for corporations remains at 35%. The tax
rates for capital gains described above will apply to distributions of capital
gain dividends by the Fund (if, as expected, the Fund designates capital gain
dividends as 28% rate gain distributions or 20% rate gain distributions, in
accordance with its holding periods for the securities sold that generated such
capital gain dividends) as well as to sales and exchanges of shares in the Fund.
With respect to capital losses recognized on dispositions of shares held six
months or less where such losses are treated as long-term capital losses to the
extent of prior distributions of capital gain dividends received on such shares
(see "Sale of Shares" above), it is unclear how such capital losses offset the
capital gains referred to above. Shareholders should consult their own tax
advisers as to the application of the new capital gains rates to their
particular circumstances.
51
<PAGE> 354
GENERAL. The federal, state and local income tax discussion set forth above
is for general information only. Prospective investors should consult their
advisors regarding the specific federal tax consequences of purchasing, holding
and disposing of shares, as well as the effects of state, local and foreign tax
law and any proposed tax law changes.
- ------------------------------------------------------------------------------
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 and adopted its current name at that time. 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
"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 certain 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.
52
<PAGE> 355
- ------------------------------------------------------------------------------
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.
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<PAGE> 356
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 341-2911.
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) 421-2833.
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 847-2424.
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 West 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 (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 357
------------------------------------------------------------------------------
NEW YORK TAX FREE INCOME FUND
------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 30, 1998
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 358
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 30, 1998 (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
writing or calling Van Kampen American Capital Distributors, Inc. at One
Parkview Plaza, Oakbrook Terrace, IL 60181 at (800) 421-5666 (or (800) 421-2833
for the hearing impaired). This Statement of Additional Information incorporates
by reference the entire Prospectus.
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-12
Investment Advisory and Other Services...................... B-21
Custodian and Independent Accountants....................... B-22
Portfolio Transactions and Brokerage Allocation............. B-23
Tax Status of the Fund...................................... B-24
The Distributor............................................. B-24
Distribution and Service Plans.............................. B-25
Transfer Agent.............................................. B-26
Legal Counsel............................................... B-26
Performance Information..................................... B-26
Report of Independent Accountants........................... B-28
Financial Statements........................................ B-29
Notes to Financial Statements............................... B-43
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1998.
B-1
<PAGE> 359
THE FUND AND THE TRUST
Van Kampen American Capital Tax Free High Income Fund (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, 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.
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
B-2
<PAGE> 360
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, except that the Fund may purchase
securities of other investment companies to the extent permitted by (i)
the 1940 Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time,
or (iii) an exemption or other relief from the provisions of the 1940 Act.
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), except that the Fund may purchase securities
of other investment companies to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
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, except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
9. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and extent permitted by
(i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
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 (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
B-3
<PAGE> 361
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 normally will 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 often are 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.
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
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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 and 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.
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.
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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.
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
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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 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
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options, which generally have standardized terms and performance mechanics, all
the terms of an OTC option, including such terms as method of settlement, term,
exercise price, premium, guarantees and security, are set by negotiation of the
parties. The Fund will only sell OTC options that are subject to a buy-back
provision permitting the Fund to require the Counterparty to sell the option
back to the Fund at a formula price within seven days. The Fund expects
generally to enter into OTC options that have cash settlement provisions,
although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that, in general, OTC options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities "covering"
the amount of the Fund's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on investing no more than 15% of its assets
in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets. All calls sold by the
Fund must be "covered" (i.e., the Fund must own the securities or futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate or fixed-income market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The purchase of a futures
contract creates a firm obligation by the Fund, as purchaser, to take delivery
from the seller the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to 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) 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
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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 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
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
securities 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 securities 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.
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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 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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TRUSTEES AND OFFICERS
The tables below list the trustees and officers of the Fund and other
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with VK/AC
Holding, Inc. ("VKAC Holding"), Van Kampen American Capital, Inc. ("Van Kampen
American Capital" or "VKAC"), Van Kampen American Capital Investment Advisory
Corp. ("Advisory Corp."), Van Kampen American Capital Asset Management, Inc.
("Asset Management"), Van Kampen American Capital Distributors, Inc., the
distributor of the Fund's shares (the "Distributor"), Van Kampen American
Capital Advisors Corp., Van Kampen Merritt Equity Advisors Corp., Van Kampen
American Capital Insurance Agency of Illinois, Inc., VK/AC System, Inc., Van
Kampen American Capital Record Keeping Services, Inc., American Capital
Contractual Services, Inc., Van Kampen American Capital Trust Company, Van
Kampen American Capital Exchange Corporation, and ACCESS Investors Services
Inc., the Fund's transfer agent ("ACCESS"). Advisory Corp. and Asset Management
sometimes are referred to herein collectively as the "Advisers". For purposes
hereof, the term "Fund Complex" includes each of the open-end investment
companies advised by the Advisers (excluding the Van Kampen American Capital
Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee/Director of each of the
funds in the Fund Complex.
Richard M. DeMartini*..................... President and Chief Operating Officer, Individual Asset
Two World Trade Center Management Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Mr. DeMartini is a Director of InterCapital
New York, NY 10048 Funds, Dean Witter Distributors, Inc. and Dean Witter
Date of Birth: 10/12/52 Trust Company. Trustee of the TCW/DW Funds. Director of
the National Healthcare Resources, Inc. Formerly Vice
Chairman of the Board of the National Association of
Securities Dealers, Inc. and Chairman of the Board of the
Nasdaq Stock Market, Inc. Trustee/Director of each of the
funds in the Fund Complex.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board, The
International House Board and the Women's Board of the
University of Chicago. Trustee/Director of each of the
funds in the Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont 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.
Trustee/Director of each of the funds in the Fund
Complex.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee/Director of each of
the funds in the Fund Complex.
</TABLE>
B-12
<PAGE> 370
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Don G. Powell*............................ Chairman and a Director of VKAC. Chairman and a Director
2800 Post Oak Blvd. of the Advisers and the Distributor. Chairman and a
Houston, TX 77056 Director of ACCESS. Director or officer of certain other
Date of Birth: 10/19/39 subsidiaries of VKAC. Chairman of the Board of Governors
and the Executive Committee of the Investment Company
Institute. Prior to November 1996, President, Chief
Executive Officer and a Director of VKAC Holding.
Trustee/Director of funds in the Fund Complex advised by
Advisory Corp. and prior to July 1996, President, Chief
Executive Officer and a Trustee of the funds in the Fund
Complex.
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer services Company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company; the
Date of Birth: 07/08/44 Urban Shopping Centers Inc., a retail mall management
company; and Stone Container Corp., a paper manufacturing
company. Trustee, University of Notre Dame. Formerly,
President and Chief Executive Officer, Waste Management,
Inc., an environmental services company, and prior to
that President and Chief Operating Officer, Waste
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen American Capital
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex, and other open-end and closed-end funds
advised by the Advisers or Van Kampen American Capital
Management, Inc.
</TABLE>
- ---------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
position with Morgan Stanley Dean Witter & Co. and its affiliates.
B-13
<PAGE> 371
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Wood, Sullivan, Dalmaso, Martin,
Wetherell and Hill are located at One Parkview Plaza, Oakbrook Terrace, IL
60181. The Fund's other officers are located at 2800 Post Oak Blvd., Houston, TX
77056.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Dennis J. McDonnell......... President Executive Vice President and a Director of
Date of Birth: 05/20/42 VKAC and VK/AC Holding, Inc. President,
Chief Operating Officer and a Director of
the Advisers, Van Kampen American Capital
Advisors, Inc., and Van Kampen American
Capital Management, Inc. President and a
Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he
was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996,
Mr. McDonnell was Chief Executive Officer
and Director of MCM Group, Inc., McCarthy,
Crisanti & Maffei, Inc. and Chairman and
Director of MCM Asia Pacific Company,
Limited and MCM (Europe) Limited. Prior to
November 1996, Executive Vice President and
a Director of VKAC Holding. Prior to July
of 1996, Mr. McDonnell was President, Chief
Operating Officer and Trustee of VSM Inc.
and VCJ Inc. President of each of the funds
in the Fund Complex. President, Chairman of
the Board and Trustee of other investment
companies advised by the Advisers or their
affiliates.
Peter W. Hegel.............. Vice President Executive Vice President of the Advisers,
Date of Birth: 06/25/56 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Prior to July of 1996, Mr.
Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of
McCarthy, Crisanti & Maffei, Inc. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Curtis W. Morell............ Vice President and Chief Senior Vice President of the Advisers, Vice
Date of Birth: 08/04/46 Accounting Officer President and Chief Accounting Officer of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
</TABLE>
B-14
<PAGE> 372
<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 Secretary Executive Vice President, General Counsel,
Date of Birth: 07/29/53 Secretary and Director of VKAC and VK/AC
Holding, Inc. Mr. Nyberg is also Executive
Vice President, General Counsel and a
Director of Van Kampen Merritt Equity
Holdings Corp. Executive Vice President,
General Counsel, Assistant Secretary and a
Director of the Advisers and the
Distributor, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Management, Inc., Van Kampen American
Capital Exchange Corporation, American
Capital Contractual Services, Inc. and Van
Kampen American Capital Trust Company.
Executive Vice President, General Counsel
and Assistant Secretary of ACCESS. Director
or officer of certain other subsidiaries of
VKAC. Prior to June of 1997, Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to April of 1997,
he was Executive Vice President, General
Counsel and Director of Van Kampen Merritt
Equity Advisors Corp. Prior to July of
1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc.
and Executive Vice President and General
Counsel of VCJ Inc. Prior to September of
1996, he was General Counsel of McCarthy,
Crisanti & Maffei, Inc. Vice President and
Secretary of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Alan T. Sachtleben.......... Vice President Executive Vice President of the Advisers,
Date of Birth: 04/20/42 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Vice President of each of
the funds in the Fund Complex and certain
other investment companies advised by the
Advisers or their affiliates.
Paul R. Wolkenberg.......... Vice President Executive Vice President and Director of
Date of Birth: 11/10/44 VKAC, and VK/AC Holding Inc. Executive Vice
President of the AC Adviser and the
Distributor. President and a Director of
ACCESS. President and Chief Operating
Officer of Van Kampen American Capital
Record Keeping Services, Inc. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Edward C. Wood III.......... Vice President and Chief Senior Vice President of the Advisers and
Date of Birth: 01/11/56 Financial Officer Van Kampen American Capital Management,
Inc. Vice President and Chief Financial
Officer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
B-15
<PAGE> 373
<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 Advisers.
Date of Birth: 08/20/55 Treasurer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Tanya M. Loden.............. Controller Vice President of the Advisers. Controller
Date of Birth: 11/19/59 of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Nicholas Dalmaso............ Assistant Secretary Associate General Counsel and Assistant
Date of Birth: 03/01/65 Secretary of VKAC. Vice President,
Associate General Counsel and Assistant
Secretary of the Advisers, the Distributor,
Van Kampen American Capital Advisors, Inc.
and Van Kampen American Capital Management,
Inc. Assistant Secretary of each of the
funds in the Fund Complex and other
investment companies advised by the
Advisers or their affiliates.
Huey P. Falgout, Jr......... Assistant Secretary Vice President and a Senior Attorney of
Date of Birth: 11/15/63 VKAC. Vice President and Assistant
Secretary of the Advisers, the Distributor,
ACCESS, Van Kampen American Capital
Management, Inc., American Capital
Contractual Services, Inc., Van Kampen
American Capital Exchange Corporation and
Van Kampen American Capital Advisors, Inc.
Assistant Secretary of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
Scott E. Martin............. Assistant Secretary Senior Vice President, Deputy General
Date of Birth: 08/20/56 Counsel and Assistant Secretary of VKAC and
VKAC Holding, Inc. Senior Vice President,
Deputy General Counsel and Secretary of the
Advisers, the Distributor, ACCESS American
Capital Contractual Services, Inc., Van
Kampen American Capital Management, Inc.,
Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Insurance Agency of Illinois, Inc., VKAC
System, Inc., Van Kampen American Capital
Record Keeping Services, Inc. and Van
Kampen Merritt Equity Advisors Corp. Prior
to April of 1997, Senior Vice President,
Deputy General Counsel and Secretary of Van
Kampen American Capital Services, Inc. and
Van Kampen Merritt Holdings Corp. Prior to
September of 1996, Mr. Martin was Deputy
General Counsel and Secretary of McCarthy,
Crisanti & Maffei, Inc., and prior to July
of 1996, he was Senior Vice President,
Deputy General Counsel and Secretary of VSM
Inc. and VCJ Inc. Assistant Secretary of
each of the funds in the Fund Complex and
other investment companies advised by the
Advisers or their affiliates.
</TABLE>
B-16
<PAGE> 374
<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: 06/15/56 and Assistant Secretary of VKAC, the
Advisers, the Distributor, Van Kampen
American Capital Management, Inc. and Van
Kampen American Capital Advisors, Inc.
Prior to September of 1996, Mr. Wetherell
was Assistant Secretary of McCarthy,
Crisanti & Maffei, Inc. Assistant Secretary
of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Steven M. Hill.............. Assistant Treasurer Vice President of the Advisers. Assistant
Date of Birth: 10/16/64 Treasurer of each of the funds in the Fund
Complex and other investment companies
advised by the Advisers or their
affiliates.
Michael Robert Sullivan..... Assistant Controller Assistant Vice President of the Advisers.
Date of Birth: 03/30/33 Assistant Controller of each of the funds
in the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 64 operating funds in the Fund Complex. For purposes of the following
compensation and benefits discussion, the Fund Complex is divided into the
following three groups: the funds advised by Asset Management (the "AC Funds"),
the funds advised by Advisory Corp. excluding funds organized as series of the
Morgan Stanley Fund, Inc. (the "VK Funds") and the funds advised by Advisory
Corp. organized as series of the Morgan Stanley Fund, Inc. (the "MS Funds").
Each trustee/director who is not an affiliated person of VKAC, the Advisers, the
Distributor, ACCESS or Morgan Stanley Dean Witter & Co. (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 (except the money
market series of the MS Funds) provides a deferred compensation plan to its
Non-Affiliated Trustees that allows trustees/directors to defer receipt of their
compensation and earn a return on such deferred amounts. Deferring compensation
has the economic effect as if the Non-Affiliated Trustee reinvested his or her
compensation into the funds. Each fund in the Fund Complex (except the money
market series of the MS Funds) provides a retirement plan to its Non-Affiliated
Trustees that provides Non-Affiliated Trustees with compensation after
retirement, provided that certain eligibility requirements are met as more fully
described below.
The trustees recently reviewed and adopted a standardized compensation and
benefits program for each fund in the Fund Complex. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes an annual retainer in
an amount equal to $50,000 per calendar year, due in four quarterly installments
on the first business day of each quarter. Payment of the annual retainer is
allocated among the funds in the Fund Complex (except the money market series of
the MS Funds) on the basis of the relative net assets of each fund as of the
last business day of the preceding calendar quarter. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes a per meeting fee from
each fund in the Fund Complex (except the money market series of the MS Funds)
in the amount of $200 per quarterly or special meeting attended by the
Non-Affiliated Trustee, due on the date of the 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.
For each AC Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from the AC
Funds includes an annual retainer in an amount equal to $35,000 per calendar
year, due in four quarterly installments on the first business day of each
calendar quarter. The AC Funds pay each Non-Affiliated Trustee a per meeting fee
in the amount of $2,000 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. Payment of the annual
B-17
<PAGE> 375
retainer and the regular meeting fee is allocated among the AC Funds (i) 50% on
the basis of the relative net assets of each AC Fund to the aggregate net assets
of all the AC Funds and (ii) 50% equally to each AC Fund, in each case as of the
last business day of the preceding calendar quarter. Each AC Fund which is the
subject of a special meeting of the trustees generally pays each Non-Affiliated
Trustee a per meeting fee 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.
For each VK Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from each VK
Fund includes an annual retainer 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 each VK
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 each VK 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.
For the period from July 2, 1997 up to and including December 31, 1997, the
compensation of each Non-Affiliated Trustee from the MS Funds was based
generally on the compensation amounts and methodology used by such funds prior
to their joining the current Fund Complex on July 2, 1997. Each trustee/director
was elected as a director of the MS Funds on July 2, 1997. Prior to July 2,
1997, the MS Funds were part of another fund complex (the "Prior Complex") and
the former directors of the MS Funds were paid an aggregate fee allocated among
the funds in the Prior Complex that resulted in individual directors receiving
total compensation between approximately $8,000 to $10,000 from the MS Funds
during such funds' last fiscal year.
Under the deferred compensation plan, each Non-Affiliated Trustee generally
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 the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
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 the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
B-18
<PAGE> 376
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
1997 COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
----------------------------------------------------------
AGGREGATE AGGREGATE TOTAL
YEAR FIRST PENSION OR ESTIMATED MAXIMUM COMPENSATION
APPOINTED OR AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
ELECTED TO THE BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) BOARD FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- -------------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
J. Miles Branagan 1991 $3,000 $30,328 $60,000 $111,197
Linda Hutton Heagy 1995 3,000 3,141 60,000 111,197
R. Craig Kennedy 1995 3,000 2,229 60,000 111,197
Jack E. Nelson 1995 3,000 15,820 60,000 104,322
Jerome L. Robinson* 1995 3,000 32,020 15,750 107,947
Phillip B. Rooney** 1997 2,250 0 60,000 74,697
Dr. Fernando Sisto 1973 3,000 60,208 60,000 111,197
Wayne W. Whalen 1995 3,000 10,788 60,000 111,197
</TABLE>
- ---------------
* Mr. Robinson retired from the Board of Trustees on December 31, 1997.
** Mr. Phillip B. Rooney became a member of the Board of Trustees effective
April 14, 1997 and thus does not have a full fiscal year of information to
report.
(1) Messrs. DeMartini, McDonnell and Powell, trustees of the Fund during all or
a portion of the Fund's last fiscal year, are not included in the
compensation table because they are not eligible for compensation or
retirement benefits from the Fund. Mr. McDonnell resigned as a Trustee of
the Fund, effective May 31, 1997.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Fund's fiscal year ended December 31, 1997. The
details of aggregate compensation before deferral for each series, including
the Fund, are shown in Table A below. The details of amounts deferred for
each series, including the Fund, are shown in Table B below. Amounts
deferred are retained by the Fund and earn a rate of return determined by
reference to either the return on the common shares of the Fund or other
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted
by the 1940 Act, each Fund may invest in securities of those funds selected
by the Non-Affiliated Trustees in order to match the deferred compensation
obligation. The details of cumulative deferred compensation (including
interest) owed to current Trustees. The deferred compensation plan is
described above the Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for their respective fiscal years ended in 1997. The retirement
plan is described above the Compensation Table.
(4) For Mr. Robinson, this is the sum of the actual annual benefits payable by
the operating investment companies in the Fund Complex as of the date of
their retirement for each year of the 10-year period since such trustee's
retirement. For the remaining trustees, this is the sum of the estimated
maximum annual benefits payable by the operating investment companies in the
Fund Complex for each year of the 10-year period commencing in the year of
such trustee's anticipated retirement. The Retirement Plan is described
above the Compensation Table. Each Non-Affiliated Trustee of the Board of
Trustees has served as a member of the Board of Trustees since he or she was
first appointed or elected in the year set forth in Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1997 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1997. The
B-19
<PAGE> 377
deferred compensation earns a rate of return determined by reference to the
return on the shares of the funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
trustees were not trustees of such investment companies. Combining the Fund
Complex with other investment companies advised by the Advisers and their
affiliates, Mr. Whalen received Total Compensation of $268,447 during the
calendar year ended December 31, 1997.
As of April 2, 1998, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.
TABLE A
1997 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......... 12/31 $ 3,000 $ 3,000 $3,000 $ 3,000 $ 3,000 $ 2,250 $ 3,000 $ 3,000
Tax Free High Income Fund............ 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
California Insured Tax Free Income
Fund............................... 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
Municipal Income Fund*............... 12/31 4,125 4,125 4,125 4,125 4,125 3,250 4,125 4,125
Intermediate Term Municipal Income
Fund............................... 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
Florida Insured Tax Free Income
Fund............................... 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
New York Tax Free Income Fund........ 12/31 1,125 1,125 1,125 1,125' 1,125 1,000 1,125 1,125
Trust Total........................ 20,250 20,250 20,250 20,250 20,250 15,500 20,250 20,250
</TABLE>
*Includes the deferred compensation balances from New Jersey Tax Free Income
Fund, which was merged into Municipal Income Fund in November 1997.
TABLE B
1997 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund........ 12/31 $ 3,000 $ 3,000 $1,500 $ 3,000 $ 3,000 $ 1,500 $ 1,500 $ 3,000
Tax Free High Income Fund........... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
California Insured Tax Free Fund.... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Municipal Income Fund............... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Intermediate Term Municipal Income
Fund.............................. 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Florida Insured Tax Free Income
Fund.............................. 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
New York Tax Free Income Fund....... 12/31 1,125 1,125 563 1,125 1,125 875 563 1,125
New Jersey Tax Free Income Fund..... 12/31 1,125 1,125 563 1,125 1,125 875 563 1,125
Trust Total....................... 20,250 20,250 10,126 20,250 20,250 10,750 10,126 20,250
</TABLE>
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......... 12/31 $ 4,324 $ 6,482 $11,233 $15,086 $14,485 $ 1,513 $ 3,180 $12,966
Tax Free High Income Fund............ 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
California Insured Tax Free Fund..... 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
Municipal Income Fund*............... 12/31 5,170 7,878 14,033 19,758 18,928 1,765 8,110 17,020
Intermediate Term Municipal Income
Fund............................... 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
Florida Insured Tax Free Income
Fund............................... 12/31 4,324 6,482 6,853 10,650 10,391 1,513 1,622 9,946
New York Tax Free Income Fund........ 12/31 1,487 1,181 3,118 4,223 4,049 891 591 3,586
Trust Total........................ 28,277 41,469 68,936 94,975 91,308 10,221 18,369 82,416
</TABLE>
*Includes the deferred compensation balances from New Jersey Tax Free Income
Fund, which was merged into Municipal Income Fund in November 1997.
B-20
<PAGE> 378
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------
FUND NAME BRANAGAN HEAGY KENNEDY NELSON ROONEY ROBINSON SISTO WHALEN
- --------- -------- ----- ------- ------ ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......................... 1995 1995 1993 1984 1997 1992 1995 1984
Tax Free High Income Fund............................ 1995 1995 1993 1985 1997 1992 1995 1985
California Insured Tax Free Income Fund.............. 1995 1995 1993 1985 1997 1992 1995 1985
Municipal Income Fund................................ 1995 1995 1993 1990 1997 1992 1995 1990
Intermediate Term Municipal Income Fund.............. 1995 1995 1993 1993 1997 1993 1995 1993
Florida Insured Tax Free Income Fund................. 1995 1995 1994 1994 1997 1994 1995 1994
New Jersey Tax Free Income Fund...................... 1995 1995 1994 1994 1997 1994 1995 1994
New York Tax Free Income Fund........................ 1995 1995 1994 1994 1997 1994 1995 1994
</TABLE>
As of April 4, 1998, 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 4, 1998 SHARES OF OWNERSHIP
-------------------------- ------------- -------- ------------
<S> <C> <C> <C>
MLPF&S for the Sole Benefit of its Customers................ 1,258,490 B 7.52%
ATTN Fund Administration 568,771 C 18.08%
4800 Deer Lake Dr E FL 3
Jacksonville, FL 32246-6484
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
The Adviser is the Fund's investment adviser. The Adviser was incorporated
as a Delaware corporation in 1982 (and through December 31, 1987 transacted
business under the name of American Portfolio Advisory Service Inc.).
The Adviser, Van Kampen American Capital Distributors, Inc. (the
"Distributor") and ACCESS Investor Services ("ACCESS") are wholly-owned
subsidiaries of Van Kampen American Capital, Inc. ("VKAC"), which is an indirect
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The principal office
of the Fund, the Adviser, the Distributor and VKAC is located at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc. an investment
adviser, Morgan Stanley & Co. Incorporated, a registered broker-dealer and
investment adviser, and Morgan Stanley International, are engaged in a wide
range of financial services. Their principal businesses include securities
underwriting, distribution and trading; merger, acquisition, restructuring and
other corporate finance advisory activities; merchant banking; stock brokerage
and research services; credit services asset management; trading of futures,
options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.
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
B-21
<PAGE> 379
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, 1997, 1996 and 1995, the Fund paid
advisory expenses of $4,318,581, $3,953,376 and $3,705,007 respectively.
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which Asset Management provides accounting
services to the Fund. The Fund shares with the other Van Kampen American Capital
mutual funds 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, 1997, 1996 and 1995, the Fund paid
expenses of approximately $166,000, $39,200 and $33,600 respectively,
representing Asset Management's and its affiliates' cost of providing accounting
services.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen
American Capital funds advised by the 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, 1997, 1996 and 1995, the Fund paid
expenses of approximately $22,700, $27,100 and $40,000 respectively,
representing Van Kampen American Capital's cost of providing legal services.
CUSTODIAN AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, 225 West 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
B-22
<PAGE> 380
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 accountants for the Fund are KPMG Peat Marwick LLP,
Chicago, Illinois. The selection of independent accountants 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.
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.
During the year ended December 31, 1997, the Fund did not pay brokerage
commissions on transactions to brokers selected primarily on the basis of
research services provided to the Adviser.
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.
B-23
<PAGE> 381
TAX STATUS OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal 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. VKAC
manages or supervises more than $60 billion in mutual funds, closed-end funds
and unit investment trusts -- assets which have been entrusted to VKAC in more
than 2 million investor accounts. VKAC has one of the largest research teams
(outside of the rating agencies) in the country. Each of our high yield
analysts, based either in San Francisco, Chicago, Houston or Boston, has the
responsibility to cover a specific region of the country. This regional focus
enables each high yield analyst to provide more specialized coverage of the
market and alert the portfolio manager to issues of local importance.
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 1997 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.
Shares of the Fund are offered on a continuous basis through the
Distributor. The Distributor is an indirect wholly-owned subsidiary of Morgan
Stanley Dean Witter & Co. The principal office of the Fund, the Adviser, the
Distributor and VKAC is located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management, Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending.
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.
Total underwriting commissions on the sale of shares of the Fund for the
last fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
AMOUNTS
TOTAL UNDERWRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------------ --------------
<S> <C> <C>
Fiscal Year Ended December 31, 1995......................... $1,947,516 $239,013
Fiscal Year Ended December 31, 1996......................... $3,152,458 $365,176
Fiscal Year Ended December 31, 1997......................... $2,853,738 $312,163
</TABLE>
B-24
<PAGE> 382
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 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 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 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 fiscal year ended December 31, 1997, the Fund's aggregate expenses
under the Plans for Class A Shares were $1,570,770 or 0.23% of the Class A
shares' average net assets. Such expenses were paid to reimburse the Distributor
for payments made to financial intermediaries for servicing Fund shareholders
and for administering the Plans. For the fiscal year ended December 31, 1997,
the Fund's aggregate expenses under the Plans for Class B Shares were $1,958,687
or 1.00% of the Class B shares' average net assets. Such expenses were paid to
reimburse the Distributor for the following payments: $1,483,792 for commissions
and transaction fees paid to financial intermediaries in respect of sales of
Class B shares of the Fund and $474,895 for fees paid to financial
intermediaries for servicing Class B shareholders and administering the Plans.
For the fiscal year ended December 31, 1997, the Fund's aggregate expenses under
the Plans for Class C shares were 255,378 or 1.00% of the Class C shares'
average net assets. Such expenses were paid to reimburse the Distributor for the
following payments: $153,032 for commissions and transaction fees paid to
financial intermediaries in respect of sales of Class C shares of the Fund and
$102,346 for fees paid to financial intermediaries for servicing Class C
shareholders and administering the Plans.
B-25
<PAGE> 383
TRANSFER AGENT
During the fiscal years ended December 31, 1995, 1996 and 1997, ACCESS,
transfer agent, shareholder holder service agent and dividend disbursing agent
for the Fund, received fees approximately aggregating $486,400, $673,900, and
$644,000, respectively for these services. The transfer agency prices are
determined through negotiations with the Fund's Board of Trustees and are based
on competitive market benchmarks.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (Illinois).
PERFORMANCE INFORMATION
CLASS A SHARES
The average total return, including payment of the maximum sales charge,
with respect to the Class A Shares for (i) the one year period ended December
31, 1997 was 3.89%; (ii) the 5 year period ended December 31, 1997 was 6.41%;
(iii) the 10 year period ended December 31, 1997 was 6.38%; and (iv) the
approximately 12 year, 6 month period from June 28, 1985 (the commencement of
investment operations of the Fund) through December 31, 1997 was 7.65%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending December 30, 1997 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 5.11%. The tax-equivalent yield for
the 30 day period ending December 30, 1997 (calculated in the manner described
in the Prospectus under the heading "Fund Performance" and assuming a 36% tax
rate) was 7.98%. The Fund's current distribution rate with respect to the Class
A Shares for the month ending December 31, 1997 (calculated in the manner
described in the Prospectus under the heading "Fund Performance") was 5.62%. The
taxable equivalent distribution rate with respect to Class A Shares for the
month ending December 31, 1997 was 8.78%.
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 151.53%.
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 164.05%.
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,
1997 was 4.23% and (ii) the approximately 4 year, 8 month period from May 1,
1993 (commencement of distribution) through December 31, 1997 was 6.06%.
The Class B Share's yield for the 30 day period ending December 30, 1997
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.57%. The tax-equivalent yield for the 30 day period ending
December 30, 1997 (calculated in the manner described in the Prospectus under
the heading "Fund Performance" and assuming a 36% tax rate) was 7.14%. The Class
B Share's current distribution rate for the month ending December 31, 1997
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 5.15%. The taxable equivalent distribution rate with respect
to Class B Shares for the month ending December 31, 1997 was 8.05%.
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
31.62%.
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
33.12%.
B-26
<PAGE> 384
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,
1997 was 7.23% and (ii) the approximately 4 year, 5 month period from August 13,
1993 (commencement of distribution) through December 31, 1997 was 5.69%.
The Class C Share's yield for the 30 day period ending December 30, 1997
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.56%. The tax-equivalent yield for the 30 day period ending
December 30, 1997 (calculated in the manner described in the Prospectus under
the heading "Fund Performance" and assuming a 36% tax rate) was 7.13%. The Class
C Share's current distribution rate for the month ending December 31, 1997
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 5.15%. The taxable equivalent distribution rate with respect
to Class C Shares for the month ending December 31, 1997 was 8.05%.
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
27.52%.
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
27.52%.
B-27
<PAGE> 385
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1997, 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, 1997, 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, 1997, 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 4, 1998
B-28
<PAGE> 386
PORTFOLIO OF INVESTMENTS
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 98.1%
ALABAMA 0.7%
$ 1,000 Mobile, AL Indl Dev Brd Solid Waste Disp Rev Mobile Energy
Svcs Co Proj Rfdg........................................... 6.950% 01/01/20 $ 1,105,230
1,500 Valley, AL Spl Care Fac Fin Auth Rev Lanier Mem Hosp Ser
A........................................................... 5.650 11/01/22 1,510,170
1,000 West Jefferson Cnty, AL Amusement & Pub Park Auth........... 7.500 12/01/08 1,061,400
3,000 West Jefferson Cnty, AL Amusement & Pub Park Auth........... 8.000 12/01/26 3,163,020
------------
6,839,820
------------
ALASKA 0.2%
2,250 Seward, AK Rev AK Sealife Cent Proj......................... 7.650 10/01/16 2,408,017
------------
ARIZONA 1.1%
6,250 Chandler, AZ Indl Dev Auth Rev Chandler Finl Cent Proj Ser
1986 (c) (g)................................................ 9.875 12/01/16 5,312,329
2,605 Maricopa Cnty, AZ Indl Dev Auth Sr Living Fac Rev........... 7.750 04/01/15 2,786,412
2,700 Maricopa Cnty, AZ Uni Sch Dist No 41 Gilbert Rfdg (FGIC
Insd)....................................................... * 01/01/08 1,706,697
825 Pinal Cnty, AZ Sch Dist No 8 Mammoth Ser A.................. 11.000 07/01/00 907,434
------------
10,712,872
------------
ARKANSAS 0.2%
1,945 Arkansas St Dev Fin Auth Single Family Mtg Rev Replacement
Ser C....................................................... 8.600 02/01/17 1,988,004
------------
CALIFORNIA 5.8%
1,310 California Edl Fac Auth Rev Univ of La Verne................ 6.375 04/01/13 1,389,687
7,800 California St Dept Wtr Resources Cent Valley Proj Rev (MBIA
Insd)....................................................... 4.750 12/01/29 7,359,924
1,000 Capistrano, CA Uni Sch Dist Cmnty Fac Dist Spl Tax.......... 7.100 09/01/21 1,099,520
1,500 Colton, CA Pub Fin Auth Rev Elec Sys Impts (Prerefunded @
10/01/03)................................................... 7.500 10/01/20 1,755,090
5,000 Contra Costa, CA Home Mtg Fin Auth Home Mtg Rev (MBIA
Insd)....................................................... * 09/01/17 1,802,700
2,500 Corona, CA Ctfs Partn Vista Hosp Sys Inc Ser C.............. 8.375 07/01/11 2,806,900
2,000 Culver City, CA Redev Fin Auth Rev Tax Alloc Rfdg (AMBAC
Insd) (b)................................................... 5.500 11/01/14 2,157,860
3,465 Escondido, CA Jt Pwrs Fin Auth Lease Rev CA Cent for the
Arts (AMBAC Insd)........................................... * 09/01/15 1,236,277
3,480 Escondido, CA Jt Pwrs Fin Auth Lease Rev CA Cent for the
Arts (AMBAC Insd)........................................... * 09/01/18 1,011,671
1,000 Indio, CA Pub Fin Auth Rev Tax Increment.................... 6.500 08/15/27 1,029,350
2,000 Lake Elsinore, CA Pub Fin Auth Local Agy Rev................ 7.100 09/01/20 2,143,340
1,500 Millbrae, CA Residential Fac Rev Magnolia Of Millbrae Proj
Ser A....................................................... 7.375 09/01/27 1,524,600
2,495 Palm Desert, CA Fin Auth Tax Alloc Rev (MBIA Insd).......... 5.150 04/01/11 2,569,601
6,350 Riverside Cnty, CA Air Force Village West Inc Ser A Rfdg.... 8.125 06/15/20 6,981,126
2,000 San Diego Cnty, CA Ctfs Partn (AMBAC Insd).................. 5.500 08/15/10 2,157,480
1,900 San Diego Cnty, CA Ctfs Partn (AMBAC Insd).................. 5.500 08/15/11 2,034,729
7,625 San Francisco, CA City & Cnty Redev Agy Lease Rev Gains
(Crossover Rfdg @ 07/01/04)................................. 0/8.500 07/01/14 6,499,398
3,300 San Francisco, CA City & Cnty Redev Fin Auth Tax Alloc
Rev......................................................... 5.250 08/01/21 3,255,912
1,000 San Luis Obispo, CA Ctfs Partn Vista Hosp Sys Inc........... 8.375 07/01/29 1,100,990
3,000 Santa Ana, CA Cmnty Redev Agy Tax Alloc Ser B Rfdg.......... 7.500 09/01/16 3,182,910
3,000 Westminster, CA Redev Agy Tax Alloc Rev Commercial Redev
Proj No 1................................................... 6.200 08/01/23 3,300,300
------------
56,399,365
------------
COLORADO 8.0%
11,920 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy................... * 08/31/10 6,070,856
19,000 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy Rev E-470 Proj Ser
C (Prerefunded @ 08/31/05).................................. * 08/31/26 2,825,490
66 Arapahoe Cnty, CO Centennial Downs Metro Dist Cash Payment
Deficiency Bond (g)......................................... 8.090 12/01/34 63,044
378 Arapahoe Cnty, CO Centennial Downs Metro Dist Interest
Certificate (e) (g)......................................... 6.000 12/01/34 358,843
650 Arapahoe Cnty, CO Centennial Downs Metro Dist Ltd Tax Bond
Ser 1993 Rfdg (g)........................................... 8.090 12/01/34 617,869
1,000 Bowles Metro Dist CO GO..................................... 7.750 12/01/15 1,059,650
2,000 Colorado Hlth Fac Auth Rev Baptist Home Assn Ser A.......... 6.375 08/15/24 2,087,480
1,590 Colorado Hlth Fac Auth Rev Christian Living Campus Proj..... 6.850 01/01/15 1,654,300
1,060 Colorado Hlth Fac Auth Rev Christian Living Campus Proj..... 7.050 01/01/19 1,123,791
6,200 Colorado Hlth Fac Auth Rev Christian Living Campus Proj..... 9.000 01/01/25 7,295,850
</TABLE>
See Notes to Financial Statements
B-29
<PAGE> 387
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COLORADO (CONTINUED)
$ 6,310 Colorado Hlth Fac Auth Rev Christian Living Campus Proj
(Prerefunded @ 01/01/99).................................... 10.500% 01/01/19 $ 6,902,509
460 Colorado Hsg Fin Auth Single Family Residential Rev Ser C
Rfdg........................................................ 8.750 09/01/17 470,911
1,000 Denver, CO City & Cnty Arpt Rev Ser A (b)................... 6.900 11/15/98 1,025,280
1,175 Denver, CO City & Cnty Arpt Rev Ser A....................... 8.400 11/15/98 1,219,509
2,205 Denver, CO City & Cnty Arpt Rev Ser A....................... 8.875 11/15/12 2,570,942
9,135 Denver, CO City & Cnty Arpt Rev Ser A....................... 8.500 11/15/23 10,263,995
865 Denver, CO City & Cnty Arpt Rev Ser A (Prerefunded @
11/15/00)................................................... 8.500 11/15/23 983,046
795 Denver, CO City & Cnty Arpt Rev Ser A (Prerefunded @
11/15/01)................................................... 8.875 11/15/12 942,067
2,500 Denver, CO City & Cnty Arpt Rev Ser D....................... 7.750 11/15/13 3,173,525
820 East River Regl Santn Dist CO Var Rfdg (Var Rate Cpn) (g)... 5.000 12/01/08 586,792
5,715 Greeley, CO Multi-Family Rev Hsg Mtg Creek Stone (FHA
Guaranteed)................................................. 6.050 07/01/37 5,867,419
2,816 Gunnison Cnty, CO Indl Rev Bond Crested Butte Mtn Resort
Inc......................................................... 9.250 10/01/07 2,902,395
4,163 Himalaya Wtr & Santn Dist Adams Cnty, CO Genl Oblig Ltd Tax
Bond Ser 1995 (d) (g)....................................... 9.500 12/01/24 2,886,343
2,000 Northern Metro Dist CO Adams Cnty Rfdg...................... 6.500 12/01/16 2,036,900
4,605 Skyland Metro Dist CO Gunnison Cnty Rfdg (Var Rate Cpn)
(g)......................................................... 5.000 12/01/08 3,295,052
13,868 Tower Metro Dist Adams Cnty, CO Genl Oblig Ltd Tax Bond Ser
1995 (d) (g)................................................ 9.500 12/01/24 9,615,555
------------
77,899,413
------------
CONNECTICUT 2.1%
3,740 Connecticut St Hlth & Edl Fac Auth Rev Nursing Home Pgm
AHF/Windsor Proj (b)........................................ 7.125 11/01/24 4,299,990
3,000 Mashantucket Western Pequot Tribe CT Spl Rev Ser A
(Prerefunded @ 09/01/07).................................... 6.400 09/01/11 3,456,480
9,000 Mashantucket Western Pequot Tribe CT Spl Rev Ser B, 144A
(f)......................................................... 5.750 09/01/27 9,211,320
3,000 Mashantucket Western Pequot Tribe CT Spl Rev Ser B, 144A
(f)......................................................... 6.400 09/01/11 3,350,460
------------
20,318,250
------------
DISTRICT OF COLUMBIA 0.4%
1,700 District of Columbia Ser A1 Rfdg (MBIA Insd)................ 6.500 06/01/10 1,975,706
2,000 District of Columbia Ser E (FSA Insd)....................... 6.000 06/01/11 2,152,680
------------
4,128,386
------------
FLORIDA 7.0%
2,700 Brevard Cnty, FL Sch Brd Ctfs Ser A (AMBAC Insd) (b)........ 5.100 07/01/07 2,854,062
28,000 Dade Cnty, FL Gtd Entitlement Rev Cap Apprec Ser A Rfdg
(MBIA Insd) (b)............................................. * 02/01/18 9,145,080
4,955 Escambia Cnty, FL Rev ICF/MR Pensacola Care Dev Cent (g).... 10.250 07/01/11 4,707,250
2,085 Escambia Cnty, FL Rev ICF/MR Pensacola Care Dev Cent Ser A
(g)......................................................... 10.250 07/01/11 1,980,750
1,135 Fishhawk Cmnty, FL Dev Dist Spl Assmt Rev................... 7.625 05/01/18 1,216,607
9,315 Florida St Muni Pwr Agy Rev (AMBAC Insd).................... 4.500 10/01/27 8,423,834
1,300 Heritage Harbor Cmnty Dev Dist Recreational................. 7.750 05/01/19 1,283,126
1,000 Heritage Harbor Cmnty Dev Spl Assmt Ser A................... 6.700 05/01/19 988,700
1,000 Lake Saint Charles, FL Cmnty Dev Dist Spl Assmt Rev......... 7.875 05/01/17 1,064,930
5,500 Miramar, FL Wastewater Impt Assmt Rev (FGIC Insd) (b)....... 6.750 10/01/25 6,219,455
3,760 Monroe Cnty, FL Indl Dev Auth First Mtg Med Fac Rev Kennedy
Dr Invt Ltd Proj Rfdg (g)................................... 11.000 11/01/12 3,758,646
1,250 North Springs, FL Impt Dist Spl Assessment Rev.............. 6.250 05/01/05 1,268,937
1,500 Orange Cnty, FL Hlth Fac Auth Rev First Mtg Orlando Lutheran
Twr......................................................... 8.750 07/01/26 1,763,400
1,300 Orange Cnty, FL Hlth Fac Auth Rev First Mtg Orlando Lutheran
Twr Rfdg.................................................... 8.625 07/01/20 1,515,839
2,395 Pinellas Cnty, FL Edl Fac Auth Rev College Harbor Proj Ser
A........................................................... 8.250 12/01/21 2,532,880
6,000 Sarasota Cnty, FL Hlth Fac Auth Hlth Fac Sunnyside Prty..... 6.700 07/01/25 6,292,740
16,065 Sun N Lake of Sebring, FL Impt Dist Spl Assmt Ser A (d)
(g)......................................................... 10.000 12/15/11 8,032,500
900 Tampa Palms, FL Open Space & Transn Cmnty Dev Dist Rev Cap
Impt Area 7 Proj............................................ 8.500 05/01/17 992,556
1,930 Volusia Cnty, FL Indl Dev Auth Bishops Glen Proj Rfdg....... 7.500 11/01/16 2,082,856
2,000 Volusia Cnty, FL Indl Dev Auth Bishops Glen Proj Rfdg....... 7.625 11/01/26 2,169,060
------------
68,293,208
------------
</TABLE>
See Notes to Financial Statements
B-30
<PAGE> 388
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
GEORGIA 2.1%
$19,000 Class A Ctfs relating to Atlanta, GA Urban Residential Fin
Auth Multi-Family Hsg Renaissance on Peachtree Apts Proj Ser
85 (g)...................................................... 8.500% 04/01/26 $ 20,009,660
------------
IDAHO 1.4%
8,000 Idaho Hlth Fac Auth Rev IHC Hosp Inc Rfdg (Inverse Fltg).... 8.200 02/15/21 9,607,200
4,300 Owyhee Cnty, ID Indl Dev Corp Indl Dev Rev Envirosafe
Services of ID Inc.......................................... 8.250 11/01/02 4,509,926
------------
14,117,126
------------
ILLINOIS 10.0%
975 Alton, IL Hosp Fac Rev Saint Anthony's Hlth Cent Proj
(Prerefunded @ 09/01/99).................................... 8.375 09/01/14 1,057,056
1,850 Bridgeview, IL Tax Increment Rev Rfdg....................... 9.000 01/01/11 2,146,888
3,375 Chicago, IL O'Hare International Arpt Spl Fac Rev........... 6.450 05/01/18 3,582,427
3,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev American Airls Inc
Proj Ser A (b).............................................. 7.875 11/01/25 3,306,030
23,975 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc
Proj Ser 84A (b)............................................ 8.850 05/01/18 26,909,300
2,680 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc
Ser B....................................................... 8.950 05/01/18 3,049,438
3,875 Chicago, IL Rev Chatham Ridge Tax Increment................. 10.250 01/01/07 4,008,687
1,000 Chicago, IL Tax Increment................................... 7.250 01/01/14 1,074,580
2,000 Huntley, IL Increment Alloc Rev Huntley Redev Proj Ser A.... 8.500 12/01/15 2,228,880
1,405 Illinois Dev Fin Auth Rev Cmnty Fac Clinic Altgeld Proj..... 8.000 11/15/16 1,560,548
7,200 Illinois Dev Fin Auth Rev Mercy Hsg Corp Proj Rfdg.......... 7.000 08/01/24 7,953,192
4,000 Illinois DuPage Cnty Forest Preserve Dist................... 5.000 10/01/17 3,965,000
1,000 Illinois Edl Fac Auth Rev Peace Mem Ministries Proj......... 7.500 08/15/26 1,070,200
3,730 Illinois Edl Fac Auth Rev Trinity Med Cent (FSA Insd)....... 6.000 07/01/28 4,019,187
3,000 Illinois Hlth Fac Auth Rev Fairview Oblig Group Ser A
Rfdg........................................................ 7.400 08/15/23 3,326,010
4,550 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D.......... 9.500 11/15/15 5,384,834
1,000 Illinois Hlth Fac Auth Rev Lifelink Corp Oblig Group Ser
B........................................................... 8.000 02/15/25 1,092,060
4,905 Illinois Hlth Fac Auth Rev Midwest Physician Group Ltd
Proj........................................................ 8.100 11/15/14 5,654,043
1,250 Mill Creek Wtr Reclamation Dist IL Sewage Rev............... 8.000 03/01/10 1,408,300
750 Mill Creek Wtr Reclamation Dist IL Wtrwks Rev............... 8.000 03/01/10 844,980
1,500 Palatine, IL Tax Increment Rev Rand/Dundee Cent Proj........ 7.750 01/01/17 1,573,755
1,800 Peoria, IL Spl Tax Weaver Ridge Spl Svc Area................ 8.050 02/01/17 1,963,656
2,095 Regional Tran Auth IL Ser B (AMBAC Insd).................... 8.000 06/01/17 2,855,904
7,000 Robbins, IL Res Recovery Rev................................ 8.375 10/15/16 7,306,390
------------
97,341,345
------------
INDIANA 0.6%
825 Crawfordsville, IN Redev Comm Redev Dist Tax Increment
Rev......................................................... 7.000 02/01/12 842,135
2,000 East Chicago, IN Exempt Fac Inland Steel Co Proj No 14...... 6.700 11/01/12 2,249,720
3,190 Kokomo, IN School Bldg Corp First Mtg (AMBAC Insd).......... 4.125 07/15/17 2,781,201
------------
5,873,056
------------
KANSAS 0.2%
1,865 Kansas City, KS Crawford Cnty Leavenworth Single Family Mtg
Rev (AMBAC Insd)............................................ * 04/01/16 270,929
1,000 Lawrence, KS Commercial Dev Rev Holiday Inn Sr Ser A........ 8.000 07/01/16 1,086,520
1,000 Manhattan, KS Commercial Dev Rev Holiday Inn Sr Ser A
Rfdg........................................................ 8.000 07/01/16 1,072,900
------------
2,430,349
------------
KENTUCKY 0.3%
2,700 Jefferson Cnty, KY Hosp Rev Alliant Hlth Sys Proj (Inverse
Fltg) (MBIA Insd)........................................... 8.607 10/09/08 3,226,500
------------
LOUISIANA 0.2%
1,910 Louisiana Pub Fac Auth Rev Student Ln Subser A3............. 7.000 09/01/06 2,047,807
------------
MAINE 0.1%
1,250 Maine Hlth & Higher Edl Fac Auth Rev Ser B (FSA Insd) (b)... 7.000 07/01/24 1,435,513
------------
MARYLAND 0.7%
1,440 Maryland St Cmnty Dev Admin Dept Hsg & Cmnty Dev
Multi-Family Hsg Rev Ser A Rfdg............................. 8.300 05/15/17 1,473,926
</TABLE>
See Notes to Financial Statements
B-31
<PAGE> 389
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MARYLAND (CONTINUED)
$ 1,725 Maryland St Cmnty Dev Admin Dept Hsg & Cmnty Dev Rev Single
Family Pgm Seventh Ser...................................... 7.300% 04/01/25 $ 1,857,515
3,000 Prince Georges Cnty, MD Spl Oblig Spl Assmt Woodview Ser
A........................................................... 8.000 07/01/26 3,202,740
------------
6,534,181
------------
MASSACHUSETTS 5.9%
13,770 Canton, MA Hsg Auth Multi-Family Hsg Mtg Rev Canton
Arboretum Apts (g).......................................... 6.500 09/01/19 13,494,600
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 4,769,350
1,670 Massachusetts St Hlth & Edl Fac Auth Rev Saint Anne's Hosp
Ser A....................................................... 9.375 07/01/14 1,675,795
2,200 Massachusetts St Hsg Fin Agy Hsg Rev Insd Rental Ser A Rfdg
(AMBAC Insd)................................................ 6.650 07/01/19 2,343,374
640 Massachusetts St Hsg Fin Agy Hsg Rev Ser A.................. 9.000 12/01/18 656,102
4,000 Massachusetts St Indl Fin Agy Rev Cent For Autism........... 9.500 11/01/17 4,400,600
575 Massachusetts St Indl Fin Agy Rev Dimmock Cmnty Hlth Cent... 8.000 12/01/06 644,201
1,085 Massachusetts St Indl Fin Agy Rev Dimmock Cmnty Hlth Cent... 8.375 12/01/13 1,251,483
675 Massachusetts St Indl Fin Agy Rev Dimmock Cmnty Hlth Cent... 8.500 12/01/20 784,316
6,700 Massachusetts St Indl Fin Agy Rev Swr Fac Res Ctl Composting
(g)......................................................... 9.250 08/01/10 7,086,992
700 Massachusetts St Indl Fin Agy Solid Waste Disp Rev Res Recov
Sys......................................................... 9.200 12/01/99 709,583
15,000 Massachusetts St Tpk Auth Ser A (MBIA Insd)................. 5.000 01/01/37 14,549,700
5,000 Massachusetts St Wtr Resources Auth Genl Ser D Rfdg (MBIA
Insd)....................................................... 5.000 08/01/24 4,891,850
------------
57,257,946
------------
MICHIGAN 3.0%
2,000 Battle Creek, MI Downtown Dev Auth Tax Increment Rev........ 7.600 05/01/16 2,383,300
1,000 Detroit, MI Local Dev Fin Auth Ser C........................ 6.850 05/01/21 1,027,080
5,000 Detroit, MI Wtr Supply Sys Rev Sr Lien Ser A (MBIA Insd).... 5.000 07/01/21 4,898,450
7,000 Detroit, MI Wtr Supply Sys Rev Rfdg (FGIC Insd)............. 5.000 07/01/23 6,784,260
2,390 Meridian, MI Econ Dev Corp Ltd Oblig Rev First Mtg Burcham
Hills Ser A................................................. 7.500 07/01/13 2,596,520
3,430 Meridian, MI Econ Dev Corp Ltd Oblig Rev First Mtg Burcham
Hills Ser A................................................. 7.750 07/01/19 3,770,119
12,500 Michigan St Strategic Fd Ltd Oblig Rev Great Lakes Pulp &
Fibre Proj (d) (g).......................................... 10.250 12/01/16 6,937,500
680 Saint Clair Cnty, MI Econ Dev Corp Kmart Proj............... 9.500 02/01/06 681,761
------------
29,078,990
------------
MINNESOTA 2.0%
5,490 Eden Prairie, MN Multi-Family Hsg Rev Sterling Ponds Proj
Ser A (g)................................................... 10.000 01/15/20 5,490,000
495 Eden Prairie, MN Multi-Family Hsg Rev Sterling Ponds Proj
Ser B Cap Apprec (g)........................................ * 01/15/20 777,051
860 Little Canada, MN Fac Rev Hsg Alt Dev Co Proj Ser A......... 6.100 12/01/17 863,122
1,450 Little Canada, MN Fac Rev Hsg Alt Dev Co Proj Ser A......... 6.250 12/01/27 1,455,220
1,750 Minnesota St Hsg Fin Agy Single Family Mtg Ser D............ 8.800 07/01/16 1,804,058
9,750 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser A Rfdg (MBIA
Insd)....................................................... 4.750 01/01/16 9,462,862
------------
19,852,313
------------
MISSISSIPPI 0.1%
1,000 Claiborne Cnty, MS Pollutn Ctl Rev Sys Energy Res Inc
Rfdg........................................................ 7.300 05/01/25 1,060,340
------------
MISSOURI 1.3%
615 Ferguson, MO Tax Increment Rev Crossings at Halls Ferry
Proj........................................................ 7.250 04/01/07 619,139
3,095 Ferguson, MO Tax Increment Rev Crossings at Halls Ferry
Proj........................................................ 7.625 04/01/17 3,135,235
675 Ferguson, MO Tax Increment Rev Crossings at Halls Ferry
Proj........................................................ 7.625 04/01/18 683,775
955 Jefferson Cnty, MO Indl Dev Auth Indl Rev Cedars Hlthcare
Cent Proj Ser A Rfdg........................................ 8.250 12/01/15 1,042,488
4,695 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Skaggs Cmnty
Hosp Rfdg (b)............................................... 9.500 05/15/13 4,849,794
1,000 Sikeston, MO Elec Rev Rfdg (MBIA Insd)...................... 6.000 06/01/15 1,127,830
1,000 West Plains, MO Indl Dev Auth Hosp Rev Ozark Med Cent....... 5.600 11/15/17 1,003,370
------------
12,461,631
------------
MONTANA 0.4%
4,000 Montana St Brd Invt Res Recovery Rev Yellowstone Energy L P
Proj........................................................ 7.000 12/31/19 3,976,480
------------
</TABLE>
See Notes to Financial Statements
B-32
<PAGE> 390
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEBRASKA 0.5%
$ 2,200 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg)
(GNMA Collateralized)....................................... 9.712% 10/17/23 $ 2,466,750
2,400 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg)
(GNMA Collateralized)....................................... 11.287 09/10/30 2,709,000
------------
5,175,750
------------
NEVADA 0.2%
1,945 Reno, NV Redev Agy Tax Alloc Downtown Redev Proj Ser E
Rfdg........................................................ 5.600 09/01/09 1,967,776
------------
NEW HAMPSHIRE 1.5%
2,000 New Hampshire Higher Edl & Hlth Fac Auth Rev
Havenwood-Heritage Heights.................................. 7.350 01/01/18 2,143,340
2,000 New Hampshire Higher Edl & Hlth Fac Auth Rev
Havenwood-Heritage Heights.................................. 7.450 01/01/25 2,157,960
4,000 New Hampshire Higher Edl & Hlth Fac Auth Rev Hosp Catholic
Med Cent Rfdg (b)........................................... 8.250 07/01/13 4,242,520
3,435 New Hampshire Higher Edl & Hlth Fac Auth Rev Vly Regl
Hosp........................................................ 7.350 04/01/23 3,456,778
2,000 New Hampshire St Business Fin Auth Pollutn Ctl & Solid Waste
Disposal Rev................................................ 7.750 01/01/22 2,290,700
------------
14,291,298
------------
NEW JERSEY 2.3%
2,240 Camden Cnty, NJ Impt Auth Lease Rev Dockside Refrigerated... 8.400 04/01/24 2,535,165
5,500 New Jersey Bldg Auth Str Bldg............................... 5.000 06/15/18 5,437,410
6,420 New Jersey Econ Dev Auth Rev First Mtg Gross Rev Oakridge
Manor Proj Rfdg............................................. 9.500 11/01/14 6,650,542
1,000 New Jersey Econ Dev Auth Rev First Mtg Winchester Gardens
Ser A....................................................... 8.500 11/01/16 1,073,110
1,500 New Jersey Econ Dev Auth Rev First Mtg Winchester Gardens
Ser A....................................................... 8.625 11/01/25 1,619,805
3,000 New Jersey Econ Dev Auth Rev Sr Mtg Arbor Glen Proj Ser A... 8.750 05/15/26 3,497,190
1,275 New Jersey St Edl Fac Auth Rev Felician College of Lodi Ser
D........................................................... 7.375 11/01/22 1,286,322
------------
22,099,544
------------
NEW MEXICO 1.2%
2,250 Albuquerque, NM Retirement Fac Rev La Vida Liena Proj Ser A
Rfdg........................................................ 8.850 02/01/23 2,397,915
5,835 Albuquerque, NM Retirement Fac Rev OGL Retirement Fac Rfdg
(c) (g)..................................................... 10.000 10/01/13 4,261,884
1,000 Bernalillo Cnty, NM Multi-Family Rev Hsg Topke
Commons/Arbors Proj Ser D................................... 7.700 04/01/27 1,029,390
3,600 Farmington, NM Pollutn Ctl Rev Pub Svc Co San Juan Proj D
Rfdg........................................................ 6.375 04/01/22 3,908,520
------------
11,597,709
------------
NEW YORK 6.9%
1,195 Clifton Springs, NY Hosp & Clinic Ser B Rfdg & Impt......... 7.000 01/01/05 1,251,392
1,500 Islip, NY Cmnty Dev Agy Cmnty Dev Rev NY Institute of
Technology Rfdg............................................. 7.500 03/01/26 1,663,995
1,500 New York City Indl Dev Agy Rev Visy Paper Inc Proj.......... 7.950 01/01/28 1,732,710
2,000 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev Ser A
Rfdg........................................................ 5.125 06/15/21 1,974,420
5,000 New York City Ser A (b)..................................... 7.000 08/01/07 5,804,550
3,000 New York City Ser D Rfdg (b)................................ 8.000 02/01/05 3,584,460
10,330 New York City SubSer A1 (Embedded Swap)..................... 5.195 08/01/12 10,629,363
4,250 New York City Tran Auth Tran Fac Livingston Plaza Proj Rfdg
(FSA Insd).................................................. 5.400 01/01/18 4,496,628
5,000 New York St Dorm Auth Rev City Univ Ser F................... 5.500 07/01/12 5,104,600
5,000 New York St Dorm Auth Rev City Univ Ser F................... 5.000 07/01/20 4,766,350
3,000 New York St Energy Resh & Dev Auth Gas Fac Rev (MBIA
Insd)....................................................... 7.031 07/08/26 3,093,750
2,500 New York St Energy Resh & Dev Auth Gas Fac Rev (Inverse
Fltg)....................................................... 8.553 04/01/20 3,087,500
225 New York St Energy Resh & Dev Auth St Svc Contract Rev
Western NY Nuclear Svc Cent Ser B........................... 5.500 04/01/00 231,689
1,000 New York St Energy Resh & Dev Auth St Svc Contract Rev
Western NY Nuclear Svc Cent Ser B........................... 5.500 04/01/01 1,038,120
750 New York St Energy Resh & Dev Auth St Svc Contract Rev
Western NY Nuclear Svc Cent Ser B........................... 5.250 04/01/02 774,705
1,750 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Rfdg
(MBIA Insd)................................................. 5.250 02/15/19 1,747,673
1,500 New York St Thruway Auth Hwy & Brdg Tr Fund Ser A........... 6.000 04/01/14 1,613,310
3,000 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl
Tennis Cent Proj (FSA Insd) (b)............................. 6.250 11/15/06 3,363,720
1,500 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl
Tennis Cent Proj (FSA Insd)................................. 6.375 11/15/07 1,697,640
2,000 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl
Tennis Cent Proj (FSA Insd)................................. 6.500 11/15/09 2,269,900
7,775 Triborough Bridge & Tunnel Auth NY Rev Ser 1994A............ 4.750 01/01/19 7,350,096
------------
67,276,571
------------
</TABLE>
See Notes to Financial Statements
B-33
<PAGE> 391
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NORTH CAROLINA 0.8%
$ 7,855 Eastern Band Cherokee Indians NC Spl Oblig Rev Carolina
Mirror Co Proj (g).......................................... 10.250% 09/01/09 $ 7,855,000
------------
NORTH DAKOTA 0.2%
1,000 Grand Forks, ND Sr Hsg Rev 4000 Vly Square Proj............. 6.250 12/01/34 1,005,070
1,000 Grand Forks, ND Sr Hsg Rev Spl Term 4000 Vly Square Proj.... 6.375 12/01/34 1,005,400
------------
2,010,470
------------
OHIO 2.5%
1,500 Cuyahoga Cnty, OH Multi-Family Rev Hsg Park Lane Apts Proj
Ser A....................................................... 8.250 07/01/28 1,550,250
2,000 East Liverpool, OH Hosp Rev East Liverpool City Hosp Ser
A........................................................... 8.125 10/01/11 2,208,520
6,850 Ohio Hsg Fin Agy Single Family Mtg Rev Ser B (Inverse Fltg)
(GNMA Collateralized)....................................... 9.517 03/31/31 7,706,250
1,500 Ohio St Solid Waste Rev CSC Ltd Proj........................ 8.500 08/01/22 1,588,365
3,700 Ohio St Solid Waste Rev Republic Engineered Steels Proj..... 8.250 10/01/14 3,772,742
1,000 Ohio St Solid Waste Rev Republic Engineered Steels Proj..... 9.000 06/01/21 1,054,980
4,490 Reynoldsburg, OH Hlth Care Fac Rev Wesley Ridge Proj (GNMA
Collateralized)............................................. 6.150 10/20/38 4,806,141
1,500 Sandusky Cnty, OH Hosp Fac Rev Mem Hosp Proj Rfdg........... 7.750 12/01/09 1,502,250
------------
24,189,498
------------
OKLAHOMA 0.6%
1,000 Oklahoma Cnty, OK Fin Auth Epworth Villa Proj Ser A Rfdg.... 7.000 04/01/25 1,037,710
4,000 Tulsa, OK Indl Auth Hosp Rev Tulsa Regional Med Cent
(Prerefunded @ 06/01/03) (b)................................ 7.200 06/01/17 4,623,840
------------
5,661,550
------------
PENNSYLVANIA 7.2%
5,255 Allegheny Cnty, PA Indl Dev Auth Rev Rfdg Environmental Impt
USX Proj.................................................... 6.100 01/15/18 5,587,011
6,000 Beaver Cnty, PA Indl Dev Auth Pollutn Ctl Rev Collateral
Toledo Edison Co Proj Ser A Rfdg............................ 7.750 05/01/20 7,000,920
1,000 Berks Cnty, PA Muni Auth Rev Phoebe Berks Village Inc Proj
Rfdg........................................................ 7.700 05/15/22 1,115,680
4,000 Cambria Cnty, PA Indl Dev Auth Pollutn Ctl Rev Bethlehem
Steel Corp Proj Rfdg........................................ 7.500 09/01/15 4,461,560
1,725 Clarion Cnty, PA Hosp Auth Hosp Rev Clarion Hosp Proj....... 8.500 07/01/13 1,977,678
2,000 Cumberland Cnty, PA Auth Rev First Mtg Carlisle Hosp & Hlth
Rfdg........................................................ 6.800 11/15/14 2,184,140
1,500 Delaware Cnty, PA Auth First Mtg Rev Riddle Vlg Proj........ 7.000 06/01/21 1,572,660
2,405 Harrisburg, PA Cap Apprec Notes Ser F Rfdg (AMBAC Insd)..... * 03/15/16 947,907
2,500 Harrisburg, PA Auth Wtr Rev (Inverse Fltg) (FGIC Insd)...... 7.520 06/18/15 2,818,750
2,000 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp Proj
(Crossover Rfdg @ 10/01/00)................................. 8.875 10/01/20 2,268,620
3,695 Montgomery Cnty, PA Higher Edl & Hlth Auth Nursing Home Rev
Delco Sys Svcs Proj A....................................... 9.875 11/01/18 3,866,743
8,100 Montgomery Cnty, PA Indl Dev Auth Rev First Mtg The
Meadowood Corp Proj Ser A (Prerefunded @ 12/01/00).......... 10.000 12/01/19 9,512,640
500 Montgomery Cnty, PA Indl Dev Auth Rev First Mtg The
Meadowood Corp Rfdg......................................... 7.000 12/01/10 527,710
2,500 Montgomery Cnty, PA Indl Dev Auth Rev First Mtg The
Meadowood Corp Rfdg......................................... 7.250 12/01/15 2,657,825
6,000 Montgomery Cnty, PA Indl Dev Auth Rev First Mtg The
Meadowood Corp Rfdg......................................... 7.400 12/01/20 6,412,320
1,000 Montgomery Cnty, PA Indl Dev Auth Rev Wordsworth Academy.... 7.750 09/01/24 1,106,950
3,000 Pennsylvania Econ Dev Fin Auth Exempt Fac Rev MacMillan Ltd
Partnership Proj............................................ 7.600 12/01/20 3,553,890
3,000 Pennsylvania Econ Dev Fin Auth Res Recovery Rev Colver Proj
Ser D....................................................... 7.050 12/01/10 3,322,950
5,000 Philadelphia, PA Auth for Indl Dev Rev Long-Term Care
Maplewood................................................... 8.000 01/01/24 5,513,950
1,500 Scranton Lackawanna, PA Hlth & Welfare Auth Rev Rfdg........ 7.250 01/15/17 1,602,225
2,000 Scranton Lackawanna, PA Hlth & Welfare Auth Rev Rfdg........ 7.350 01/15/22 2,151,980
------------
70,164,109
------------
RHODE ISLAND 0.2%
2,000 Providence, RI Redev Agy Ctfs Partn Ser A................... 8.000 09/01/24 2,206,880
------------
</TABLE>
See Notes to Financial Statements
B-34
<PAGE> 392
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SOUTH CAROLINA 0.4%
$ 115 Charleston Cnty, SC Ctfs Partn Ser B (MBIA Insd) (b)........ 7.000% 06/01/19 $ 130,863
2,385 Charleston Cnty, SC Ctfs Partn Ser B (Prerefunded @
06/01/04) (MBIA Insd)....................................... 7.000 06/01/19 2,784,964
1,000 Oconee Cnty, SC Indl Rev Bond Johnson Ctl Inc Ser 84 (Var
Rate Cpn)................................................... 6.250 06/15/04 1,000,000
------------
3,915,827
------------
TENNESSEE 2.7%
3,000 SCA Tax Exempt Trust Multi-Family Mtg Memphis Hlth Edl Rev
Bond Receipt Ser A6 (FSA Insd).............................. 7.350 01/01/30 3,317,010
4,550 Shelby Cnty, TN Hlth Edl & Hsg Fac Brd Rev ICF/MR Open Arms
Dev Cent Ser A.............................................. 9.750 08/01/19 4,882,696
4,610 Shelby Cnty, TN Hlth Edl & Hsg Fac Brd Rev ICF/MR Open Arms
Dev Cent Ser C.............................................. 9.750 08/01/19 4,947,083
2,000 Springfield, TN Hlth & Edl Fac Brd Hosp Rev Jesse Holman
Jones Hosp Proj............................................. 8.250 04/01/12 2,302,400
6,005 Sullivan Cnty, TN Hlth Edl & Hsg Fac Brd Rev First Mtg
RHA/Sullivan Inc Fac Rev.................................... 9.750 09/01/19 6,477,474
4,400 Trenton, TN Hlth & Edl Fac Brd Rev ICF/MR RHA/Trenton Golden
Door........................................................ 10.000 05/01/19 3,960,000
------------
25,886,663
------------
TEXAS 9.4%
25,000 Alliance Arpt Auth Inc TX Spl Fac Rev Federal Express Corp
Proj........................................................ 6.375 04/01/21 26,948,000
2,000 Amarillo, TX Hlth Fac Corp Hosp Rev High Plains Baptist Hosp
(Inverse Fltg) (FSA Insd) (b)............................... 8.480 01/01/22 2,360,000
2,000 Bell Cnty, TX Indl Dev Corp Solid Waste Disposal Rev (a).... 7.600 12/01/17 2,006,180
1,000 Bexar Cnty, TX Hlth Fac Dev Corp Rev Rfdg Baptist Hlth Sys
Ser A (MBIA Insd)........................................... 6.000 11/15/12 1,128,740
2,370 Bexar Cnty, TX Hlth Fac Dev Corp Rev Rfdg Baptist Hlth Sys
Ser A (MBIA Insd)........................................... 6.000 11/15/13 2,671,962
665 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... * 08/01/00 549,197
1,165 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... * 08/01/01 891,912
335 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... * 08/01/02 238,048
1,825 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... * 08/01/11 630,866
775 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... 8.750 08/01/11 813,959
2,670 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... 8.750 08/01/12 2,804,221
1,635 Garland, TX Independent Sch Dist............................ 4.000 02/15/15 1,437,982
2,500 Garland, TX Indl Dev Auth Rev Bond Ashland Oil Proj Ser 84
Rfdg (Var Rate Cpn)......................................... 5.363 04/01/04 2,510,975
2,500 Houston, TX Arpt Sys Rev Spl Fac Continental Airl Term Impt
Ser B....................................................... 6.125 07/15/27 2,618,475
5,000 Lower Colorado Rvr Auth TX Polltn Ctl Rev Samsung Austin
Semiconductor............................................... 6.375 04/01/27 4,750,000
17,000 Tarrant Cnty, TX Hlth Fac Dev (MBIA Insd)................... 5.250 02/15/22 16,998,980
2,620 Texas Genl Svcs Comm Partn Int Lease Purch Ctfs............. 7.250 08/15/11 2,674,243
8,000 Texas St Dept Hsg & Cmnty Affairs Home Mtg Rev (GNMA
Collateralized)............................................. 6.900 07/02/24 9,030,240
2,000 Texas St Tpk Auth Dallas North Thruway Rev Addison Arpt Toll
Tunnel Proj (FGIC Insd)..................................... 6.750 01/01/15 2,319,900
2,000 Texas St Tpk Auth Dallas North Thruway Rev Addison Arpt Toll
Tunnel Proj (FGIC Insd) (b)................................. 6.600 01/01/23 2,301,940
5,000 West Side Calhoun Cnty, TX Navig Dist Solid Waste Disp Union
Carbide Chem & Plastics (b)................................. 8.200 03/15/21 5,583,300
------------
91,269,120
------------
UTAH 4.5%
1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 7.800 09/01/15 1,043,950
1,165 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 8.000 09/01/20 1,229,005
1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 7.800 09/01/25 1,039,830
4,000 Intermountain Pwr Agy UT Pwr Supply Rev Ser B Rfdg (MBIA
Insd)....................................................... 5.750 07/01/19 4,249,200
30,400 Murray City, UT Hosp Rev Inc Hlth Svc Inc Rfdg (MBIA
Insd)....................................................... 4.750 05/15/20 28,640,144
265 Saint George, UT Indl Dev Rev Kmart Corp Ser 1984A.......... 10.750 10/15/08 268,132
3,270 Salt Lake Cnty, UT Hsg Auth Multi-Family Hsg Rev (FHA
Gtd)........................................................ 6.375 11/01/33 3,470,713
2,500 Tooele Cnty, UT Pollutn Ctl Rev Rfdg Laidlaw Environmental
Ser A....................................................... 7.550 07/01/27 2,768,925
1,455 Utah St Hsg Fin Agy Single Family Mtg Mezz A1 (AMBAC Insd)
(b)......................................................... 6.100 07/01/13 1,538,662
------------
44,248,561
------------
VIRGINIA 0.5%
2,650 Fairfax Cnty, VA Park Auth Park Fac Rev..................... 6.625 07/15/20 2,864,199
1,500 Pittsylvania Cnty, VA Indl Dev Auth Rev Exempt Fac Ser A.... 7.450 01/01/09 1,661,040
------------
4,525,239
------------
</TABLE>
See Notes to Financial Statements
B-35
<PAGE> 393
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
WASHINGTON 1.3%
$ 1,000 Spokane Cnty, WA Indl Dev Corp Solid Waste Disp Rev......... 7.600% 03/01/27 $ 1,130,660
5,500 Washington St Pub Pwr Supply Comp Interest Ser C Rfdg (MBIA
Insd)....................................................... * 07/01/17 1,971,915
9,525 Washington St Pub Pwr Supply Ser A Rfdg (a)................. 5.000 07/01/12 9,394,603
------------
12,497,178
------------
WISCONSIN 1.2%
1,000 Oconto Falls, WI Cmnty Dev Oconto Falls Tissue Inc Proj..... 7.750 12/01/22 1,042,600
4,105 Wisconsin St Hlth & Edl Fac Auth Rev Chippewa Vly Hosp Ser F
Rfdg (b).................................................... 9.500 11/15/12 4,839,343
2,130 Wisconsin St Hlth & Edl Fac Auth Rev Eau Claire Manor....... 9.625 06/01/13 2,178,841
3,000 Wisconsin St Hlth & Edl Milwaukee Catholic Home Proj........ 7.500 07/01/26 3,256,230
------------
11,317,014
------------
PUERTO RICO 0.2%
1,769 Centro de Recaudaciones de Ingresos Muni Ctfs Partn......... 6.850 10/17/03 1,843,407
------------
TOTAL LONG-TERM INVESTMENTS 98.1%
(Cost $904,706,449)..................................................................... 955,689,736
SHORT-TERM INVESTMENTS 0.3%
(Cost $3,178,572)....................................................................... 3,071,429
------------
TOTAL INVESTMENTS 98.4%
(Cost $907,885,021)..................................................................... 958,761,165
OTHER ASSETS IN EXCESS OF LIABILITIES 1.6%............................................... 15,710,841
------------
NET ASSETS 100.0%........................................................................ $974,472,006
------------
</TABLE>
*Zero coupon bond
(a) Securities purchased on a when issued or delayed delivery basis.
(b) Assets segregated as collateral for when issued or delayed delivery purchase
commitments and open futures transactions.
(c) Interest is accruing at less than the stated coupon.
(d) Non-income producing security.
(e) Currently is a payment-in-kind security which will convert to a cash paying
security with a higher coupon at a predetermined date.
(f) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
(g) Market value is determined in accordance with procedures established in good
faith by the Board of Trustees.
See Notes to Financial Statements
B-36
<PAGE> 394
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $907,885,021)....................... $ 958,761,165
Cash........................................................ 10,496,263
Receivables:
Interest.................................................. 18,141,442
Fund Shares Sold.......................................... 3,158,840
Investments Sold.......................................... 630,421
Variation Margin on Futures............................... 196,443
Other....................................................... 196,512
--------------
Total Assets.......................................... 991,581,086
--------------
LIABILITIES:
Payables:
Investments Purchased..................................... 11,331,827
Income Distributions...................................... 2,617,617
Fund Shares Repurchased................................... 1,704,620
Distributor and Affiliates................................ 734,711
Investment Advisory Fee................................... 390,028
Accrued Expenses............................................ 207,332
Trustees' Deferred Compensation and Retirement Plans........ 122,945
--------------
Total Liabilities..................................... 17,109,080
--------------
NET ASSETS.................................................. $ 974,472,006
==============
NET ASSETS CONSIST OF:
Capital..................................................... $1,027,557,609
Net Unrealized Appreciation................................. 50,697,747
Accumulated Distributions in Excess of Net Investment
Income.................................................... (9,046,242)
Accumulated Net Realized Loss............................... (94,737,108)
--------------
NET ASSETS.................................................. $ 974,472,006
==============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $706,274,738 and 47,576,526 shares of
beneficial interest issued and outstanding)............ $ 14.85
Maximum sales charge (4.75%* of offering price)......... .74
--------------
Maximum offering price to public........................ $ 15.59
==============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $229,575,988 and 15,466,416 shares of
beneficial interest issued and outstanding)............ $ 14.84
==============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $38,621,280 and 2,602,078 shares of
beneficial interest issued and outstanding)............ $ 14.84
==============
*On sales of $100,000 or more, the sales charge will be
reduced.
</TABLE>
See Notes to Financial Statements
B-37
<PAGE> 395
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $63,584,303
-----------
EXPENSES:
Investment Advisory Fee..................................... 4,318,581
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $1,563,986, $1,983,980 and $263,926,
respectively)............................................. 3,811,892
Shareholder Services........................................ 970,151
Legal....................................................... 350,742
Custody..................................................... 84,770
Trustees Fees and Expenses.................................. 50,600
Other....................................................... 661,264
-----------
Total Expenses.......................................... 10,248,000
-----------
NET INVESTMENT INCOME....................................... $53,336,303
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments (Including reorganization and restructuring
costs of $275,074)...................................... $ 6,836,534
Options................................................... 98,094
Futures................................................... (6,543,274)
-----------
Net Realized Gain........................................... 391,354
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 26,675,438
-----------
End of the Period:
Investments............................................. 50,876,144
Futures................................................. (178,397)
-----------
50,697,747
-----------
Net Unrealized Appreciation During the Period............... 24,022,309
-----------
NET REALIZED AND UNREALIZED GAIN............................ $24,413,663
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $77,749,966
===========
</TABLE>
See Notes to Financial Statements
B-38
<PAGE> 396
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income....................................... $ 53,336,303 $ 53,036,530
Net Realized Gain/Loss...................................... 391,354 (15,209,862)
Net Unrealized Appreciation/Depreciation During the
Period.................................................... 24,022,309 (12,362,837)
------------ -------------
Change in Net Assets from Operations........................ 77,749,966 25,463,831
------------ -------------
Distributions from Net Investment Income.................... (53,336,303) (53,036,530)
Distributions in Excess of Net Investment Income............ (664,960) (228,957)
------------ -------------
Total Distributions from and in Excess of Net Investment
Income*................................................. (54,001,263) (53,265,487)
------------ -------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES......... 23,748,703 (27,801,656)
------------ -------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold................................... 198,765,477 164,096,198
Net Asset Value of Shares Issued Through Dividend
Reinvestment.............................................. 23,168,036 22,996,285
Cost of Shares Repurchased.................................. (135,758,091) (108,010,178)
------------ -------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.......... 86,175,422 79,082,305
------------ -------------
TOTAL INCREASE IN NET ASSETS................................ 109,924,125 51,280,649
NET ASSETS:
Beginning of the Period..................................... 864,547,881 813,267,232
------------ -------------
End of the Period (Including accumulated distributions in
excess of net investment income of $9,046,242 and
$8,821,755, respectively)................................. $974,472,006 $ 864,547,881
============ =============
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class December 31, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of Net Investment Income:
Class A Shares............................................ $(41,926,549) $(43,633,838)
Class B Shares............................................ (10,667,625) (8,865,546)
Class C Shares............................................ (1,407,089) (766,103)
------------ ------------
$(54,001,263) $(53,265,487)
============ ============
</TABLE>
See Notes to Financial Statements
B-39
<PAGE> 397
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 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $14.474 $14.984 $13.848 $15.629 $14.529
------- ------- ------- ------- -------
Net Investment Income..................................... .895 .963 1.024 .956 1.052
Net Realized and Unrealized Gain/Loss..................... .376 (.513) 1.072 (1.717) 1.158
------- ------- ------- ------- -------
Total from Investment Operations............................ 1.271 .450 2.096 (.761) 2.210
Less Distributions from and in Excess of Net Investment
Income.................................................... .900 .960 .960 1.020 1.110
------- ------- ------- ------- -------
Net Asset Value, End of the Period.......................... $14.845 $14.474 $14.984 $13.848 $15.629
======= ======= ======= ======= =======
Total Return (a)............................................ 9.05% 3.21% 15.52% (4.93%) 15.82%
Net Assets at End of the Period (In millions)............... $ 706.3 $671.9 $665.8 $603.0 $636.2
Ratio of Expenses to Average Net Assets (b)................. .94% .99% .95% .87% 1.03%
Ratio of Net Investment Income to Average Net Assets (b).... 6.09% 6.60% 7.05% 6.48% 6.95%
Portfolio Turnover.......................................... 63% 59% 59% 101% 91%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1995 through December 31, 1996, the impact
on the Ratios of Expenses and Net Investment Income to Average Net Assets
due to VKAC reimbursement of certain expenses was less than 0.01%.
See Notes to Financial Statements
B-40
<PAGE> 398
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one common share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
May 1, 1993
Year Ended December 31, (Commencement of
------------------------------------- Distributions) to
Class B Shares 1997 1996 1995 1994 December 31, 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................. $14.474 $14.983 $13.850 $15.621 $14.670
------- ------- ------- ------- -------
Net Investment Income................................... .774 .843 .908 .841 .656
Net Realized and Unrealized Gain/Loss................... .384 (.506) 1.071 (1.718) .945
------- ------- ------- ------- -------
Total from Investment Operations.......................... 1.158 .337 1.979 (.877) 1.601
------- ------- ------- ------- -------
Less Distributions from and in Excess of Net Investment
Income.................................................. .788 .846 .846 .894 .650
------- ------- ------- ------- -------
Net Asset Value, End of the Period........................ $14.844 $14.474 $14.983 $13.850 $15.621
======= ======= ======= ======= =======
Total Return (a).......................................... 8.23% 2.40% 14.62% (5.69%) 11.12%*
Net Assets at End of the Period (In millions)............. $229.6 $173.8 $137.9 $112.4 $56.6
Ratio of Expenses to Average Net Assets (b)............... 1.71% 1.75% 1.70% 1.64% 1.74%
Ratio of Net Investment Income to Average Net Assets
(b)..................................................... 5.30% 5.84% 6.25% 5.70% 5.95%
Portfolio Turnover........................................ 63% 59% 59% 101% 91%
</TABLE>
* Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1995 through December 31, 1996, the impact
on the Ratios of Expenses and Net Investment Income to Average Net Assets
due to VKAC reimbursement of certain expenses was less than 0.01%.
See Notes to Financial Statements
B-41
<PAGE> 399
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one common share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
August 13, 1993
(Commencement of
Year Ended December 31, Distribution) to
------------------------------------- December 31,
Class C Shares 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $14.474 $14.987 $13.846 $15.610 $15.030
------- ------- ------- ------- -------
Net Investment Income..................................... .778 .851 .910 .824 .369
Net Realized and Unrealized Gain/Loss..................... .378 (.518) 1.077 (1.694) .580
------- ------- ------- ------- -------
Total from Investment Operations............................ 1.156 .333 1.987 (.870) .949
Less Distributions from and in Excess of Net Investment
Income.................................................... .788 .846 .846 .894 .369
------- ------- ------- ------- -------
Net Asset Value, End of the Period.......................... $14.842 $14.474 $14.987 $13.846 $15.610
======= ======= ======= ======= =======
Total Return (a)............................................ 8.23% 2.33% 14.70% (5.62%) 6.37%*
Net Assets at End of the Period (In millions)............... $38.6 $18.8 $9.5 $7.6 $5.2
Ratio of Expenses to Average Net Assets (b)................. 1.71% 1.75% 1.69% 1.64% 1.82%
Ratio of Net Investment Income to Average Net Assets (b).... 5.24% 5.84% 6.19% 5.71% 5.21%
Portfolio Turnover.......................................... 63% 59% 59% 101% 91%
</TABLE>
* Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1995 through December 31, 1996, the impact
on the Ratios of Expenses and Net Investment Income to Average Net Assets
due to VKAC reimbursement of certain expenses was less than 0.01%.
See Notes to Financial Statements
B-42
<PAGE> 400
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
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, 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.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. 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.
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 60 days or less 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. 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. Expenses of the Fund are allocated on a pro rata basis to
each class of shares, except for distribution and service fees and transfer
agency costs which are unique to each class of shares.
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, 1997, the Fund had an accumulated
capital loss carryforward for tax purposes of $92,653,257 which expires between
December 31, 1999 and December 31, 2005. Net realized gains or losses may differ
for financial reporting and tax purposes primarily as a result of the
capitalization of reorganization and
B-43
<PAGE> 401
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
restructuring costs for tax purposes and gains and losses recognized for tax
purposes on open futures positions at December 31, 1997.
At December 31, 1997, for federal income tax purposes, cost of long- and
short-term investments is $910,195,944, the aggregate gross unrealized
appreciation is $73,075,594 and the aggregate gross unrealized depreciation is
24,510,373, resulting in net unrealized appreciation of $48,565,221.
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.
For federal income tax purposes, the following information is furnished
with respect to the distributions paid by the Fund during its taxable year ended
December 31, 1997. The Fund designated 99.31% of the income distributions as a
tax exempt income distribution.
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. Permanent book and tax differences totaling ($440,473) were
reclassified from accumulated distributions in excess of net investment income
to capital.
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, 1997, the Fund recognized expenses of
approximately $35,100 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended December 31, 1997, the Fund recognized expenses of
approximately $188,700 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") cost of providing accounting,
cash management and legal services to the Fund.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the year ended
December 31, 1997, the Fund recognized expenses of approximately $644,000,
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.
B-44
<PAGE> 402
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Fund. The maximum annual
benefit per trustee under the plan is equal to $2,500.
3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of shares of beneficial interest, 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, 1997, capital aggregated $761,338,901, $227,916,630 and
$38,302,078 for Classes A, B and C, respectively. For the year ended December
31, 1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A................................................... 6,584,725 $ 95,897,790
Class B................................................... 5,414,821 78,851,895
Class C................................................... 1,645,028 24,015,792
----------- -------------
Total Sales................................................. 13,644,574 $ 198,765,477
============ =============
Dividend Reinvestment:
Class A................................................... 1,260,959 $ 18,367,805
Class B................................................... 276,853 4,036,121
Class C................................................... 52,358 764,110
----------- -------------
Total Dividend Reinvestment................................. 1,590,170 $ 23,168,036
============ =============
Repurchases:
Class A................................................... (6,688,927) $ (97,347,533)
Class B................................................... (2,235,801) (32,600,924)
Class C................................................... (397,427) (5,809,634)
----------- -------------
Total Repurchases........................................... (9,322,155) $(135,758,091)
============ =============
</TABLE>
B-45
<PAGE> 403
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
At December 31, 1996, capital aggregated $744,740,084, $177,733,309 and
$19,349,267 for Classes A, B and C, respectively. For the year ended December
31, 1996, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A................................................... 6,370,895 $ 92,301,711
Class B................................................... 4,180,416 60,439,439
Class C................................................... 787,103 11,355,048
---------- -------------
Total Sales................................................. 11,338,414 $ 164,096,198
========== =============
Dividend Reinvestment:
Class A................................................... 1,326,707 $ 19,189,337
Class B................................................... 229,488 3,317,782
Class C................................................... 33,851 489,166
---------- -------------
Total Dividend Reinvestment................................. 1,590,046 $ 22,996,285
========== =============
Repurchases:
Class A................................................... (5,711,728) $ (82,614,355)
Class B................................................... (1,605,061) (23,186,460)
Class C................................................... (153,484) (2,209,363)
---------- -------------
Total Repurchases........................................... (7,470,273) $(108,010,178)
========== =============
</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.
<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, 1997, VKAC, as distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$315,200 and CDSC on redeemed shares of approximately $520,700. Sales charges do
not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $653,314,161 and $564,013,425,
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.
B-46
<PAGE> 404
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
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
unrealized appreciation/depreciation. Upon disposition, a realized gain or loss
is recognized accordingly, except when exercising a call option contract or
taking delivery of a security underlying a futures contract. In these instances,
the recognition of gain or loss is postponed until the disposal of the security
underlying the option or futures contract.
Summarized on the following page 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, 1997, were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1996............................ -0- $ -0-
Options Written and Purchased (Net)......................... 29,222 (899,313)
Options Terminated in Closing Transactions (Net)............ (15,576) (687,585)
Options Exercised (Net)..................................... (500) 519,660
Options Expired (Net)....................................... (13,146) 1,067,238
-------- -------------
Outstanding at December 31, 1997............................ -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.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin).
Transactions in futures contracts for the year ended December 31, 1997,
were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- -----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1996............................ 426
Futures Opened.............................................. 7,884
Futures Closed.............................................. (7,862)
------
Outstanding at December 31, 1997............................ 448
======
</TABLE>
B-47
<PAGE> 405
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
The futures contracts outstanding as of December 31, 1997, and the
descriptions and unrealized appreciation/depreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION/
CONTRACTS DEPRECIATION
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Long Contracts -- U.S. Treasury Bond Futures March 1998
(Current notional value $120,469 per contract)............ 348 $ 13,816
Short Contracts -- Municipal Bond Index Futures March 1998
(Current notional value $123,125 per contract)............ 100 (192,213)
--- ---------
448 $(178,397)
=== =========
</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. 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 pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a 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 net assets and
1.00% each for Class B and Class C net assets are accrued daily. Included in
these fees for the year ended December 31, 1997 are payments retained by VKAC of
approximately $1,751,600.
B-48
<PAGE> 406
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 and Poor's Ratings Group ("S&P") 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 30, 1998 (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
writing or calling Van Kampen American Capital Distributors, Inc. at One
Parkview Plaza, Oakbrook Terrace, IL 60181 at (800) 421-5666 (or (800) 421-2833
for the hearing impaired). This Statement of Additional Information incorporates
by reference the entire Prospectus.
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-21
Investment Advisory and Other Services...................... B-32
Custodian and Independent Accountants....................... B-33
Portfolio Transactions and Brokerage Allocations............ B-34
Tax Status of the Fund...................................... B-35
The Distributor............................................. B-35
Distribution and Service Plans.............................. B-36
Transfer Agent.............................................. B-37
Legal Counsel............................................... B-37
Performance Information..................................... B-37
Report of Independent Accountants........................... B-39
Financial Statements........................................ B-40
Notes to Financial Statements............................... B-55
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1998.
B-1
<PAGE> 407
THE FUND AND THE TRUST
Van Kampen American Capital Insured Tax Free Income Fund (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 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 originally was 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, except that the Fund
B-2
<PAGE> 408
may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
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), except that the Fund may purchase securities
of other investment companies to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
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, except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
9. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and extent permitted by
(i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
10. Invest in equity interests in oil, gas or other mineral exploration or
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.
B-3
<PAGE> 409
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 normally will 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 often are 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
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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.
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 also may 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
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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 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
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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 into 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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options are closed by entering into offsetting purchase or sale transactions
that do not result in ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that, in general, OTC options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities "covering"
the amount of the Fund's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on investing no more than 15% of its assets
in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
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
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security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The purchase of a futures contract
creates a firm obligation by the Fund, as purchaser, to take delivery from the
seller the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or 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
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on an index depends on price movements in the instruments making up the market,
market segment, industry or other composite on which the underlying index is
based, rather than price movements in individual securities, as is the case with
respect to options on securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or 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 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
securities
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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 securities
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
securities 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 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.
B-11
<PAGE> 417
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
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.
B-12
<PAGE> 418
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 or Secondary Market Insurance, the Fund is
not required to insure additionally 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 will 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
B-13
<PAGE> 419
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 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 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 or guarantor of the relevant municipal
securities for payments of principal and interest and such issuer 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.
B-14
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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 S&P 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, B Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as
CCC, CC, C having significant speculative characteristics with respect
to capacity to pay interest and repay principal. 'BB'
indicates the least degree of speculation and 'C' the
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 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-15
<PAGE> 421
<TABLE>
<S> <C>
B Debt rated 'B' is more vulnerable to default than debt rated
'B' 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' is currently vulnerable 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 Debt rated 'CC' is currently highly vulnerable to
nonpayment. The rating 'CC' is also used for debt
subordinated to senior debt that is assigned an actual or
implied 'CCC' rating.
C The 'C' rating may be used to cover a situation where a
bankruptcy petition has been filed, but debt service
payments are continued. The rating 'C' typically is applied
to debt subordinated to senior debt which is assigned an
actual or implied 'CCC-' debt rating.
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 or the taking of a similar action 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 judgment with respect to such
likelihood and risk.
</TABLE>
B-16
<PAGE> 422
<TABLE>
<S> <C>
* 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.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
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<PAGE> 423
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>
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<PAGE> 424
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 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.
</TABLE>
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<PAGE> 425
<TABLE>
<S> <C>
(P) (..) When applied to forward delivery bonds, indicates that the
rating is provisional pending the delivery of the bonds. The
rating may be revised prior to delivery if changes occur in
the legal documents or the underlying credit quality of the
bonds.
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 promissory obligations not having an original maturity
in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933,
nor does it represent that any specific note is a valid obligation of a
rated issuer or issued in conformity with any applicable law.
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 (for related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well established industries.
B-20
<PAGE> 426
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
- Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
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 Fund and other
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with VK/AC
Holding, Inc. ("VKAC Holding"), Van Kampen American Capital, Inc. ("Van Kampen
American Capital" or "VKAC"), Van Kampen American Capital Investment Advisory
Corp. ("Advisory Corp."), Van Kampen American Capital Asset Management, Inc.
("Asset Management"), Van Kampen American Capital Distributors, Inc., the
distributor of the Fund's shares (the "Distributor"), Van Kampen American
Capital Advisors Corp., Van Kampen Merritt Equity Advisors Corp., Van Kampen
American Capital Insurance Agency of Illinois, Inc., VK/AC System, Inc., Van
Kampen American Capital Record Keeping Services, Inc., American Capital
Contractual Services, Inc., Van Kampen American Capital Trust Company, Van
Kampen American Capital Exchange Corporation, and ACCESS Investors Services
Inc., the Fund's transfer agent ("ACCESS"). Advisory Corp. and Asset Management
sometimes are referred to herein collectively as the "Advisers". For purposes
hereof, the term "Fund Complex" includes each of the open-end investment
companies advised by the Advisers (excluding the Van Kampen American Capital
Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee/Director of each of the
funds in the Fund Complex.
</TABLE>
B-21
<PAGE> 427
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Richard M. DeMartini*..................... President and Chief Operating Officer, Individual Asset
Two World Trade Center Management Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Mr. DeMartini is a Director of InterCapital
New York, NY 10048 Funds, Dean Witter Distributors, Inc. and Dean Witter
Date of Birth: 10/12/52 Trust Company. Trustee of the TCW/DW Funds. Director of
the National Healthcare Resources, Inc. Formerly Vice
Chairman of the Board of the National Association of
Securities Dealers, Inc. and Chairman of the Board of the
Nasdaq Stock Market, Inc. Trustee/Director of each of the
funds in the Fund Complex.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board, The
International House Board and the Women's Board of the
University of Chicago. Trustee/Director of each of the
funds in the Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont 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.
Trustee/Director of each of the funds in the Fund
Complex.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee/Director of each of
the funds in the Fund Complex.
Don G. Powell*............................ Chairman and a Director of VKAC. Chairman and a Director
2800 Post Oak Blvd. of the Advisers and the Distributor. Chairman and a
Houston, TX 77056 Director of ACCESS. Director or officer of certain other
Date of Birth: 10/19/39 subsidiaries of VKAC. Chairman of the Board of Governors
and the Executive Committee of the Investment Company
Institute. Prior to November 1996, President, Chief
Executive Officer and a Director of VKAC Holding.
Trustee/Director of each of the funds in the Fund Complex
and other funds advised by the Advisers or Van Kampen
American Capital Management, Inc.
</TABLE>
B-22
<PAGE> 428
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer services company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company; the
Date of Birth: 07/08/44 Urban Shopping Centers Inc., a retail mall management
company; and Stone Container Corp., a paper manufacturing
company. Trustee, University of Notre Dame. Formerly,
President and Chief Executive Officer, Waste Management,
Inc., an environmental services company, and prior to
that President and Chief Operating Officer, Waste
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen American Capital
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex, and other open-end and closed-end funds
advised by the Advisers or Van Kampen American Capital
Management, Inc.
</TABLE>
- ---------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
respective positions with Morgan Stanley Dean Witter & Co. and its affiliates.
B-23
<PAGE> 429
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Wood, Sullivan, Dalmaso, Martin,
Wetherell and Hill are located at One Parkview Plaza, Oakbrook Terrace, IL
60181. The Fund's other officers are located at 2800 Post Oak Blvd., Houston, TX
77056.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Dennis J. McDonnell......... President Executive Vice President and a Director of
Date of Birth: 05/20/42 VKAC and VK/AC Holding, Inc. President,
Chief Operating Officer and a Director of
the Advisers, Van Kampen American Capital
Advisors, Inc., and Van Kampen American
Capital Management, Inc. President and a
Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he
was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996,
Mr. McDonnell was Chief Executive Officer
and Director of MCM Group, Inc., McCarthy,
Crisanti & Maffei, Inc. and Chairman and
Director of MCM Asia Pacific Company,
Limited and MCM (Europe) Limited. Prior to
November 1996, Executive Vice President and
a Director of VKAC Holding. Prior to July
of 1996, Mr. McDonnell was President, Chief
Operating Officer and Trustee of VSM Inc.
and VCJ Inc. President of each of the funds
in the Fund Complex. President, Chairman of
the Board and Trustee of other investment
companies advised by the Advisers or their
affiliates.
Peter W. Hegel.............. Vice President Executive Vice President of the Advisers,
Date of Birth: 06/25/56 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Prior to July of 1996, Mr.
Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of
McCarthy, Crisanti & Maffei, Inc. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Curtis W. Morell............ Vice President and Chief Senior Vice President of the Advisers, Vice
Date of Birth: 08/04/46 Accounting Officer President and Chief Accounting Officer of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
</TABLE>
B-24
<PAGE> 430
<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 Secretary Executive Vice President, General Counsel,
Date of Birth: 07/29/53 Secretary and Director of VKAC and VK/AC
Holding, Inc. Mr. Nyberg is also Executive
Vice President, General Counsel and a
Director of Van Kampen Merritt Equity
Holdings Corp. Executive Vice President,
General Counsel, Assistant Secretary and a
Director of the Advisers and the
Distributor, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Management, Inc., Van Kampen American
Capital Exchange Corporation, American
Capital Contractual Services, Inc. and Van
Kampen American Capital Trust Company.
Executive Vice President, General Counsel
and Assistant Secretary of ACCESS. Director
or officer of certain other subsidiaries of
VKAC. Prior to June of 1997, Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to April of 1997,
he was Executive Vice President, General
Counsel and Director of Van Kampen Merritt
Equity Advisors Corp. Prior to July of
1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc.
and Executive Vice President and General
Counsel of VCJ Inc. Prior to September of
1996, he was General Counsel of McCarthy,
Crisanti & Maffei, Inc. Vice President and
Secretary of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Alan T. Sachtleben.......... Vice President Executive Vice President of the Advisers,
Date of Birth: 04/20/42 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Vice President of each of
the funds in the Fund Complex and certain
other investment companies advised by the
Advisers or their affiliates.
Paul R. Wolkenberg.......... Vice President Executive Vice President and Director of
Date of Birth: 11/10/44 VKAC, and VK/AC Holding Inc. Executive Vice
President of the AC Adviser and the
Distributor. President and a Director of
ACCESS. President and Chief Operating
Officer of Van Kampen American Capital
Record Keeping Services, Inc. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
B-25
<PAGE> 431
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Edward C. Wood III.......... Vice President and Chief Senior Vice President of the Advisers and
Date of Birth: 01/11/56 Financial Officer Van Kampen American Capital Management,
Inc. Vice President and Chief Financial
Officer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
John L. Sullivan............ Treasurer First Vice President of the Advisers.
Date of Birth: 08/20/55 Treasurer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Tanya M. Loden.............. Controller Vice President of the Advisers. Controller
Date of Birth: 11/19/59 of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Nicholas Dalmaso............ Assistant Secretary Associate General Counsel and Assistant
Date of Birth: 03/01/65 Secretary of VKAC. Vice President,
Associate General Counsel and Assistant
Secretary of the Advisers, the Distributor,
Van Kampen American Capital Advisors, Inc.
and Van Kampen American Capital Management,
Inc. Assistant Secretary of each of the
funds in the Fund Complex and other
investment companies advised by the
Advisers or their affiliates.
Huey P. Falgout, Jr......... Assistant Secretary Vice President and a Senior Attorney of
Date of Birth: 11/15/63 VKAC. Vice President and Assistant
Secretary of the Advisers, the Distributor,
ACCESS, Van Kampen American Capital
Management, Inc., American Capital
Contractual Services, Inc., Van Kampen
American Capital Exchange Corporation and
Van Kampen American Capital Advisors, Inc.
Assistant Secretary of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
B-26
<PAGE> 432
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Scott E. Martin............. Assistant Secretary Senior Vice President, Deputy General
Date of Birth: 08/20/56 Counsel and Assistant Secretary of VKAC and
VKAC Holding, Inc. Senior Vice President,
Deputy General Counsel and Secretary of the
Advisers, the Distributor, ACCESS American
Capital Contractual Services, Inc., Van
Kampen American Capital Management, Inc.,
Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Insurance Agency of Illinois, Inc., VKAC
System, Inc., Van Kampen American Capital
Record Keeping Services, Inc. and Van
Kampen Merritt Equity Advisors Corp. Prior
to April of 1997, Senior Vice President,
Deputy General Counsel and Secretary of Van
Kampen American Capital Services, Inc. and
Van Kampen Merritt Holdings Corp. Prior to
September of 1996, Mr. Martin was Deputy
General Counsel and Secretary of McCarthy,
Crisanti & Maffei, Inc., and prior to July
of 1996, he was Senior Vice President,
Deputy General Counsel and Secretary of VSM
Inc. and VCJ Inc. Assistant Secretary of
each of the funds in the Fund Complex and
other investment companies advised by the
Advisers or their affiliates.
Weston B. Wetherell......... Assistant Secretary Vice President, Associate General Counsel
Date of Birth: 06/15/56 and Assistant Secretary of VKAC, the
Advisers, the Distributor, Van Kampen
American Capital Management, Inc. and Van
Kampen American Capital Advisors, Inc.
Prior to September of 1996, Mr. Wetherell
was Assistant Secretary of McCarthy,
Crisanti & Maffei, Inc. Assistant Secretary
of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Steven M. Hill.............. Assistant Treasurer Vice President of the Advisers. Assistant
Date of Birth: 10/16/64 Treasurer of each of the funds in the Fund
Complex and other investment companies
advised by the Advisers or their
affiliates.
Michael Robert Sullivan..... Assistant Controller Assistant Vice President of the Advisers.
Date of Birth: 03/30/33 Assistant Controller of each of the funds
in the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 64 operating funds in the Fund Complex. For purposes of the following
compensation and benefits discussion, the Fund Complex is divided into the
following three groups: the funds advised by Asset Management (the "AC Funds"),
the funds advised by Advisory Corp. excluding funds organized as series of the
Morgan Stanley Fund, Inc. (the "VK Funds") and the funds advised by Advisory
Corp. organized as series of the Morgan Stanley Fund, Inc. (the "MS Funds").
Each trustee/director who is not an affiliated person of VKAC, the Advisers, the
Distributor, ACCESS, Van
B-27
<PAGE> 433
Kampen American Capital or Morgan Stanley Dean Witter & Co. (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
(except the money market series of the MS Funds) provides a deferred
compensation plan to its Non-Affiliated Trustees that allows trustees/directors
to defer receipt of their compensation and earn a return on such deferred
amounts. Deferring compensation has the economic effect as if the Non-
Affiliated Trustee reinvested his or her compensation into the funds. Each fund
in the Fund Complex (except the money market series of the MS Funds) provides a
retirement plan to its Non-Affiliated Trustees that provides Non-Affiliated
Trustees with compensation after retirement, provided that certain eligibility
requirements are met as more fully described below.
The trustees recently reviewed and adopted a standardized compensation and
benefits program for each fund in the Fund Complex. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes an annual retainer in
an amount equal to $50,000 per calendar year, due in four quarterly installments
on the first business day of each quarter. Payment of the annual retainer is
allocated among the funds in the Fund Complex (except the money market series of
the MS Funds) on the basis of the relative net assets of each fund as of the
last business day of the preceding calendar quarter. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes a per meeting fee from
each fund in the Fund Complex (except the money market series of the MS Funds)
in the amount of $200 per quarterly or special meeting attended by the
Non-Affiliated Trustee, due on the date of the 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.
For each AC Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from the AC
Funds includes an annual retainer in an amount equal to $35,000 per calendar
year, due in four quarterly installments on the first business day of each
calendar quarter. The AC Funds pay each Non-Affiliated Trustee a per meeting fee
in the amount of $2,000 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. Payment of the annual retainer and the regular meeting
fee is allocated among the AC Funds (i) 50% on the basis of the relative net
assets of each AC Fund to the aggregate net assets of all the AC Funds and (ii)
50% equally to each AC Fund, in each case as of the last business day of the
preceding calendar quarter. Each AC Fund which is the subject of a special
meeting of the trustees generally pays each Non-Affiliated Trustee a per meeting
fee 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.
For each VK Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from each VK
Fund includes an annual retainer 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 each VK
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 each VK 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.
For the period from July 2, 1997 up to and including December 31, 1997, the
compensation of each Non-Affiliated Trustee from the MS Funds was based
generally on the compensation amounts and methodology used by such funds prior
to their joining the current Fund Complex on July 2, 1997. Each trustee/director
was elected as a director of the MS Funds on July 2, 1997. Prior to July 2,
1997, the MS Funds were part of another fund complex (the "Prior Complex") and
the former directors of the MS Funds were paid an aggregate fee allocated among
the funds in the Prior Complex that resulted in individual directors receiving
total compensation between approximately $8,000 to $10,000 from the MS Funds
during such funds' last fiscal year.
B-28
<PAGE> 434
Under the deferred compensation plan, each Non-Affiliated Trustee generally
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 the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
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 the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
----------------------------------------------------------
AGGREGATE AGGREGATE TOTAL
YEAR FIRST PENSION OR ESTIMATED MAXIMUM COMPENSATION
APPOINTED OR AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
ELECTED TO THE BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) BOARD FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- -------------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
J. Miles Branagan 1991 $3,000 $30,328 $60,000 $111,197
Linda Hutton Heagy 1995 3,000 3,141 60,000 111,197
R. Craig Kennedy 1995 3,000 2,229 60,000 111,197
Jack E. Nelson 1995 3,000 15,820 60,000 104,322
Jerome L. Robinson* 1995 3,000 32,020 15,750 107,947
Phillip B. Rooney** 1997 2,500 0 60,000 74,697
Dr. Fernando Sisto 1973 3,000 60,208 60,000 111,197
Wayne W. Whalen 1995 3,000 10,788 60,000 111,197
</TABLE>
- ---------------
* Mr. Robinson retired from the Board of Trustees on December 31, 1997.
** Mr. Phillip B. Rooney became a member of the Board of Trustees effective
April 14, 1997 and thus does not have a full fiscal year of information to
report.
(1) Messrs. DeMartini, McDonnell and Powell, also trustees of the Fund during
all or a portion of the Fund's last fiscal year, are not included in the
compensation table because they are not eligible for compensation or
retirement benefits from the Fund. Mr. McDonnell resigned as a Trustee of
the Fund, effective May 31, 1997.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Fund's fiscal year ended December 31, 1997. The
details of aggregate compensation before deferral for each series, including
the Fund, are shown in Table A below. The details of amount deferred for
each series, including the Fund, are shown in Table B below. Amounts
deferred are retained by the Fund and earn a rate of return determined by
reference to either the return on the common shares of the Fund or other
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted
by the 1940 Act, each Fund may invest in securities of those funds selected
by the Non-Affiliated Trustees in order to match the deferred compensation
obligation. The details of cumulative
B-29
<PAGE> 435
deferred compensation (including interest) owed to current Trustees by each
series, including the Fund, are shown in Table C below. The deferred
compensation plan is described above the Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for each of the current trustees for their respective fiscal
years ended in 1997. The retirement plan is described above the Compensation
Table.
(4) For Mr. Robinson this is the sum of the actual annual benefits payable by
the operating investment companies in the Fund Complex as of the date of his
retirement for each year of the 10-year period since his retirement. For the
remaining trustees, this is the sum of the estimated maximum annual benefits
payable by the operating investment companies in the Fund Complex for each
year of the 10-year period commencing in the year of such trustee's
anticipated retirement. The Retirement Plan is described above the
Compensation Table. Each Non-Affiliated Trustee of the Board of Trustees has
served as a member of the Board of Trustees since he or she was first
appointed or elected in the year set forth in Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1997 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1997. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
Non-Affiliated Trustees were not trustees of such investment companies.
Combining the Fund Complex with other investment companies advised by the
Advisers and their affiliates, Mr. Whalen received Total Compensation of
$268,447 during the calendar year ended December 31, 1997.
As of April 6, 1998, the trustees and officers of the Fund as a group owned
less than 1% of the outstanding shares of the Fund.
B-30
<PAGE> 436
TABLE A
1997 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund........ 12/31 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 2,250 $ 3,000 $ 3,000
Tax Free High Income Fund........... 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
California Insured Tax Free Income
Fund.............................. 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
Municipal Income Fund*.............. 12/31 4,125 4,125 4,125 4,125 4,125 3,250 4,125 4,125
Intermediate Term Municipal Income
Fund.............................. 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
Florida Insured Tax Free Income
Fund.............................. 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
New York Tax Free Income Fund....... 12/31 1,125 1,125 1,125 1,125 1,125 1,000 1,125 1,125
Trust Total....................... 20,250 20,250 20,250 20,250 20,250 15,500 20,250 20,250
</TABLE>
- ---------------
* Includes the deferred compensation balances from New Jersey Tax Free Income
Fund, which was merged into the Municipal Income Fund in November 1997.
TABLE B
1997 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund........ 12/31 $ 3,000 $ 3,000 $ 1,500 $ 3,000 $ 3,000 $ 1,500 $ 1,500 $ 3,000
Tax Free High Income Fund........... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
California Insured Tax Free Fund.... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Municipal Income Fund............... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Intermediate Term Municipal Income
Fund.............................. 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Florida Insured Tax Free Income
Fund.............................. 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
New York Tax Free Income Fund....... 12/31 1,125 1,125 563 1,125 1,125 875 563 1,125
New Jersey Tax Free Income Fund..... 12/31 1,125 1,125 563 1,125 1,125 875 563 1,125
Trust Total....................... 20,250 20,250 10,126 20,250 20,250 10,750 10,126 20,250
</TABLE>
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
YEAR-
FUND NAME END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- ------ -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund........ 12/31 $ 4,324 $ 6,482 $11,233 $15,086 $14,485 $ 1,513 $ 3,180 $12,966
Tax Free High Income Fund........... 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
California Insured Tax Free Fund.... 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
Municipal Income Fund*.............. 12/31 5,170 7,878 14,033 19,758 18,928 1,765 8,110 17,020
Intermediate Term Municipal Income
Fund.............................. 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
Florida Insured Tax Free Income
Fund.............................. 12/31 4,324 6,482 6,853 10,650 10,391 1,513 1,622 9,946
New York Tax Free Income Fund....... 12/31 1,487 1,181 3,118 4,223 4,049 891 591 3,586
Trust Total....................... 28,277 41,469 68,936 94,975 91,308 10,221 18,369 82,416
</TABLE>
- ---------------
* Includes the deferred compensation balances from New Jersey Tax Free Income
Fund, which was merged into the Municipal Income Fund in November 1997.
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-----------------------------------------------------------------------------------
FUND NAME BRANAGAN DEMARTINI HEAGY KENNEDY NELSON POWELL ROONEY SISTO WHALEN
- --------- -------- --------- ----- ------- ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............... 1995 1997 1995 1993 1984 1997 1997 1995 1984
Tax Free High Income Fund.................. 1995 1997 1995 1993 1985 1997 1997 1995 1985
California Insured Tax Free Income Fund.... 1995 1997 1995 1993 1985 1997 1997 1995 1985
Municipal Income Fund...................... 1995 1997 1995 1993 1990 1997 1997 1995 1990
Intermediate Term Municipal Income Fund.... 1995 1997 1995 1993 1993 1997 1997 1995 1993
Florida Insured Tax Free Income Fund....... 1995 1997 1995 1994 1994 1997 1997 1995 1994
New Jersey Tax Free Income Fund............ 1995 1997 1995 1994 1994 1997 1997 1995 1994
New York Tax Free Income Fund.............. 1995 1997 1995 1994 1994 1997 1997 1995 1994
</TABLE>
B-31
<PAGE> 437
As of April 2, 1998, 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 2, 1998 SHARES OWNERSHIP
-------------------------- ------------- -------- ----------
<S> <C> <C> <C>
R T Kelley............................................... 48,736 C 16.16%
P O Box 237
Canadian, TX 79014-0237
Painewebber for the Benefit of........................... 18,006 C 5.97%
Ralph A. Picard & Susan E. Picard JTWROS
506 N. Church St.
West Chester, PA 19380-2304
MLPF&S for the Sole Benefit of........................... 15,616 C 5.18%
Its Customers
Attn: Fund Administration
4800 Deer Lake Dr. E FL 3
Jacksonville, FL 32246-6484
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is the
Fund's investment adviser. The Adviser was incorporated as a Delaware
corporation in 1982 (and through December 31, 1987 transacted business under the
name of American Portfolio Advisory Service Inc.).
The Adviser, Van Kampen American Capital Distributors, Inc. (the
"Distributor") and ACCESS Investor Services, Inc. ("ACCESS") are wholly-owned
subsidiaries of Van Kampen American Capital, Inc. ("VKAC"), which is an indirect
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The principal office
of the Fund, the Adviser, the Distributor and VKAC is located at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending.
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 by the Fund's shareholders) and by the
B-32
<PAGE> 438
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, 1997, 1996 and 1995, the Fund paid advisory
expenses of $6,799,897, $6,928,017 and $5,813,647, respectively.
OTHER AGREEMENTS.
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which Asset Management provides accounting
services to the Fund. The Fund shares with the other Van Kampen American Capital
funds in the cost of providing such services, with 25% of such costs shared
proportionately based on the number of outstanding classes of securities per
Fund and with the remaining 75 percent of such cost being paid by the Fund and
such other Van Kampen American Capital funds based proportionally on their
respective net assets.
For the years ended December 31, 1997, 1996 and 1995, the Fund paid expenses
of approximately $233,500, $43,900 and $42,800, respectively, representing the
Asset Management's and its affiliates' cost of providing accounting services.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital funds advised by the 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, 1997, 1996 and 1995, the Fund paid expenses
of approximately $52,500, $28,300 and $39,400, respectively, representing Van
Kampen American Capital's cost of providing legal services.
CUSTODIAN AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, 225 West 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 accountants for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent accountants will be subject to
ratification by the shareholders of the Fund at any annual meeting of
shareholders.
B-33
<PAGE> 439
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 reduce its
expenses materially.
If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security, will
have to pay a higher price for the security) than would be the case if no weight
were given to the broker's furnishing of those research services. This will be
done, however, only if, in the opinion of the Adviser, the amount of additional
commission or increased cost is reasonable in relation to the value of such
services.
In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth above to the Fund and the Adviser, (ii) have sold or are selling
shares of the Fund and (iii) may select firms that are affiliated with the Fund,
its investment adviser or its distributor and other principal underwriters.
If purchases or sales of securities of the Fund and of one or more other
investment companies or clients advised by the Adviser are considered at or
about the same time, transactions in such securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
the Adviser, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. Although it is possible that in
some cases this procedure could have a detrimental effect on the price or volume
of the security as far as the Fund is concerned, it is also possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the Trustees of
the Trust, of which the Fund is a separate series.
The Trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the Securities and Exchange Commission under the 1940 Act which
requires that the commission paid to the Distributor and other affiliates of the
Fund must be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time. The rule and procedures also contain review requirements and require
the Adviser to furnish reports to the Trustees and to maintain records in
connection with such reviews. After consideration of all factors deemed
relevant, the Trustees will consider from time to time whether the advisory fee
will be reduced by all or a portion of the brokerage commission given to brokers
that are affiliated with the Fund.
During the year ended December 31, 1997, the Fund paid $0 in brokerage
commissions on transactions totalling $0 to brokers selected primarily on the
basis of research services provided to the Adviser. The negotiated commission
paid to an affiliated broker on any transaction would be comparable to that
payable to a non-affiliated broker in a similar transaction.
Effective October 31, 1996, Morgan Stanley Group Inc. ("Morgan Stanley")
became an affiliate of the Adviser. Effective May 31, 1997, Dean Witter Discover
& Co. ("Dean Witter") became an affiliate of the Adviser. The negotiated
commission paid to an affiliated broker on any transaction would be comparable
to that payable to a non-affiliated broker in a similar transaction.
B-34
<PAGE> 440
The Fund paid the following commissions to these brokers during the periods
shown:
<TABLE>
<CAPTION>
AFFILIATED BROKERS
------------------
MORGAN DEAN
BROKERS STANLEY WITTER
-------- ------- -------
<S> <C> <C> <C>
Fiscal year 1995............................................ $ 0 NA NA
Fiscal year 1996............................................ $ 0 $ 0 NA
Fiscal year 1997............................................ $211,776 $ 0 $ 0
Fiscal year 1997 Percentages:
Commissions with affiliate to total commissions........... -- NA NA
Value of brokerage transactions with affiliate to total
transactions........................................... -- NA NA
</TABLE>
TAX STATUS OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal 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. VKAC
manages or supervises more than $60 billion in mutual funds, closed-end funds
and unit investment trusts -- assets which have been entrusted to VKAC in more
than 2 million investor accounts. VKAC has one of the largest research teams
(outside of the rating agencies) in the country. Each of our high yield
analysts, based in San Francisco, Chicago, Houston or Boston, has the
responsibility to cover a specific region of the country. This regional focus
enables each high yield analyst to provide more specialized coverage of the
market and alert the portfolio manager to issues of local importance.
Shares of the Fund are offered on a continuous basis through the Distributor.
The Distributor is a wholly owned subsidiary of Van Kampen American Capital,
Inc. ("VKAC"), which is an indirect wholly-owned subsidiary of Morgan Stanley
Dean Witter & Co. The principal office of the Fund, the Adviser, the Distributor
and VKAC is located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending.
Pursuant to a distribution agreement, the Distributor will purchase shares of
the Fund for resale to the public, either directly or through securities
dealers, and is obligated to purchase only those shares for which it has
received purchase orders. A discussion of how to purchase and redeem the Fund's
shares and how the Fund's shares are priced is contained in the Prospectus.
B-35
<PAGE> 441
Total underwriting commissions on the sale of shares of the Fund for the last
three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
AMOUNTS
TOTAL UNDERWRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------------ --------------
<S> <C> <C>
Fiscal Year Ended December 31, 1995......................... $2,171,988 $628,115
Fiscal Year Ended December 31, 1996......................... $1,589,072 $405,829
Fiscal Year Ended December 31, 1997......................... $1,239,728 $259,984
</TABLE>
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 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 fiscal year ended December 31, 1997, the Fund's aggregate expenses
under the Plans for Class A Plan were $2,919,919, or 0.23%, of the Class A
shares' average net assets. For the fiscal year ended December 31, 1997, the
Fund's aggregate expenses under the Class B Plan were $653,778, or 1.00%, of the
Class B shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following
B-36
<PAGE> 442
payments: $480,647 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class B shares of the Fund and $173,131
for fees paid to financial intermediaries for servicing Class B shareholders and
administering the Class B Plan. For the fiscal year ended December 31, 1997, the
Fund's aggregate expenses under the Class C Plan were $44,107 or 1.00% of the
Class C shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $10,615 for commissions and transaction
fees paid to financial intermediaries in respect of sales of Class C shares of
the Fund and $33,492 for fees paid to financial intermediaries for servicing
Class C shareholders and administering the Class C Plan.
TRANSFER AGENT
During the fiscal years ended December 31, 1995, 1996 and 1997, ACCESS,
transfer agent, shareholder services agent and dividend disbursing agent for the
Fund, received fees aggregating $614,500, $1,272,800 and $921,500, respectively,
for these services. The transfer agency prices are determined through
negotiations with the Fund's Board of Trustees and are based on competitive
market bench marks.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (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,
1997 was 3.05%; (ii) the five year period ended December 31, 1997 was 5.72%;
(iii) the ten year period ended December 31, 1997 was 7.64%; and (iv) the period
from December 14, 1984 (the commencement of investment operations of the Fund)
through December 31, 1997 was 8.99%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending December 30, 1997 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.04%. The tax-equivalent yield for
the 30 day period ending December 30, 1997 (calculated in the manner described
in the Prospectus under the heading "Fund Performance" and assuming a 36% tax
rate) was 6.31%. The Fund's current distribution rate with respect to the Class
A Shares for the 31 day period ending December 31, 1997 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
4.66%. The Fund's taxable equivalent distribution rate with respect to Class A
Shares for the month ending December 31, 1997 was 7.28%.
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 207.44%.
B-37
<PAGE> 443
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 222.72%.
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, 1997 was 3.36% and (ii)
the approximately four year, eight month period from May 1, 1993 (the
commencement of distribution) through December 31, 1997 was 4.95%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending December 30, 1997 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.44%. The tax-equivalent yield for
the 30 day period ending December 30, 1997 (calculated in the manner described
in the Prospectus under the heading "Fund Performance" and assuming a 36% tax
rate) was 5.38%. The Fund's current distribution rate with respect to the Class
B Shares for the 31 day period ending December 31, 1997 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
4.14%. The Fund's taxable equivalent distribution rate with respect to Class B
Shares for the month ending December 31, 1997 was 6.47%.
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 25.33%.
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 26.83%.
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, 1997 was 6.36% and (ii)
the approximately four year, five month period from August 13, 1993
(commencement of distribution) through December 31, 1997 was 4.82%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending December 30, 1997 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.38%. The tax-equivalent yield for
the 30 day period ending December 30, 1997 (calculated in the manner described
in the Prospectus under the heading "Fund Performance" and assuming a 36% tax
rate) was 5.28%. The Fund's current distribution rate with respect to the Class
C Shares for the 31 day period ending December 31, 1997 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
4.14%. The Fund's taxable equivalent distribution rate with respect to Class C
Shares for the month ending December 31, 1997 was 6.47%.
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 22.97%.
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 22.97%.
B-38
<PAGE> 444
INDEPENDENT ACCOUNTANTS' 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, 1997, 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, 1997, 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, 1997, 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 29, 1998
B-39
<PAGE> 445
PORTFOLIO OF INVESTMENTS
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS 101.0%
ALABAMA 2.6%
$ 2,250 Alabama St Brd Edl Rev Shelton St Cmnty College (MBIA
Insd)....................................................... 6.000% 10/01/14 $ 2,450,610
2,000 Alabama Wtr Pollutn Ctl Auth Revolving Fund Ln Ser A (AMBAC
Insd)....................................................... 6.750 08/15/17 2,243,660
1,900 Birmingham-Carraway, AL Methodist Hlth Sys Ser A (Connie Lee
Insd)....................................................... 5.875 08/15/25 2,024,146
2,500 Jefferson Cnty, AL Brd Edl Cap Outlay Sch (AMBAC Insd)...... 5.875 02/15/20 2,635,700
2,000 Lauderdale Cnty & Florence AL Hlthcare Auth Rev Eliza Coffee
Mem Hosp Rfdg (MBIA Insd)................................... 5.750 07/01/19 2,113,020
5,500 Limestone Cnty, AL Wtr Auth Wtr Rev (FGIC Insd)............. 7.700 12/01/19 5,694,040
5,500 Morgan Cnty Decatur, AL Hlthcare Auth Hosp Rev Decatur Genl
Hosp Rfdg (Connie Lee Insd)................................. 6.250 03/01/13 5,996,815
2,075 Mulga, AL Util Wtrwks Rev Wts (AMBAC Insd).................. 5.000 08/15/27 2,024,764
2,400 Muscle Shoals, AL Util Brd Wtr & Swr Rev (FSA Insd)......... 6.500 04/01/16 2,681,160
5,390 Walker Cnty, AL Pub Bldg Auth Wts Waler Cnty Jail Proj
(AMBAC Insd) (a)............................................ 5.000 12/01/16 5,319,715
1,400 West Morgan East Lawrence Wtr Auth AL Wtr Rev (FGIC Insd)... 5.625 08/15/21 1,463,126
1,000 West Morgan East Lawrence Wtr Auth AL Wtr Rev (FGIC Insd)... 5.625 08/15/25 1,045,090
--------------
35,691,846
--------------
ALASKA 0.2%
2,355 Ketchikan, AK Muni Util Rev Ser R (FSA Insd)................ 6.600 12/01/07 2,627,521
--------------
ARIZONA 1.4%
11,000 Arizona St Ctfs Partn Ser B Rfdg (AMBAC Insd)............... 6.250 09/01/10 11,965,470
2,110 Pima Cnty, AZ Indl Dev Auth Indl Rev Lease Oblig Irvington
Proj Tucson Ser A Rfdg (FSA Insd)........................... 7.250 07/15/10 2,364,086
1,875 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp Ser A Rfdg
(AMBAC Insd)................................................ 6.000 09/01/12 2,080,219
1,750 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp Ser A Rfdg
(AMBAC Insd)................................................ 6.125 09/01/17 1,943,882
--------------
18,353,657
--------------
CALIFORNIA 16.6%
4,290 Antioch Area, CA Pub Fac Fin Agy Cmnty Fac Dist No 1989
(FGIC Insd)................................................. 5.300 08/01/15 4,392,746
2,835 Bay Area Govt Assn CA Rev Tax Alloc CA Redev Agy Pool Rev
Ser A (FSA Insd)............................................ 6.000 12/15/14 3,096,018
2,555 Berkeley, CA Uni Sch Dist Ser C (AMBAC Insd)................ 5.875 08/01/12 2,772,788
1,985 Berkeley, CA Uni Sch Dist Ser C (AMBAC Insd)................ 5.875 08/01/14 2,140,088
5,000 Beverly Hills, CA Pub Fin Auth Lease Rev Ser A (MBIA
Insd)....................................................... 5.650 06/01/15 5,158,250
10,000 California Hlth Fac Fin Auth Rev Sutter Hosp Ser A Rfdg
(AMBAC Insd)................................................ 6.700 01/01/13 10,339,300
3,480 California Pub Cap Impt Fin Auth Rev Pooled Proj Ser B (BIGI
Insd)....................................................... 8.100 03/01/18 3,573,508
10,000 California St Pub Wks Brd Lease Rev Dept of Corrections CA
St Prison D Susanville (MBIA Insd).......................... 5.375 06/01/18 10,100,000
16,770 Capistrano, CA Uni Pub Fin Auth Spl Tax Rev First Lien Ser A
Rfdg (AMBAC Insd)........................................... 5.700 09/01/16 17,834,224
3,000 Chino, CA Ctfs Partn Redev Agy (MBIA Insd).................. 6.200 09/01/18 3,305,340
220 Concord, CA Redev Agy Tax Alloc Cent Concord Redev Proj Ser
3 (BIGI Insd)............................................... 8.000 07/01/18 228,785
805 Corona Norco, CA Uni Sch Dist Lease Rev Partn Insd Land
Acquis Ser A (FSA Insd)..................................... 6.000 04/15/19 870,350
1,250 Cucamonga, CA Cnty Wtr Dist Ctfs Partn Fac Refin (FGIC
Insd)....................................................... 6.300 09/01/12 1,350,388
425 Earlimart, CA Elem Sch Dist Ser 1 (AMBAC Insd).............. 6.700 08/01/21 527,599
5,675 Escondido, CA Jt Pwrs Fin Auth Lease Rev CA Cent for the
Arts Rfdg (AMBAC Insd)...................................... * 09/01/17 1,761,350
6,500 Grossmont, CA Union High Sch Dist Ctfs Partn (MBIA Insd).... * 11/15/21 1,406,665
1,610 Hayward, CA Ctfs Partn Civic Cent Proj (MBIA Insd).......... 5.250 08/01/26 1,613,816
1,000 La Habra, CA Ctfs Partn Pk La Habra & Viewpark Proj (FSA
Insd)....................................................... 6.500 11/01/12 1,099,310
7,000 La Habra, CA Ctfs Partn Pk La Habra & Viewpark Proj (FSA
Insd)....................................................... 6.625 11/01/22 7,732,760
4,000 Long Beach, CA Redev Agy Tax Alloc Sub Redev Proj (AMBAC
Insd)....................................................... 5.125 04/01/17 3,989,960
3,500 Los Angeles Cnty, CA Cap Asset Lease Corp Leasehold Rev Rfdg
(AMBAC Insd)................................................ 6.000 12/01/16 3,774,085
13,480 Los Angeles Cnty, CA Metro Tran Prop A Second Tier Rfdg
(MBIA Insd)................................................. 6.000 07/01/21 14,629,305
3,000 Los Angeles, CA Cmnty Redev Agy Tax Alloc Bunker Hill Ser H
Rfdg (FSA Insd)............................................. 6.500 12/01/14 3,361,260
1,830 Los Angeles, CA Ser A (FGIC Insd)........................... 6.125 09/01/13 1,994,535
2,500 Madera Cnty, CA Ctfs Partn Vly Children's Hosp (MBIA
Insd)....................................................... 6.125 03/15/23 2,731,875
7,500 Manteca, CA Redev Agy Tax Alloc Redev Proj No 1 Ser A Rfdg
(MBIA Insd)................................................. 6.700 10/01/21 8,350,050
1,290 Martinez, CA Uni Sch Dist Guar Ctfs Elig Rfdg (FSA Insd).... 6.000 08/01/09 1,370,715
</TABLE>
See Notes to Financial Statements
B-40
<PAGE> 446
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALIFORNIA (CONTINUED)
$ 2,000 MSR Pub Pwr Agy CA San Juan Proj Rev Ser F Rfdg (AMBAC
Insd)....................................................... 6.000% 07/01/20 $ 2,153,700
1,755 New Haven, CA Uni Sch Dist Cap Apprec Ser D (FGIC Insd)..... * 08/01/12 804,685
13,610 Norco, CA Redev Agy Tax Alloc Norco Redev Proj Area No 1
Rfdg (MBIA Insd)............................................ 6.250 03/01/19 14,779,643
1,500 North City West, CA Sch Fac Fin Auth Spl Tax Ser B Rfdg (FSA
Insd)....................................................... 6.000 09/01/19 1,636,095
2,860 Orange Cnty, CA Ctfs Partn Juvenile Justice Cent Fac Rfdg
(AMBAC Insd)................................................ 6.000 06/01/17 3,068,637
3,000 Palmdale CA Sch Dist Ctfs Partn Rfdg & Sch Bldg Proj (FSA
Insd)....................................................... 5.000 10/01/17 2,959,020
2,760 Palmdale, CA Civic Auth Rev Merged Redev Proj Areas Ser A
(MBIA Insd)................................................. 6.000 09/01/15 3,130,006
2,160 Paramount, CA Redev Agy Tax Alloc (MBIA Insd)............... 6.250 08/01/11 2,371,637
2,295 Paramount, CA Redev Agy Tax Alloc (MBIA Insd)............... 6.250 08/01/12 2,519,864
2,435 Paramount, CA Redev Agy Tax Alloc (MBIA Insd)............... 6.250 08/01/13 2,673,581
2,585 Paramount, CA Redev Agy Tax Alloc (MBIA Insd)............... 6.250 08/01/14 2,838,278
2,750 Paramount, CA Redev Agy Tax Alloc (MBIA Insd)............... 6.250 08/01/15 3,019,445
2,000 Perris, CA Pub Fin Auth Local Agy Rev Parity Ser F (FSA
Insd)....................................................... 5.850 09/01/24 2,145,920
1,400 Reedley, CA Pub Fin Auth Lease Rev Wastewtr Treatment Plant
Proj (AMBAC Insd)........................................... 6.050 05/01/15 1,490,258
4,000 Sacramento, CA Muni Util Dist Elec Rev Ser A Rfdg (MBIA
Insd)....................................................... 5.750 08/15/13 4,181,560
13,800 San Bernardino Cnty, CA Ctfs Partn Ser B (Embedded Swap)
(MBIA Insd)................................................. 7.040 07/01/16 14,624,136
5,000 San Joaquin Hills, CA Tran Corridor Agy Toll Rd Rev Ser A
Rfdg (MBIA Insd)............................................ 5.375 01/15/29 5,076,850
1,000 San Jose, CA Fin Auth Rev Convention Cent Proj Ser C Rfdg
(FSA Insd).................................................. 6.300 09/01/09 1,087,420
2,500 Santa Clara Cnty, CA Fin Auth Lease Rev VMC Fac Replacement
Proj Ser A (Prerefunded @ 11/15/04) (AMBAC Insd)............ 6.875 11/15/14 2,935,675
1,000 Santa Rosa, CA Wastewtr Svc Fac Dist Rfdg & Impt (AMBAC
Insd)....................................................... 6.200 07/02/09 1,088,990
2,000 Santa Rosa, CA Wtr Rev Ser B Rfdg (FGIC Insd)............... 6.200 09/01/09 2,165,020
2,510 Solano Cnty, CA Ctfs Partn Solano Park Hosp Proj (FSA
Insd)....................................................... 5.750 08/01/14 2,667,904
12,600 Southern CA Pub Pwr Auth Transmission Proj Rev (FSA Insd)... 6.000 07/01/12 13,502,916
3,370 Stockton, CA Pub Fin Auth Rev Ser A Rfdg (FSA Insd)......... 5.875 09/02/16 3,666,021
2,500 Temecula Vly, CA Uni Sch Dist Ctfs Partn Rfdg (FSA Insd).... 6.000 09/01/25 2,723,125
1,000 Temecula Vly, CA Uni Sch Dist Ser B Rfdg (FGIC Insd)........ 6.000 09/01/12 1,078,240
2,460 Torrance, CA Hosp Rev Torrance Mem Hosp Rfdg (MBIA Insd).... 6.750 01/01/12 2,489,987
3,845 Vista, CA Uni Sch Dist Ctfs Partn Ser A Rfdg (FSA Insd)..... * 11/01/17 1,230,861
2,000 William S Hart CA Jt Sch Fin Auth Spl Tax Rev Cmnty Fac Rfdg
(FSA Insd).................................................. 6.500 09/01/14 2,271,240
--------------
225,885,784
--------------
COLORADO 5.0%
12,750 Colorado Hlth Fac Auth Rev PSL Hlth Sys Proj Ser A
(Prerefunded @ 02/15/01) (FSA Insd)......................... 7.250 02/15/16 14,153,520
2,090 Colorado Hlth Fac Auth Rev Sisters of Charity Hlthcare Ser A
(MBIA Insd)................................................. 6.000 05/15/13 2,188,272
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 1,090,000
17,750 Denver, CO City & Cnty Arpt Rev Ser A (MBIA Insd)........... 5.700 11/15/25 18,679,390
5,500 Denver, CO City & Cnty Arpt Rev Ser D Rfdg (MBIA Insd)...... 5.500 11/15/25 5,681,500
10 Jefferson Cnty, CO Single Family Mtg Rev Ser A Rfdg (MBIA
Insd)....................................................... 8.875 10/01/13 10,737
2,050 Thornton, CO Rfdg (FGIC Insd)............................... * 12/01/11 1,046,545
1,100 Thornton, CO Rfdg (FGIC Insd)............................... * 12/01/15 446,985
9,000 University of CO Hosp Auth Hosp Rev Ser A (Prerefunded @
11/15/02) (AMBAC Insd)...................................... 6.250 11/15/12 9,950,940
8,600 University of CO Hosp Auth Hosp Rev Ser A (Prerefunded @
11/15/02) (AMBAC Insd)...................................... 6.400 11/15/22 9,564,920
2,500 University of CO Hosp Auth Hosp Rev Ser A Rfdg (AMBAC
Insd)....................................................... 5.000 11/15/11 2,531,375
2,000 Westminster, CO Wtr & Wastewtr Util Enterprise Rev (AMBAC
Insd)....................................................... 6.250 12/01/14 2,205,960
--------------
67,550,144
--------------
DISTRICT OF COLUMIBA 0.0%
250 District of Columbia Ser B Rfdg (MBIA Insd)................. * 06/01/04 187,900
--------------
FLORIDA 3.2%
1,350 Dade Cnty, FL Sch Brd Ctfs Partn Ser A (AMBAC Insd)......... 5.500 05/01/25 1,386,302
1,010 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd) (b)........ 8.000 10/01/03 1,204,728
</TABLE>
See Notes to Financial Statements
B-41
<PAGE> 447
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FLORIDA (CONTINUED)
$ 690 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd)............ 8.000% 10/01/04 $ 840,165
1,180 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd)............ 8.000 10/01/05 1,464,616
1,275 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd)............ 8.000 10/01/06 1,610,019
1,375 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd)............ 8.000 10/01/07 1,760,096
2,095 Dade Cnty, FL Util Pub Impt Rfdg (FGIC Insd)................ 12.000 10/01/04 3,019,628
210 Duval Cnty, FL Hsg Fin Auth Single Family Mtg Rev Ser C
(FGIC Insd)................................................. 7.650 09/01/10 223,778
915 Duval Cnty, FL Hsg Fin Auth Single Family Mtg Rev Ser C
(FGIC Insd)................................................. 7.700 09/01/24 973,569
1,410 Florida St Dept Corrections Ctfs Partn Okeechobee
Correctional (AMBAC Insd)................................... 6.250 03/01/15 1,555,427
2,000 Indian River Cnty, FL Hosp Rev Rfdg (FSA Insd).............. 6.100 10/01/18 2,204,180
1,000 Key West, FL Util Brd Elec Rev Ser D (AMBAC Insd)........... * 10/01/13 458,350
4,000 Lee Cnty, FL Hosp Brd Dir Hosp Rev (Inverse Fltg) (MBIA
Insd)....................................................... 9.266 04/01/20 4,750,000
6,000 Orange Cnty, FL Hlth Fac Auth Rev (Inverse Fltg) (MBIA
Insd)....................................................... 8.695 10/29/21 7,200,000
2,000 Palm Beach Cnty, FL Sch Brd Ctfs Partn Ser A (Prerefunded @
08/01/04) (AMBAC Insd)...................................... 6.375 08/01/15 2,258,020
1,090 Sarasota Cnty, FL Util Sys Rev (Prerefunded @ 10/01/04)
(FGIC Insd)................................................. 6.500 10/01/14 1,249,413
10,000 Tallahassee, FL Hlth Fac Rev Tallahassee Mem Regl Med Ser A
Rfdg (MBIA Insd)............................................ 6.625 12/01/13 11,289,100
--------------
43,447,391
--------------
GEORGIA 3.0%
1,250 Atlanta, GA Ctfs Partn Atlanta Pretrial Detention Cent (MBIA
Insd)....................................................... 6.250 12/01/08 1,371,950
1,750 Atlanta, GA Ctfs Partn Atlanta Pretrial Detention Cent (MBIA
Insd)....................................................... 6.250 12/01/17 1,909,338
6,500 Georgia Muni Elec Auth Pwr Rev Genl Ser B (BIGI Insd)....... * 01/01/07 4,324,320
4,750 Georgia Muni Elec Auth Pwr Rev Genl Ser B (BIGI Insd)....... * 01/01/08 3,002,522
15,550 Municipal Elec Auth GA Spl Oblig Fifth Crossover Ser Proj
One (AMBAC Insd)............................................ 6.400 01/01/13 18,097,712
10,000 Municipal Elec Auth GA Spl Oblig Fifth Crossover Ser Proj
One (MBIA Insd)............................................. 6.500 01/01/17 11,874,100
--------------
40,579,942
--------------
HAWAII 1.0%
12,785 Hawaii St Arpt Sys Rev Ser 1993 Rfdg (MBIA Insd)............ 6.400 07/01/08 14,203,496
--------------
ILLINOIS 16.8%
1,000 Berwyn, IL (MBIA Insd)...................................... 7.000 11/15/10 1,089,000
3,255 Bolingbrook, IL Pk Dist Pk Alt Rev (MBIA Insd).............. 5.125 01/01/15 3,258,776
2,645 Boone, McHenry & Dekalb Cntys, IL Cmnty Unit Schl Dist No
100 (FSA Insd).............................................. * 12/01/12 1,249,710
2,625 Boone, McHenry & Dekalb Cntys, IL Cmnty Unit Schl Dist No
100 (FSA Insd).............................................. * 12/01/14 1,112,422
5,000 Chicago, IL (FGIC Insd)..................................... 5.500 01/01/21 5,155,200
1,700 Chicago, IL Brd of Ed Chicago Schl Reform Ser A (AMBAC
Insd)....................................................... 5.250 12/01/22 1,697,569
10,000 Chicago, IL Brd of Ed Chicago Schl Reform Ser A (AMBAC
Insd)....................................................... 5.250 12/01/30 9,952,900
1,400 Chicago, IL Brd of Ed Chicago Sch Reform (AMBAC Insd)....... 5.750 12/01/20 1,486,884
25,725 Chicago, IL Brd of Ed Chicago Sch Reform (MBIA Insd)........ 6.000 12/01/26 28,043,337
16,000 Chicago, IL Brd of Ed Chicago Sch Reform (AMBAC Insd)....... 5.750 12/01/27 16,963,520
2,720 Chicago, IL Pub Bldg Comm Bldg Rev Chicago Transit Auth
(AMBAC Insd)................................................ 6.600 01/01/15 3,030,406
3,480 Chicago, IL Pub Bldg Comm Bldg Rev Ser A (MBIA Insd)........ * 01/01/06 2,429,040
3,105 Chicago, IL Pub Bldg Comm Bldg Rev Ser A (MBIA Insd)........ * 01/01/07 2,062,962
5,400 Chicago, IL Skyway Toll Brdg Rev (MBIA Insd)................ 5.500 01/01/23 5,557,248
2,000 Chicago, IL Wastewtr Transmission Rev (FGIC Insd)........... 5.125 01/01/25 1,972,660
1,000 Cook Cnty, IL Ser B Rfdg (MBIA Insd)........................ 5.000 11/15/12 1,003,500
4,750 Cook Cnty, IL Ser B Rfdg (MBIA Insd)........................ 5.000 11/15/14 4,718,175
1,000 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd) (b)............................................. 8.400 01/01/01 1,120,110
5,550 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd)................................................. 8.750 01/01/03 6,656,670
8,460 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd)................................................. 8.750 01/01/04 10,399,793
2,460 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd)................................................. 8.750 01/01/05 3,094,483
3,500 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd)................................................. 8.750 01/01/07 4,580,275
1,280 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood & Flossmor
(AMBAC Insd)................................................ * 12/01/05 897,843
</TABLE>
See Notes to Financial Statements
B-42
<PAGE> 448
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 8,280 Cook Cnty, IL Cnty Juvenile Detention Ser A (AMBAC Insd).... * 11/01/08 $ 5,008,323
1,505 Cook Cnty, IL Schl Dist No 100 Berwyn South (FSA Insd)...... 8.200% 12/01/14 2,065,191
1,775 Cook Cnty, IL Schl Dist No 100 Berwyn South (FSA Insd)...... 8.100 12/01/16 2,444,335
2,275 Des Plaines, IL Hosp Fac Rev Holy Family Hosp Rfdg (AMBAC
Insd)....................................................... 9.250 01/01/14 2,355,194
1,215 Evanston, IL Residential Mtg Rev (AMBAC Insd)............... 6.375 01/01/09 1,290,415
10,000 Illinois Dev Fin Auth Pollutn Ctl Rev Comwlth Edison Co Proj
Ser D Rfdg (AMBAC Insd)..................................... 6.750 03/01/15 11,266,700
35,000 Illinois Dev Fin Auth Pollutn Ctl Rev IL Pwr Co Proj Ser A
First Mtg Rfdg (MBIA Insd).................................. 7.400 12/01/24 40,804,750
2,000 Illinois Dev Fin Auth Rev Sch Dist Pgm Rockford Sch 205 (FSA
Insd)....................................................... 6.650 02/01/11 2,383,460
5,025 Illinois Dev Fin Auth Rev Sch Dist Pgm Rockford Sch 205 Rfdg
(FSA Insd).................................................. 6.650 02/01/12 5,714,581
2,100 Illinois Hlth Fac Auth Rev Ancilla Sys Inc Ser B (MBIA
Insd)....................................................... 5.250 07/01/22 2,085,678
1,103 Illinois Hlth Fac Auth Rev Cmnty Prov Pooled Pgm Ser B (MBIA
Insd)....................................................... 7.900 08/15/03 1,117,714
220 Illinois Hlth Fac Auth Rev Cmnty Prov Pooled Pgm Ser B Rfdg
(MBIA Insd)................................................. 7.900 08/15/03 251,702
5,000 Illinois Hlth Fac Auth Rev Hosp Sisters Svcs (Inverse Fltg)
(MBIA Insd)................................................. 9.217 06/19/15 5,993,750
5,000 Illinois Hlth Fac Auth Rev Methodist Hlth Proj (Inverse
Fltg) (AMBAC Insd).......................................... 9.740 05/18/21 5,912,500
3,400 Illinois Hlth Fac Auth Rev Rush Presbyterian Saint Luke Hosp
(Inverse Fltg) (MBIA Insd).................................. 9.716 10/01/24 4,054,500
3,000 Illinois Hlth Fac Auth Rev Sarah Bush Lincoln Hlth Rfdg
(AMBAC Insd)................................................ 6.000 01/01/27 3,224,070
3,150 Kendall Kane Cnty, IL Sch 308 Ser A (FSA Insd).............. 5.000 10/01/13 3,169,593
6,110 Rosemont, IL Tax Increment 3 (FGIC Insd).................... * 12/01/06 4,062,478
3,000 Rosemont, IL Tax Increment 3 (FGIC Insd).................... * 12/01/07 1,896,210
1,285 Saint Clair Cnty, IL Ctfs Partn (MBIA Insd)................. 8.000 12/01/05 1,591,550
1,185 Saint Clair Cnty, IL Ctfs Partn Indl Dev Rev (MBIA Insd).... 8.000 12/01/04 1,441,067
1,500 Will Cnty, IL Cmnty Unit Sch Dist No 201 Ser C (FSA Insd)... * 10/01/13 674,445
1,000 Will Cnty, IL Cmnty Unit Sch Dist No 201 Ser C (FSA Insd)... * 10/01/14 427,380
2,000 Winnebago & Boone Cntys, IL Sch Dist No 205 Rockford Ctfs
Partn (FSA Insd)............................................ 5.500 01/01/11 2,116,820
--------------
228,884,889
--------------
INDIANA 1.8%
7,000 Delaware Cnty, IN Hosp Auth Rev Cardinal Hlth Sys Oblig Rfdg
(AMBAC Insd) (a)............................................ 5.000 08/01/16 6,848,870
2,000 Indiana Bond Bank Spl Pgm Ser A (AMBAC Insd)................ 9.750 08/01/09 2,682,000
3,840 Indiana Hlth Fac Fin Auth Hosp Rev Cmnty Hosps of IN
(Prerefunded @ 07/01/01) (MBIA Insd)........................ 7.000 07/01/21 4,262,976
5,000 Indiana Hlth Fac Fin Auth Hosp Rev Cmnty Hosps Proj Rfdg &
Impt (MBIA Insd)............................................ 6.400 05/01/12 5,415,200
1,400 Marion Cnty, IN Convention & Rectl Fac Auth Excise Tax Rev
(MBIA Insd) (a)............................................. 5.000 06/01/15 1,384,866
1,000 Marion Cnty, IN Convention & Rectl Fac Auth Excise Tax Rev
Lease Rental Ser A (AMBAC Insd) (a)......................... 7.000 06/01/21 1,099,500
1,000 Saint Joseph Cnty, IN Hosp Auth Hosp Fac Rev Mem Hosp South
Bend Proj (MBIA Insd)....................................... 6.250 08/15/12 1,088,880
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 1,096,840
750 Vincennes, IN Cmnty Sch Bldg Corp (FSA Insd)................ 5.000 07/01/15 748,702
--------------
24,627,834
--------------
KANSAS 3.1%
38,750 Burlington, KS Pollutn Ctl Rev KS Gas & Elec Co Proj Rfdg
(MBIA Insd) (b)............................................. 7.000 06/01/31 42,346,775
--------------
KENTUCKY 0.2%
50 Kentucky Cntys Single Family Mtg Presbyterian Homes Ser A
Rfdg (MBIA Insd)............................................ 8.625 09/01/15 51,116
2,000 Kentucky Econ Dev Fin Auth Hosp Fac Rev Rfdg (Connie Lee
Insd)....................................................... 5.700 02/01/28 2,105,740
--------------
2,156,856
--------------
LOUISIANA 1.7%
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 4,724,668
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 6,546,912
310 Louisiana Pub Fac Auth Rev Med Cent LA at New Orleans Proj
(Connie Lee Insd)........................................... 6.250 10/15/10 330,637
4,150 Louisiana Pub Fac Auth Rev Pgm Hlth & Edl Cap Fac Our Lady
Med Cent Ser C (BIGI Insd) (b).............................. 8.200 12/01/15 4,384,018
</TABLE>
See Notes to Financial Statements
B-43
<PAGE> 449
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LOUISIANA (CONTINUED)
$ 5,000 Louisiana Pub Fac Auth Rev Tulane Univ of LA (AMBAC Insd)... 6.050% 10/01/25 $ 5,511,650
10,000 New Orleans, LA Home Mtg Auth Single Family Mtg Rev 1985 Ser
A (MBIA Insd)............................................... * 09/15/16 1,494,300
--------------
22,992,185
--------------
MAINE 0.4%
2,750 Easton, ME Indl Dev McCain Food Inc Proj Ser 1985 (AMBAC
Insd)....................................................... 9.200 08/01/99 2,759,487
1,750 Maine Hlth & Higher Edl Fac Auth Rev Ser B (FSA Insd)....... 7.100 07/01/14 2,019,448
--------------
4,778,935
--------------
MASSACHUSETTS 1.0%
1,700 Massachusetts St Hlth & Edl Fac Auth Rev Mt Auburn Hosp Ser
B1 (MBIA Insd).............................................. 6.250 08/15/14 1,873,349
1,000 Massachusetts St Hlth & Edl Fac Auth Rev Univ Hosp Ser C
(MBIA Insd)................................................. 7.250 07/01/19 1,083,970
5,000 Massachusetts St Indl Fin Agy Rev Suffolk Univ (AMBAC
Insd)....................................................... 5.250 07/01/27 5,012,850
3,250 Massachusetts St Wtr Res Auth Genl Ser A (FGIC Insd)........ 5.500 11/01/21 3,354,195
1,920 Worcester, MA (MBIA Insd)................................... 5.000 08/01/17 1,900,992
--------------
13,225,356
--------------
MICHIGAN 3.0%
2,325 Bay City, MI (AMBAC Insd)................................... * 06/01/15 968,804
1,000 Bay City, MI (AMBAC Insd)................................... * 06/01/16 393,430
3,250 Central MI Univ Rev (FGIC Insd)............................. 5.625 10/01/22 3,389,880
1,100 Central MI Univ Rev (FGIC Insd)............................. 5.500 10/01/26 1,133,803
2,245 Detroit, MI Ser A (MBIA Insd)............................... 5.000 04/01/13 2,237,704
2,795 Detroit, MI Ser A (MBIA Insd)............................... 5.000 04/01/14 2,775,742
3,000 Detroit, MI Ser A (MBIA Insd)............................... 5.000 04/01/18 2,954,700
2,195 Detroit, MI Ser B Rfdg (MBIA Insd).......................... 5.000 04/01/14 2,167,914
2,000 Durand, MI Area Schs (FGIC Insd)............................ 5.375 05/01/23 2,026,940
5,000 Ecorse, MI Pub Sch Dist (FGIC Insd)......................... 5.500 05/01/27 5,165,800
3,000 Lake Shore, MI Pub Schs Macomb Cnty (FSA Insd).............. 5.500 05/01/20 3,085,770
21,000 Livonia, MI Pub Sch Dist Ser II (FGIC Insd)................. * 05/01/21 5,316,780
5,000 Michigan St Hosp Fin Auth Rev Hosp Sparrow Oblig Group (MBIA
Insd)....................................................... 6.000 11/15/36 5,437,000
2,000 Michigan St Hsg Dev Auth Rental Hsg Rev Ser B (Embedded
Swap) (AMBAC Insd).......................................... 4.510 04/01/04 2,009,100
5,000 Mount Clemens, MI Cmnty Sch Dist Cap Apprec (Prerefunded @
05/01/07) (MBIA Insd)....................................... * 05/01/17 1,650,350
--------------
40,713,717
--------------
MINNESOTA 0.5%
1,000 Brainerd, MN Rev Evangelical Lutheran Ser B Rfdg (FSA
Insd)....................................................... 6.650 03/01/17 1,096,190
5,600 Minneapolis-Saint Paul, MN Hsg & Redev Auth Hlthcare Sys Rev
Hlth One Ser A (MBIA Insd).................................. 7.400 08/15/11 6,114,248
--------------
7,210,438
--------------
MISSISSIPPI 0.1%
1,000 Harrison Cnty, MS Wastewtr Mgmt Dist Rev Wastewtr Treatment
Fac Ser A Rfdg (FGIC Insd).................................. 8.500 02/01/13 1,382,600
--------------
MISSOURI 0.8%
2,700 Central MO St Univ Rev Hsg Sys (Prerefunded @ 07/01/01)
(MBIA Insd)................................................. 7.000 07/01/14 2,998,350
2,545 Green Cnty, MO Single Family Mtg Rev (AMBAC Insd)........... * 12/01/16 400,736
5,650 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev SSM Hlthcare
Proj Rfdg (MBIA Insd)....................................... 6.250 06/01/16 6,115,673
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 1,119,310
260 Saint Louis Cnty, MO Single Family Mtg Rev (AMBAC Insd)..... 9.250 10/01/16 278,265
--------------
10,912,334
--------------
NEBRASKA 0.2%
1,250 Douglas Cnty, NE Hosp Auth No 1 Rev Immanuel Med Cent Inc
Rfdg (Prerefunded @ 09/01/01) (AMBAC Insd).................. 6.900 09/01/11 1,388,350
1,500 Douglas Cnty, NE Hosp Auth No 1 Rev Immanuel Med Cent Inc
Rfdg (Prerefunded @ 09/01/01) (AMBAC Insd).................. 7.000 09/01/21 1,671,075
--------------
3,059,425
--------------
</TABLE>
See Notes to Financial Statements
B-44
<PAGE> 450
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEVADA 1.0%
$ 1,000 Carson City, NV Hosp Rev Ser B (AMBAC Insd)................. 5.400% 03/01/17 $ 1,016,980
2,000 Clark Cnty, NV Indl Dev Rev NV Pwr Co Proj Ser C Rfdg (AMBAC
Insd)....................................................... 7.200 10/01/22 2,244,340
3,030 Reno, NV Hosp Rev Dates Saint Mary's Hosp Inc Ser B
(Prerefunded @ 01/01/00) (BIGI Insd)........................ 7.750 07/01/15 3,244,645
4,525 Reno, NV Hosp Rev Dates Saint Mary's Hosp Inc Ser C
(Prerefunded @ 01/01/00) (BIGI Insd)........................ 7.750 07/01/15 4,931,209
3,720 Washoe Cnty, NV Rfdg & Impt (MBIA Insd)..................... * 07/01/07 2,408,217
--------------
13,845,391
--------------
NEW HAMPSHIRE 0.6%
5,000 New Hampshire Higher Edl & Hlth Fac Auth Rev (AMBAC Insd)... 6.000 10/01/26 5,402,800
2,500 New Hampshire St Tpk Sys Rev Rfdg (Inverse Fltg) (FGIC
Insd)....................................................... 9.627 11/01/17 3,365,625
--------------
8,768,425
--------------
NEW JERSEY 1.0%
5,500 Howell Twp, NJ Rfdg (FGIC Insd)............................. 6.800 01/01/14 6,065,345
3,625 Morristown, NJ Rfdg (FSA Insd).............................. 6.400 08/01/14 4,097,410
3,940 New Jersey St Hsg & Mtg Fin Agy Rev Home Mtg Ser B (MBIA
Insd)....................................................... 8.100 10/01/17 4,077,388
--------------
14,240,143
--------------
NEW YORK 7.5%
8,000 Metropolitan Tran Auth NY Commuter Fac Rev Ser A (MBIA
Insd)....................................................... 5.625 07/01/27 8,376,240
2,090 New York City Ser G (MBIA Insd)............................. 5.750 02/01/14 2,237,052
4,350 New York City Indl Dev Agy Civic Fac Rev USTA Natl Tennis
Cent Proj (FSA Insd)........................................ 6.375 11/15/14 4,855,687
50 New York City Ser C Subser C1 (FSA Insd).................... 6.250 08/01/09 54,610
18,000 New York City Ser G (FGIC Insd)............................. 5.750 02/01/14 19,266,480
3,000 New York St Dorm Auth Lease Rev Muni Hlth Fac Impt Pgm Ser A
(FSA Insd).................................................. 5.500 05/15/25 3,081,540
3,950 New York St Dorm Auth Rev City Univ Sys Ser C (FGIC Insd)... 7.000 07/01/14 4,280,102
5,000 New York St Dorm Auth Rev City Univ Sys Third Resolution
(AMBAC Insd)................................................ 6.250 07/01/18 5,554,300
4,700 New York St Dorm Auth Rev Insd Pace Univ Rfdg (MBIA Insd)... 5.750 07/01/26 4,988,580
6,000 New York St Dorm Auth Rev Lib Fac Svc Contract (CAPMAC
Insd)....................................................... 5.250 07/01/19 6,009,600
170 New York St Med Care Fac Fin Agy Rev IBC Mental Hlth Svcs
Ser A (MBIA Insd)........................................... 7.750 08/15/10 184,651
1,000 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Ser E
(FSA Insd).................................................. 6.500 08/15/15 1,117,270
28,535 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg Ser A
(AMBAC Insd) (b)............................................ 6.750 08/15/14 32,355,836
3,400 New York St Muni Bond Bank Agy Spl Pgm Rev Rochester Ser A
(MBIA Insd) (b)............................................. 6.625 03/15/06 3,740,204
1,500 New York St Twy Auth Hwy & Brdg Trust Fund Ser B (FGIC
Insd)....................................................... 6.000 04/01/14 1,623,285
1,500 New York St Urban Dev Corp Rev Correctional Fac Rfdg (AMBAC
Insd)....................................................... 5.250 01/01/18 1,506,105
1,975 New York, NY Ser B1 (MBIA Insd)............................. 6.950 08/15/12 2,264,022
25 New York, NY Ser B1 (Prerefunded @ 08/15/04) (MBIA Insd).... 6.950 08/15/12 29,047
--------------
101,524,611
--------------
NORTH CAROLINA 0.1%
1,250 Franklin Cnty, NC Ctfs Partn Jail & Sch Projs (FGIC Insd)... 6.625 06/01/14 1,396,763
--------------
NORTH DAKOTA 0.8%
4,595 Grand Forks, ND Sales Tax Rev Aurora Proj Ser A (MBIA
Insd)....................................................... 5.625 12/15/29 4,752,379
5,000 Mercer Cnty, ND Pollutn Ctl Rev Antelope Vly Station Rfdg
(AMBAC Insd)................................................ 7.200 06/30/13 6,115,600
--------------
10,867,979
--------------
OHIO 2.3%
3,600 Akron Bath Copley, OH St Twp Hosp Dist Rev Akron Genl Med
Cent Proj (Prerefunded @ 01/01/02) (AMBAC Insd)............. 6.500 01/01/19 3,976,272
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 1,108,870
5,000 Clermont Cnty, OH Hosp Fac Rev Muni (Inverse Fltg) (AMBAC
Insd)....................................................... 9.681 10/05/21 6,050,000
2,010 Cleveland, OH (Prerefunded @ 11/15/04) (MBIA Insd).......... 6.500 11/15/09 2,303,942
2,285 Cleveland, OH (Prerefunded @ 11/15/04) (MBIA Insd).......... 6.500 11/15/10 2,619,159
11,350 Franklin Cnty, OH Convention Fac Auth Tax Lease Rev Antic
(MBIA Insd) (a)............................................. 5.000 12/01/27 11,142,068
</TABLE>
See Notes to Financial Statements
B-45
<PAGE> 451
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OHIO (CONTINUED)
$ 1,500 Ohio St Air Quality Dev Auth Rev Pollutn Ctl Cleveland Co
Proj Rfdg (FGIC Insd)....................................... 8.000% 12/01/13 $ 1,736,505
2,500 Ohio St Air Quality Dev Auth Rev Pollutn Ctl OH Edison Ser A
Rfdg (FGIC Insd)............................................ 7.450 03/01/16 2,702,300
--------------
31,639,116
--------------
OKLAHOMA 0.8%
1,760 McAlester, OK Pub Wks Auth Rev Rfdg & Impt (FSA Insd)....... 5.250 12/01/20 1,765,086
1,000 Norman, OK Regl Hosp Auth Hosp Rev (Prerefunded @ 09/01/01)
(MBIA Insd)................................................. 6.900 09/01/21 1,110,680
3,300 Oklahoma Hsg Fin Agy Single Family Rev Mtg Ser A (MBIA
Insd)....................................................... 7.200 03/01/11 3,496,845
4,400 Oklahoma St Inds Auth Rev Hlth Sys Integris Baptist Rfdg
(AMBAC Insd)................................................ 5.000 08/15/14 4,352,788
--------------
10,725,399
--------------
OREGON 0.1%
1,000 Wasco Cnty, OR Vets Home (FSA Insd)......................... 6.200 06/01/13 1,097,960
--------------
PENNSYLVANIA 6.7%
12,930 Allegheny Cnty, PA Hosp Dev Auth Rev Hlth Cent Univ
Pittsburgh Med Cent Sys (MBIA Insd)......................... 5.375 12/01/25 13,033,181
4,875 Allegheny Cnty, PA Hosp Dev Auth Rev Pittsburgh Mercy Hlth
Sys Inc (AMBAC Insd)........................................ 5.625 08/15/26 5,058,300
2,500 Beaver Cnty, PA (MBIA Insd)................................. 5.300 10/01/26 2,513,025
2,985 Butler, PA Area Sch Dist Cap Apprec (FGIC Insd)............. * 11/15/23 701,833
5,650 Butler, PA Area Sch Dist Cap Apprec (FGIC Insd)............. * 11/15/26 1,105,988
31,250 Dauphin Cnty, PA Genl Auth Hlth Sys Rev Pinnacle Hlth Sys
Proj Rfdg (MBIA Insd)....................................... 5.500 05/15/27 32,153,437
2,000 Dauphin Cnty, PA Genl Auth Hosp Rev Hapsco Phoenixville Hosp
Proj Ser B (FGIC Insd)...................................... 6.125 07/01/10 2,228,380
1,295 Deer Lakes Sch Dist PA Ser A (FSA Insd)..................... 5.250 01/15/17 1,310,087
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 1,029,430
2,000 Lehigh Cnty, PA Genl Purp Auth Rev Good Shepherd Rehab Hosp
Rfdg (AMBAC Insd)........................................... 5.250 11/15/27 1,999,880
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 1,098,680
3,750 Montgomery Cnty, PA Indl Dev Auth Rev Pollutn Ctl Ser E Rfdg
(MBIA Insd)................................................. 6.700 12/01/21 4,101,787
1,000 New Kensington Arnold, PA Sch Dist (FGIC Insd).............. 5.500 05/15/26 1,028,690
1,000 Northeastern PA Hosp & Edl Auth College Rev Gtd Luzerne Cnty
Cmnty College (Prerefunded @ 02/15/05) (AMBAC Insd)......... 6.625 08/15/15 1,136,940
10,765 Northeastern PA Hosp & Edl Auth Wyoming Vly Hlthcare Ser A
(AMBAC Insd)................................................ 5.250 01/01/26 10,765,000
1,000 Pennsylvania St Higher Edl Fac Auth College & Univ Rev Bryn
Mawr College (MBIA Insd).................................... 5.625 12/01/27 1,046,730
2,250 Philadelphia, PA Gas Wks Rev 14th Ser A Rfdg (FSA Insd)..... 6.375 07/01/14 2,485,283
1,000 Saint Mary's Hosp Auth Bucks Cnty, PA Rev Franciscan Hlth
Saint Mary Ser A (MBIA Insd)................................ 6.500 07/01/22 1,091,460
1,000 Saint Mary's Hosp Auth Bucks Cnty, PA Rev Franciscan Hlth
Sys Ser B (MBIA Insd)....................................... 6.500 07/01/12 1,093,600
1,000 Sayre, PA Hlthcare Fac Auth Rev VHA Cap Asset Fin Pgm Ser H2
(AMBAC Insd)................................................ 7.625 12/01/15 1,088,540
3,750 Southmoreland Sch Dist PA (AMBAC Insd)...................... 5.250 10/01/17 3,792,488
1,000 State Pub Sch Bldg Auth PA Sch Rev Burgettstown Sch Dist Ser
D (MBIA Insd)............................................... 6.500 02/01/14 1,109,240
--------------
90,971,979
--------------
RHODE ISLAND 1.8%
2,000 Rhode Island St Hlth & Edl Bldg Corp Rev Higher Edl Fac
Roger Williams (Prerefunded @ 11/15/04) (Connie Lee Insd)... 7.250 11/15/24 2,379,660
18,000 Rhode Island St Hlth & Edl Bldg Corp Rev RI Hosp (Inverse
Fltg) (FGIC Insd)........................................... 9.816 08/15/21 21,825,000
--------------
24,204,660
--------------
SOUTH CAROLINA 0.1%
70 Charleston Cnty, SC Ctfs Partn Ser B (MBIA Insd)............ 6.875 06/01/14 79,177
1,430 Charleston Cnty, SC Ctfs Partn Ser B (Prerefunded @
06/01/04) (MBIA Insd)....................................... 6.875 06/01/14 1,659,872
--------------
1,739,049
--------------
SOUTH DAKOTA 0.8%
5,205 South Dakota St Lease Rev Trust Ctfs Ser A (FSA Insd)....... 6.625 09/01/12 6,196,552
4,000 South Dakota St Lease Rev Trust Ctfs Ser A (FSA Insd)....... 6.700 09/01/17 4,825,480
--------------
11,022,032
--------------
</TABLE>
See Notes to Financial Statements
B-46
<PAGE> 452
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TENNESSEE 0.5%
$ 2,000 Chattanooga-Hamilton Cnty, TN Hosp Auth Hosp Rev Erlanger
Med Cent Ser B (Inverse Fltg) (Prerefunded @ 05/01/01) (FSA
Insd)....................................................... 9.723% 05/25/21 $ 2,400,000
3,320 Johnson City, TN Sch Sales Tax (Prerefunded @ 05/01/06)
(AMBAC Insd)................................................ 6.700 05/01/18 3,853,192
--------------
6,253,192
--------------
TEXAS 6.5%
3,000 Amarillo, TX Hlth Fac Corp Hosp Rev High Plains Baptist Hosp
(Inverse Fltg) (FSA Insd)................................... 8.987 01/01/22 3,540,000
1,000 Austin, TX Util Sys Rev (Prerefunded @ 05/15/02) (BIGI
Insd)....................................................... 8.625 11/15/12 1,177,000
2,500 Austin, TX Util Sys Rev Rfdg (AMBAC Insd) (a)............... 6.500 11/15/05 2,804,875
12,500 Austin, TX Util Sys Rev Ser A Rfdg (MBIA Insd).............. * 11/15/10 6,711,625
1,730 Brazos Cnty TX Hlth Fac Dev Corp Franciscan Svcs Corp Rev
Ser A (MBIA Insd)........................................... 5.375 01/01/17 1,751,469
9,000 Brazos River Auth TX Rev Coll Houston Lt & Pwr Co Proj B
Rfdg (BIGI Insd)............................................ 8.250 05/01/15 9,306,090
6,515 Brazos River Auth TX Rev Coll Houston Lt & Pwr Co Proj C
Rfdg (BIGI Insd)............................................ 8.100 05/01/19 6,733,383
2,850 Corpus Christi, TX Hsg Fin Corp Single Family Mtg Rev Ser A
Rfdg (MBIA Insd)............................................ 7.700 07/01/11 3,176,182
6,525 Dallas Cnty, TX Util & Reclamation Dist (MBIA Insd)......... * 02/15/07 3,688,256
6,780 Dallas Cnty, TX Util & Reclamation Dist (MBIA Insd)......... * 02/15/08 3,552,449
7,705 Dallas Cnty, TX Util & Reclamation Dist (MBIA Insd)......... * 02/15/09 3,723,056
8,795 El Paso, TX Hsg Fin Corp Mtg Rev Single Family (FGIC
Insd)....................................................... * 11/01/16 1,249,418
1,250 Harris Cnty, TX Hlth Fac Dev Corp Thermal Util Rev Teco Proj
Ser A (AMBAC Insd).......................................... 7.250 02/15/15 1,343,350
4,615 Harris Cnty, TX Toll Rd Tax & Sub Lien Ser A Rfdg (FGIC
Insd)....................................................... * 08/15/07 2,970,952
17,000 Harris Cnty, TX Toll Road Sr Lien Rfdg (MBIA Insd).......... 5.000 08/15/24 16,631,780
245 Henderson, TX (AMBAC Insd).................................. 9.125 05/15/04 310,430
2,505 Montgomery Cnty, TX Cap Apprec Rfdg (MBIA Insd)............. * 03/01/15 1,026,148
1,000 Montgomery Cnty, TX Cap Apprec Rfdg (MBIA Insd)............. * 03/01/16 384,990
1,305 Montgomery Cnty, TX Cap Apprec Rfdg (MBIA Insd)............. * 03/01/17 475,412
5,000 North Cent, TX Hlth Fac Dev TX Hlth Res Sys Ser B (AMBAC
Insd)....................................................... 5.375 02/15/26 5,050,750
1,000 San Antonio, TX Indt Sch Dist Pub Fac Corp Lease Rev (AMBAC
Insd)....................................................... 5.850 10/15/10 1,100,580
10,000 Tarrant Cnty, TX Hlth Fac Dev (MBIA Insd)................... 5.250 02/15/22 9,999,400
1,750 Tarrant Cnty, TX Hlth Fac Dev Corp Hlth Sys Rev Ser B (FGIC
Insd)....................................................... 5.000 09/01/15 1,726,060
--------------
88,433,655
--------------
UTAH 2.9%
21,000 Intermountain Pwr Agy UT Pwr Supply Rev Ser B Rfdg (MBIA
Insd)....................................................... 5.750 07/01/19 22,308,300
2,415 Payson City, UT Cnty UT Elec Pwr Rev (BIGI Insd)............ 8.000 08/15/03 2,524,496
750 Provo, UT Elec Rev 1984 Ser A Rfdg (AMBAC Insd)............. 10.375 09/15/15 1,102,380
3,500 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg (Inverse Fltg)
(AMBAC Insd)................................................ 9.363 05/15/20 4,165,000
7,385 Utah St Muni Fin Co-op Local Govt Rev Pool Cap Salt Lake
(FSA Insd).................................................. * 03/01/09 4,353,014
2,000 Washington Cnty/St George Interlocal Agy UT Lease Rev (AMBAC
Insd)....................................................... 5.125 12/01/22 1,976,340
3,115 West Jordan, UT Multi-Family Rev Broadmoor Village Apts Proj
Ser A Rfdg (FSA Insd)....................................... 6.800 01/01/15 3,355,167
--------------
39,784,697
--------------
VIRGINIA 0.4%
4,000 Loudoun Cnty, VA Ctfs Partn (FSA Insd)...................... 6.800 03/01/14 4,493,440
750 University of VA Hosp Rev Ser C Rfdg (Prerefunded @
06/01/00) (AMBAC Insd)...................................... 9.375 06/01/07 848,625
--------------
5,342,065
--------------
WASHINGTON 3.0%
1,250 Franklin Cnty, WA Pub Util Dist No 1 Elec Rev (Prerefunded @
09/01/01) (AMBAC Insd)...................................... 7.100 09/01/08 1,377,038
2,995 Grant Cnty, WA Pub Util Dist No 2 Priest Rapids Hydro Elec
Rev Second Ser C Rfdg (AMBAC Insd).......................... 6.000 01/01/13 3,279,315
2,335 Grant Cnty, WA Pub Util Dist No 2 Priest Rapids Hydro Elec
Rev Second Ser C Rfdg (AMBAC Insd).......................... 6.000 01/01/17 2,528,151
1,315 Grant Cnty, WA Pub Util Dist No 2 Wanapum Hydro Elec Rev
Second Ser C Rfdg (AMBAC Insd).............................. 6.000 01/01/13 1,439,833
1,025 Grant Cnty, WA Pub Util Dist No 2 Wanapum Hydro Elec Rev
Second Ser C Rfdg (AMBAC Insd).............................. 6.000 01/01/17 1,109,788
350 Pierce Cnty, WA Swr Rev Ser A (MBIA Insd)................... 9.000 02/01/05 426,668
1,000 Snohomish Cnty, WA Solid Waste Rev (MBIA Insd).............. 7.000 12/01/10 1,110,190
5,000 Spokane, WA Regl Solid Waste Mgmt Sys Rev (AMBAC Insd)...... 6.250 12/01/11 5,443,700
</TABLE>
See Notes to Financial Statements
B-47
<PAGE> 453
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WASHINGTON (CONTINUED)
$ 160 University of WA Univ Rev (MBIA Insd)....................... 7.000% 12/01/21 $ 177,630
3,090 Washington St Pub Pwr Supply Sys Nuclear Proj No 1 Rev Ser A
Rfdg (AMBAC Insd)........................................... 5.700 07/01/09 3,352,588
9,435 Washington St Pub Pwr Supply Sys Nuclear Proj No 1 Rev Ser C
Rfdg (Prerefunded @ 07/01/00) (FGIC Insd)................... 7.750 07/01/08 10,428,977
3,015 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev Ser C
Rfdg (MBIA Insd)............................................ * 07/01/04 2,250,517
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 7,215,195
--------------
40,139,590
--------------
WISCONSIN 1.1%
12,490 Wisconsin St Hlth & Edl Fac Auth Rev Aurora Med Group Inc
Proj (FSA Insd)............................................. 5.750 11/15/25 13,054,923
1,000 Wisconsin St Hlth & Edl Fac Auth Rev Med College of WI Inc
Proj (MBIA Insd)............................................ 5.500 03/01/17 1,021,270
1,000 Wisconsin St Hlth & Edl Fac Auth Rev Med College of WI Inc
Proj (MBIA Insd)............................................ 5.750 03/01/27 1,057,360
--------------
15,133,553
--------------
WYOMING 0.2%
2,000 Laramie Cnty, WY Hosp Rev Mem Hosp Proj (AMBAC Insd)........ 6.700 05/01/12 2,204,780
--------------
PUERTO RICO 0.2%
3,000 Puerto Rico Indl Tourist Edl Med & Environmental Ctl Fac
Hosp Aux (MBIA Insd)........................................ 6.250 07/01/16 3,314,220
--------------
TOTAL LONG-TERM INVESTMENTS 101.0%
(Cost $1,242,260,995)................................................................... 1,373,468,284
LIABILITIES IN EXCESS OF OTHER ASSETS (1.0%)............................................. (14,249,011)
--------------
NET ASSETS 100.0%........................................................................ $1,359,219,273
==============
</TABLE>
* Zero coupon bond
(a) Securities purchased on a when issued or delayed delivery basis.
(b) Assets segregated as collateral for when issued or delayed delivery purchase
commitments and open futures transactions.
AMBAC--AMBAC Indemnity Corporation
BIGI--Bond Investor Guaranty Inc.
CAPMAC--Capital Markets Assurance Corp.
Connie Lee--Connie Lee Insurance Company
FGIC--Financial Guaranty Insurance Company
FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements
B-48
<PAGE> 454
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $1,242,260,995)..................... $1,373,468,284
Receivables:
Interest.................................................. 20,801,666
Investments Sold.......................................... 10,091,644
Fund Shares Sold.......................................... 712,838
Other....................................................... 41,587
--------------
Total Assets.......................................... 1,405,116,019
--------------
LIABILITIES:
Payables:
Investments Purchased..................................... 27,963,944
Fund Shares Repurchased................................... 10,063,771
Income Distributions...................................... 3,025,227
Custodian Bank............................................ 2,988,650
Distributor and Affiliates................................ 650,871
Investment Advisory Fee................................... 587,363
Variation Margin on Futures............................... 178,125
Accrued Expenses............................................ 314,696
Trustees' Deferred Compensation and Retirement Plans........ 124,099
--------------
Total Liabilities..................................... 45,896,746
--------------
NET ASSETS.................................................. $1,359,219,273
==============
NET ASSETS CONSIST OF:
Capital..................................................... $1,225,462,543
Net Unrealized Appreciation................................. 131,036,118
Accumulated Net Realized Gain............................... 2,556,582
Accumulated Undistributed Net Investment Income............. 164,030
--------------
NET ASSETS.................................................. $1,359,219,273
==============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $1,283,505,387 and 65,380,120 shares of
beneficial interest issued and outstanding)............. $ 19.63
Maximum sales charge (4.75%* of offering price)......... .98
--------------
Maximum offering price to public........................ $ 20.61
==============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $70,136,534 and 3,572,287 shares of
beneficial interest issued and outstanding)............. $ 19.63
==============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $5,577,352 and 284,125 shares of
beneficial interest issued and outstanding)............. $ 19.63
==============
</TABLE>
*On sales of $100,000 or more, the sales charge will be
reduced.
See Notes to Financial Statements
B-49
<PAGE> 455
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 81,024,876
------------
EXPENSES:
Investment Advisory Fee..................................... 6,799,897
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B, and C of $2,889,918, $693,713 and $49,687,
respectively)............................................. 3,633,318
Shareholder Services........................................ 1,437,336
Custody..................................................... 119,050
Legal....................................................... 110,242
Insurance................................................... 44,844
Trustees' Fees and Expenses................................. 36,865
Other....................................................... 805,717
------------
Total Expenses.......................................... 12,987,269
------------
NET INVESTMENT INCOME....................................... $ 68,037,607
============
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 12,503,696
Options................................................... (847,958)
Futures................................................... (3,130,732)
------------
Net Realized Gain........................................... 8,525,006
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 99,934,215
------------
End of the Period:
Investments............................................. 131,207,289
Futures................................................. (171,171)
------------
131,036,118
------------
Net Unrealized Appreciation During the Period............... 31,101,903
------------
NET REALIZED AND UNREALIZED GAIN............................ $ 39,626,909
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $107,664,516
============
</TABLE>
See Notes to Financial Statements
B-50
<PAGE> 456
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income....................................... $ 68,037,607 $ 70,583,949
Net Realized Gain........................................... 8,525,006 10,645,588
Net Unrealized Appreciation/Depreciation During the
Period.................................................... 31,101,903 (32,868,974)
-------------- --------------
Change in Net Assets from Operations........................ 107,664,516 48,360,563
-------------- --------------
Distributions from Net Investment Income*................... (67,785,067) (70,583,949)
Distributions in Excess of Net Investment Income*........... -0- (467,897)
-------------- --------------
Distributions from and in Excess of Net Investment
Income*................................................... (67,785,067) (71,051,846)
Distributions from Net Realized Gain*....................... (11,111,608) -0-
-------------- --------------
Total Distributions*...................................... (78,896,675) (71,051,846)
-------------- --------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES......... 28,767,841 (22,691,283)
-------------- --------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold................................... 631,717,458 579,040,170
Net Asset Value of Shares Issued Through Dividend
Reinvestment.............................................. 54,493,315 48,357,526
Cost of Shares Repurchased.................................. (716,001,683) (690,249,529)
-------------- --------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.......... (29,790,910) (62,851,833)
-------------- --------------
TOTAL DECREASE IN NET ASSETS................................ (1,023,069) (85,543,116)
NET ASSETS:
Beginning of the Period..................................... 1,360,242,342 1,445,785,458
-------------- --------------
End of the Period (Including accumulated undistributed
net investment income of $164,030 and ($88,510),
respectively)............................................. $1,359,219,273 $1,360,242,342
============== ==============
</TABLE>
<TABLE>
<CAPTION>
*Distributions Year Ended Year Ended
by Class December 31, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of Net Investment Income:
Class A Shares............................................ $64,607,170 $67,667,425
Class B Shares............................................ 2,965,479 3,178,918
Class C Shares............................................ 212,418 205,503
----------- -----------
$67,785,067 $71,051,846
=========== ===========
Distributions from Net Realized Gain:
Class A Shares............................................ $10,489,973 $ -0-
Class B Shares............................................ 580,452 -0-
Class C Shares............................................ 41,183 -0-
----------- -----------
$11,111,608 $ -0-
=========== ===========
</TABLE>
See Notes to Financial Statements
B-51
<PAGE> 457
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 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $ 19.238 $19.549 $17.572 $19.857 $18.721
-------- -------- -------- -------- --------
Net Investment Income..................................... .974 .980 1.021 1.051 1.107
Net Realized and Unrealized Gain/Loss..................... .551 (.304) 1.982 (2.280) 1.145
-------- -------- -------- -------- --------
Total from Investment Operations............................ 1.525 .676 3.003 (1.229) 2.252
-------- -------- -------- -------- --------
Less:
Distributions from and in Excess of Net Investment
Income.................................................. .971 .987 1.026 1.056 1.116
Distributions from Net Realized Gain...................... .161 -0- -0- -0- -0-
-------- -------- -------- -------- --------
Total Distributions......................................... 1.132 .987 1.026 1.056 1.116
-------- -------- -------- -------- --------
Net Asset Value, End of the Period.......................... $ 19.631 $19.238 $19.549 $17.572 $19.857
======== ======== ======== ======== ========
Total Return (a)............................................ 8.19% 3.65% 17.49% (6.31%) 12.32%
Net Assets at End of the Period (In millions)............... $1,283.5 $1,283.7 $1,365.4 $1,110.2 $1,230.0
Ratio of Expenses to Average Net Assets (b)................. .92% .95% .88% .88% .84%
Ratio of Net Investment Income to Average Net Assets (b).... 5.07% 5.11% 5.44% 5.70% 5.69%
Portfolio Turnover.......................................... 82% 92% 70% 48% 79%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1996 and 1995, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to VKAC's
reimbursement of certain expenses was less than 0.01%.
See Notes to Financial Statements
B-52
<PAGE> 458
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
Year Ended December 31, (Commencement of
---------------------------------------- Distribution) to
Class B Shares 1997 1996 1995 1994 December 31, 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $19.240 $19.549 $17.563 $19.824 $19.320
------- ------- ------- ------- -------
Net Investment Income..................................... .826 .832 .890 .899 .619
Net Realized and Unrealized Gain/Loss..................... .551 (.304) 1.978 (2.276) .513
------- ------- ------- ------- -------
Total from Investment Operations............................ 1.377 .528 2.868 (1.377) 1.132
------- ------- ------- ------- -------
Less:
Distributions from and in Excess of Net Investment
Income.................................................. .822 .837 .882 .884 .628
Distributions from Net Realized Gain...................... .161 -0- -0- -0- -0-
------- ------- ------- ------- -------
Total Distributions......................................... .983 .837 .882 .884 .628
------- ------- ------- ------- -------
Net Asset Value, End of the Period.......................... $19.634 $19.240 $19.549 $17.563 $19.824
======= ======= ======= ======== =======
Total Return (a)............................................ 7.36% 2.83% 16.67% (7.03%) 5.92%*
Net Assets at End of the Period (In millions)............... $70.1 $71.6 $75.3 $30.0 $20.8
Ratio of Expenses to Average
Net Assets (b)............................................ 1.69% 1.74% 1.67% 1.71% 1.68%
Ratio of Net Investment Income to Average Net Assets (b).... 4.29% 4.38% 4.69% 4.88% 4.25%
Portfolio Turnover.......................................... 82% 92% 70% 48% 79%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sale charge or contingent deferred sales charge.
(b) For the years ended December 31, 1996 and 1995, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to VKAC's
reimbursement of certain expenses was less than 0.01%.
* Non-Annualized
See Notes to Financial Statements
B-53
<PAGE> 459
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
Year Ended December 31 (Commencement of
---------------------------------------- Distribution) to
Class C Shares 1997 1996 1995 1994 December 31, 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $19.239 $19.548 $17.568 $19.823 $19.650
------- ------- ------- ------- -------
Net Investment Income..................................... .822 .830 .883 .908 .350
Net Realized and Unrealized Gain/Loss..................... .552 (.302) 1.979 (2.279) .181
------- ------- ------- ------- -------
Total from Investment Operations............................ 1.374 .528 2.862 (1.371) .531
------- ------- ------- ------- -------
Less:
Distributions from and in Excess of Net Investment
Income.................................................. .822 .837 .882 .884 .358
Distributions from Net Realized Gain...................... .161 -0- -0- -0- -0-
------- ------- ------- ------- -------
Total Distributions......................................... .983 .837 .882 .884 .358
------- ------- ------- ------- -------
Net Asset Value, End of the Period.......................... $19.630 $19.239 $19.548 $17.568 $19.823
======= ======= ======= ======= =======
Total Return (a)............................................ 7.36% 2.83% 16.60% (6.98%) 2.70%*
Net Assets at End of the Period (In millions)............... $5.6 $4.9 $5.1 $3.5 $5.0
Ratio of Expenses to Average Net Assets (b)................. 1.69% 1.74% 1.67% 1.70% 1.68%
Ratio of Net Investment Income to Average Net Assets (b).... 4.29% 4.37% 4.68% 4.89% 4.21%
Portfolio Turnover.......................................... 82% 92% 70% 48% 79%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1996 and 1995, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to VKAC's
reimbursement of certain expenses was less than 0.01%.
* Non-Annualized
See Notes to Financial Statements
B-54
<PAGE> 460
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
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 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 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.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. 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.
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 60 days or less 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. 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. Expenses of the Fund are allocated on a pro rata basis to
each class of shares, except for distribution and service fees and transfer
agency costs which are unique to each class of shares.
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.
Net realized gains differ for financial reporting and tax purposes as a
result of losses from wash sales and losses recognized for tax purposes on open
futures positions at December 31, 1997.
At December 31, 1997, for federal income tax purposes, cost of long-term
investments is $1,242,268,278; the aggregate gross unrealized appreciation is
$131,263,997 and the aggregate gross unrealized depreciation is $63,991,
resulting in net unrealized appreciation of $131,200,006.
B-55
<PAGE> 461
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
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.
Due to inherent differences in the recognition of certain expenses under
generally accepted accounting principles and federal income tax purposes, the
amount of distributed net investment income may differ 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.
For Federal income tax purposes, the following information is furnished
with respect to the distributions paid by the Fund during its taxable year ended
December 31, 1997. The Fund designated $5,483,818 as a 28% rate capital gain
distribution and $796,940 as a 20% rate capital gain distribution. Shareholders
were sent a 1997 Form 1099-DIV in January 1998 representing their proportionate
share of the capital gain distribution to be reported on their income tax
returns. The Fund designated 99.95% of the income distributions as a tax-exempt
income distribution.
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>
For the year ended December 31, 1997, the Fund recognized expenses of
approximately $52,500 representing legal expenses provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended December 31, 1997, the Fund recognized expenses of
approximately $259,600 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") cost of providing accounting,
cash management and legal services to the Fund.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the year ended
December 31, 1997, the Fund recognized expenses of approximately $921,500,
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 provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
B-56
<PAGE> 462
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Fund. The maximum annual
benefit per trustee under the plan is equal to $2,500.
3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of shares of beneficial interest, 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, 1997, capital aggregated $1,152,273,936, $67,523,705 and
$5,664,902 for Classes A, B and C, respectively. For the year ended December 31,
1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................................. 32,247,420 $ 617,534,974
Class B.................................................. 410,394 7,887,393
Class C.................................................. 324,754 6,295,091
----------- -------------
Total Sales................................................ 32,982,568 $ 631,717,458
=========== =============
Dividend Reinvestment:
Class A.................................................. 2,721,901 $ 52,405,367
Class B.................................................. 99,148 1,908,983
Class C.................................................. 9,300 178,965
----------- -------------
Total Dividend Reinvestment................................ 2,830,349 $ 54,493,315
=========== =============
Repurchases:
Class A.................................................. (36,316,268) $(697,389,583)
Class B.................................................. (660,311) (12,665,655)
Class C.................................................. (306,866) (5,946,445)
----------- -------------
Total Repurchases.......................................... (37,283,445) $(716,001,683)
=========== =============
</TABLE>
B-57
<PAGE> 463
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
At December 31, 1996, capital aggregated $1,179,723,178, $70,392,984 and
$5,137,291 for Classes A, B and C, respectively. For the year ended December 31,
1996, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................................. 29,859,557 $ 567,772,788
Class B.................................................. 504,537 9,594,322
Class C.................................................. 88,189 1,673,061
----------- -------------
Total Sales................................................ 30,452,283 $ 579,040,171
=========== =============
Dividend Reinvestment:
Class A.................................................. 2,446,455 $ 46,553,726
Class B.................................................. 86,458 1,644,731
Class C.................................................. 8,358 159,069
----------- -------------
Total Dividend Reinvestment................................ 2,541,271 $ 48,357,526
=========== =============
Repurchases:
Class A.................................................. (35,424,716) $(674,636,862)
Class B.................................................. (718,709) (13,659,358)
Class C.................................................. (101,870) (1,953,309)
----------- -------------
Total Repurchases.......................................... (36,245,295) $(690,249,529)
=========== =============
</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.
<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, 1997, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$260,200 and CDSC on redeemed shares of approximately $161,700. Sales charges do
not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $1,100,209,993 and $1,137,330,157,
respectively.
B-58
<PAGE> 464
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
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. Upon disposition, a realized gain or
loss is recognized accordingly, except when exercising a call option contract or
taking delivery of a security underlying a futures contract. In these instances,
the recognition of gain or loss is postponed until the disposal of the security
underlying the option or futures 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, 1997 were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
- --------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1996............................ -0- $ -0-
Options Written and Purchased (Net)......................... 2,500 (1,492,056)
Options Terminated in Closing Transactions (Net)............ (2,500) 1,492,056
------ -----------
Outstanding at December 31, 1997............................ -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.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin).
Transactions in futures contracts for the year ended December 31, 1997,
were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- -----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1996............................ 100
Futures Opened.............................................. 23,821
Futures Closed.............................................. (23,621)
-------
Outstanding at December 31, 1997............................ 300
=======
</TABLE>
B-59
<PAGE> 465
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
The futures contracts outstanding as of December 31, 1997, and the
description and unrealized depreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS DEPRECIATION
- ---------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Bond Futures
March 1998--Short Contract (Current notional value of
$120,469 per contract).................................... 300 $171,171
=== ========
</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. 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 pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a 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 net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the year ended December 31, 1997, are payments retained by VKAC of
approximately $736,900.
B-60
<PAGE> 466
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 and Poor's
Ratings Group ("S&P") 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 30, 1998 (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
writing or calling Van Kampen American Capital Distributors, Inc. at One
Parkview Plaza, Oakbrook Terrace, IL 60181 at (800) 421-5666 (or (800) 421-2833
for the hearing impaired). This Statement of Additional Information incorporates
by reference the entire Prospectus.
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-39
Custodian and Independent Accountants....................... B-41
Portfolio Transactions and Brokerage Allocation............. B-41
Tax Status of the Fund...................................... B-42
The Distributor............................................. B-43
Distribution and Service Plans.............................. B-44
Transfer Agent.............................................. B-45
Legal Counsel............................................... B-45
Performance Information..................................... B-45
Report of Independent Accountants........................... B-47
Financial Statements........................................ B-48
Notes to Financial Statements............................... B-59
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1998.
B-1
<PAGE> 467
THE FUND AND THE TRUST
Van Kampen American Capital California Insured Tax Free Fund (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 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 originally was 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
B-2
<PAGE> 468
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, except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
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), except that the Fund may purchase securities
of other investment companies to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
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, except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
9. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and extent permitted by
(i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
10. Invest in equity interests in oil, gas or other mineral exploration or
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.
B-3
<PAGE> 469
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 normally will 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 often are 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
B-4
<PAGE> 470
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.
The Fund may also 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
B-5
<PAGE> 471
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. 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.
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In 1979, the voters of California passed an amendment adding Article XIIIB to
the California Constitution, the effect of which is to significantly limit
spending by State government and by "local government" (defined as "any city,
county, city and county, school district, special district, authority, or other
political subdivision of or within the state"). Excluded from these limitations
on government entities is "debt service" (defined as "appropriations required to
pay the cost of interest and redemption charges, including the funding of any
reserve or sinking fund required in connection therewith, on indebtedness
existing or legally authorized as of January 1, 1979 or on bonded indebtedness
thereafter approved" by the voters of the issuing entity).
In November 1986, California voters approved an amendment to the California
Government Code known as Proposition 62 which added Article 3.7 to Title 5,
Division 2, Chapter 4 of the California Government Code. The effect of Article
3.7 is to limit the abilities of local governments to impose new taxes or
increase existing taxes by requiring certain legislative and voter approvals
prior to the imposition of certain taxes by any 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 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
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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.
On November 5, 1996, voters approved Proposition 218, entitled the "Right to
Vote on Taxes Act," which incorporates new Articles XIIIC and XIIID into the
California Constitution. These new provisions enact limitations on the ability
of local government agencies to impose or raise various taxes, fees, charges and
assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995 must be approved by voters in order to remain in effect. In
addition, Article XIIIC clarifies the right of local voters to reduce taxes,
fees, assessments or charges through local initiatives.
Proposition 218 does not affect the State or its ability to levy or collect
taxes. There are a number of ambiguities concerning the Proposition and its
impact on local governments and their bonded debt which will require
interpretation by the courts or the Legislature. The Legislative Analyst
estimated that enactment of Proposition 218 would reduce local government
revenues statewide by over $100 million a year, and that over time revenues to
local government would be reduced by several hundred million dollars a year
under this Proposition.
Because of the complex nature of Articles XIIIA-D, 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-D or any implementing or related legislation on the California
municipal securities in which the Fund may invest, or the abilities of State or
local governments to pay the interest on, or repay the principal of such
California municipal securities.
Proposition 98. On November 8, 1988, voters approved Proposition 98, a
combined initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act" (the "Act"). The Act changes
State funding of public education below the university level and the operation
of the State's Appropriations Limit. The Act, as amended, guarantees State
funding for K-12 school districts and community college districts at a level
equal to the greater of (a) in general, a fixed percentage of General Fund
revenues, (b) the amount actually appropriated to such districts from the
General Fund in the previous fiscal year, adjusted for either changes in the
cost of living, or (c) a third test which would replace the test in (b) if the
percentage growth in per capita of General Fund revenues in the prior year plus
one half of one percent is less than the percentage growth in California per
capita personal income. Under the test in (c), the schools would receive the
amount appropriated in the prior year adjusted for changes in enrollment and
General Fund revenues. The Act permits the legislature, by two-thirds vote of
both houses, with the Governor's concurrence, to suspend this formula for a
one-year period. The Act could cause increasing pressure on the State's budget
over future years, potentially reducing resources available for other State
programs, especially to the extent the Article XIIIB spending limit would
restrain the State's ability to fund such other programs by raising taxes. The
Act also changes how tax revenues in excess of the State's Appropriations Limit
are distributed. Any excess State tax revenues up to a specified amount would,
instead of being returned to taxpayers, be transferred to K-12 school and
community college districts. Such transfer would be excluded from the
Appropriations Limit for K-14 school districts, and the K-14 school
Appropriations Limits for the next year would be automatically increased by the
amount of such transfer. These additional moneys would enter the base funding
calculation for K-14 schools for subsequent years, creating further pressure on
other portions of the state budget, particularly if revenues decline in a year
following such a transfer.
During the recent recession, General Fund revenues for several years were less
than originally projected, so that the original Proposition 98 appropriations
turned out to be higher than the minimum percentage provided in the law. The
Legislature responded to these developments by designating the "extra"
Proposition 98 payments in one year as a "loan" from future years' Proposition
98 entitlements, and also intended that the "extra" payments would not be
included in the Proposition 98 "base" for calculating future years'
entitlements.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July, 1996, provides, among other things,
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that both the State and K-14 schools share in the repayment of prior years'
emergency loans to schools. Of the total $1.76 billion in loans, the State will
repay $935 million by forgiveness of the amount owed, while schools will repay
$825 million. The State share of the repayment will be reflected as an
appropriation above the current Proposition 98 base calculation. The schools'
share of the repayment will count as appropriations that count toward satisfying
the Proposition 98 guarantee, or from "below" the current base. Repayments are
spread over the eight-year period of 1994-95 through 2001-02 to mitigate any
adverse fiscal impact. Substantially increased General Fund revenues, above
initial budget projections, in the fiscal years 1994-95 and thereafter have
resulted or will result in retroactive increases in Proposition 98
appropriations from subsequent fiscal years' budgets.
Local Governments. The fiscal condition of local governments has been
constrained since the enactment of "Proposition 13" in 1978, which reduced and
limited the future growth of property taxes, and limited the ability of local
government to impose "special taxes" (those devoted to a specific purpose)
without two-thirds voter approval.
Counties, in particular, have had fewer options to raise revenues than many
other local government entities, and have been required to maintain many
services. The entire statewide welfare system was changed in response to the
change in federal welfare law enacted in 1996. As part of the 1997-98 Budget Act
legislative package, the Legislature and Governor agreed on a comprehensive
reform of the State's public assistance programs to implement the new federal
law. The new basic State welfare program is called California Work Opportunity
and Responsibility to Kids Act ("CalWORKs"), which replaces the former Aid to
Families with Dependent Children (AFDC) and Greater Avenues to Independence
(GAIN) programs effective January 1, 1998. Consistent with the federal law,
CalWORKs contains new time limits on receipt of welfare aid, both lifetime as
well as for any current period on aid. The centerpiece of CALWORKs is the
linkage of eligibility to work participation requirements. Administration of the
new Welfare-to-Work programs will be largely at the county level and counties
are given financial incentives for success in this program.
Although the longer-term impact of the new federal Law and CalWORKs cannot be
determined until there has been more experience, the State does not presently
anticipate that these new programs will have an adverse financial impact on the
General Fund. Overall Temporary Assistance for Needy Families (TANF) grants from
the federal government are expected to equal or exceed the amounts the State
would have received under the old AFDC program.
Under current law, counties are required to provide "general assistance" aid
to certain persons who cannot obtain welfare from other programs, but this
mandate may be eliminated as part of the overhaul.
In the aftermath of Proposition 13, the State provided aid from the General
Fund to make up some of the loss of property tax moneys, including taking over
the principal responsibility for funding local K-12 schools and community
colleges. Under the pressure of the recent recession, the Legislature has
eliminated the remnants of this post-Proposition 13 aid to entities other than
K-14 education districts, although it has also provided additional funding
sources (such as sales taxes) and reduced mandates for local services. Many
counties continue to be under severe fiscal stress. While such stress has in
recent years most often been experienced by smaller, rural counties, larger
urban counties, such as Los Angeles, have also been affected.
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. Since the passage of Proposition 218 in November 1996, five of the
seven California cities reviewed by the major rating agencies have been
downgraded (Los Angeles, Sacramento, San Diego, Fresno and Anaheim).
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
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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. In June, 1996, Orange County
emerged from bankruptcy protection as part of a fiscal recovery plan that
included the issuance of new recovery bonds and sharp reductions in services and
personnel. Moody's gave the insured recovery bonds an underlying rating of Baa
and the county's general obligation bonds a Ba rating. Standard & Poor's gave
the recovery bonds a B underlying rating and Fitch Investors Service assigned
the bonds as underlying rating of BBB.
State Finances. 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. By
the 1993-94 Fiscal Year, the accumulated deficit was so large that it was
impractical to budget to retire it in one year, so a two-year program was
implemented, using the issuance of revenue anticipation warrants to carry a
portion of the deficit over the end of the fiscal year. When the economy failed
to recover sufficiently in 1993-94, a second two-year plan was implemented in
1994-95, again using cross-fiscal year revenue anticipation warrants to partly
finance the deficit into the 1995-96 fiscal year.
Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish its cash reserves,
the State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
For several fiscal years during the recession, the State was forced to rely on
external debt markets to meet its cash needs, as a succession of notes and
revenue anticipation warrants were issued in the period from June 1992 to July
1994, often needed to pay previously maturing notes or warrants. These
borrowings were used also in part to spread out the repayment of the accumulated
budget deficit over the end of a fiscal year, as noted earlier. The last and
largest of these borrowings was $4.0 billion of revenue anticipation warrants
which were issued in July, 1994 and matured on April 25, 1996.
The State's financial condition improved markedly during the 1995-96 and
1996-97 fiscal years, with a combination of better than expected revenues,
slowdown in growth of social welfare programs, and continued spending restraint
based on the actions taken in earlier years. The State's cash position also
improved, and no external deficit borrowing has occurred over the end of these
two fiscal years.
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (around $2.2 billion in
1995-96 and $1.6 billion in 1996-97) than were initially planned when the
budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, and to make up shortfalls from reduced
federal health and welfare aid. The accumulated budget deficit from the
recession years was finally eliminated. In the Governor's 1998-99 Budget
Proposal,
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released January 9, 1998, the Department of Finance reported that the State's
budget reserve totaled $461 million as of June 30, 1997.
As a result of the deterioration in the State's budget and cash situation
during the early 1990, 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 Fitch Investors Service lowered its rating from "AA" to
"A". In July 1996, Standard & Poor's raised its rating to A+ from A. In 1997,
Fitch Investors Service raised its rating to "AA-" from "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.
On January 9, 1997, the Governor released his proposed budget for the 1997-98
Fiscal Year (the "Proposed Budget"). The Proposed Budget estimated General Fund
revenues and transfers of about $50.7 billion, and proposed expenditures of
$50.3 billion. In May 1997, the Department of Finance increased its revenue
estimate for the upcoming fiscal year by $1.3 billion, in response to the
continued strong growth in the State's economy.
In May, 1997, action was taken by the California Supreme Court in an ongoing
lawsuit, PERS v. Wilson, which made final a judgment against the State requiring
an immediate payment from the General Fund to the Public Employees Retirement
Fund ("PERF") to make up certain deferrals in annual retirement fund
contributions which had been legislated in earlier years for budget savings, and
which the courts found to be unconstitutional. On July 30, 1997, following a
direction from the Governor, the Controller transferred $1.228 billion from the
General Fund to the PERF in satisfaction of the judgment, representing the
principal amount of the improperly deferred payments from 1995-96 and 1996-97.
Once the pension payment of $1.228 billion eliminated essentially all the
"increased" revenue in the budget, final agreement was reached within a few
weeks on a welfare reform package and the remainder of the budget. The
Legislature passed the Budget Bill on August 11, 1997, along with numerous
related bills to implement its provisions. On August 18, 1997, the Governor
signed the 1997-98 Budget Act, but vetoed approximately $314 million of specific
spending items, primarily in health and welfare and education areas from both
the General Fund and Special Funds. Most of this spending (approximately $200
million) was restored in later legislation passed before the end of the
Legislative Session.
The 1997-98 Budget Act anticipated General Fund revenues and transfers of
$52.5 billion (a 6.8 percent increase over the final 1996-97 amount), and
expenditures of $52.8 billion (an 8.0 percent increase from the 1996-97 levels).
The 1997-98 Budget Act also included Special Fund expenditures of $14.4 billion
(as against estimated Special Fund revenues of $14.0 billion), and $2.1 billion
of expenditures from various Bond Funds. Following enactment of the 1997-98
Budget Act, the State implemented its normal annual cash flow borrowing program,
issuing $3.0 billion of notes which mature on June 30, 1998.
The Department of Finance released updated estimates for the 1997-98 Fiscal
Year on January 9, 1998 as part of the Governor's 1998-99 Fiscal Year Budget
Proposal. Total revenues and transfers are projected at $52.9 billion, up
approximately $360 million from the Budget Act projection. Expenditures for the
fiscal year are expected to rise approximately $200 million above the original
Budget Act, to $53.0 billion. The balance in the budget reserve, the Special
Fund for Economic Uncertainties (SFEU), is projected to be $329 million at June
30, 1998, compared to $461 million at June 30, 1997.
On January 9, 1998, the Governor released his Budget Proposal for the 1998-99
Fiscal Year (the "Governor's Budget"). The Governor's Budget projects total
General Fund revenues and transfers of $55.4 billion, a $2.5 billion increase
(4.7 percent) over revised 1997-98 revenues. This revenue increase takes into
account reduced revenues of approximately $600 million from the 1997 tax cut
package, but also assumes
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approximately $500 million additional revenues primarily associated with capital
gains realizations. The Governor's Budget notes, however, that capital gains
activity and the resultant revenues derived from it are very hard to predict.
Total General Fund expenditures for 1998-99 are recommended at $55.4 billion
an increase of $2.4 billion (4.5 percent) above the revised 1997-98 level. The
Governor's Budget includes funds to pay the interest claim relating to the court
decision on pension fund payments, PERS v. Wilson. The Governor's Budget
projects that the State will carry out its normal intra-year cash flow external
borrowing in 1998-99, in an estimated amount of $3.0 billion. The Governor's
Budget projects that the budget reserve, the SFEU, will be $296 million at June
30, 1999, slightly lower than the projected level at June 30, 1998.
The Governor's Budget projects Special Fund revenues of $14.7 billion, and
Special Fund expenditures of $15.2 billion, in the 1998-99 Fiscal Year. A total
of $3.2 billion of bond fund expenditures are also proposed.
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.
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.
Northern California 1997 Flood Litigation: In January of 1997, California
experienced major flooding in six different areas with current estimates of
property damage to be approximately $1.6 to $2 billion. To date, one lawsuit has
been filed by 500 homeowners, but more lawsuits are expected. Exposure from all
of the anticipated cases arising from these floods could total approximately $2
billion.
The State is a defendant in several related cases, mainly California Ambulance
Association v. Shalala et al., in which the plaintiffs are seeking action to
compel the Department of Health Services to pay Part B ambulance and physician
services co-payments under the Medicare and Medicaid Acts. Should the plaintiffs
prevail, the liability for retroactive payments is estimated to be $490 million,
and the liability for future payments can be in excess of $130 million annually.
The General Fund and the federal government will share the liability equally.
The State is a defendant in Ceridian Corporation v. Franchise Tax Board, a
suit which challenges the validity of two sections of the California Tax laws.
The first relates to deduction from corporate taxes for dividends received from
insurance companies to the extent the insurance companies have California
activities. The second relates to corporate deduction of dividends to the extent
the earnings of the dividend paying corporation have already been included in
the measure of their California tax. If both sections of the California Tax law
are invalidated, and all dividends become deductible, then the General Fund can
become liable for approximately $200-$250 million annually.
The State is involved in a lawsuit. Thomas Hayes v. Commission on State
Mandates, related to state-mandated costs. The action involves an appeal by the
Director of Finance from a 1984 decision by the State Board of Control (now
succeeded by the Commission on State Mandates (Commission)). The Board of
Control decided in favor of local school districts' claims for reimbursement for
special education programs for handicapped students. The case was then brought
to the trial court by the State and later remanded to the Commission for
redetermination. The Commission has since expanded the claim to include
supplemental claims filed by seven other educational institutions; the issuance
of a final consolidated decision is anticipated sometime in early 1997. To date,
the Legislature has not appropriated funds. The liability to the State, if all
potentially eligible school districts pursue timely claims, has been estimated
by the Department of Finance at more than $1 billion.
The State is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In United States, People of the State of
California v. J. B. Stringfellow, Jr., et al., the State is seeking recovery for
past
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costs of cleanup of the site, a declaration that the defendants are jointly and
severally liable for future costs, and an injunction ordering completion of the
cleanup. However, the defendants have filed a counterclaim against the State for
alleged negligent acts. Because the State is the present owner of the site, the
State may be found liable. Present estimates of the cleanup range from $300
million to $800 million.
The State is a defendant in a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The trial court has found liability in inverse condemnation and awarded damages
of $500,000 to a sample of plaintiffs. The State's potential liability to the
remaining plaintiffs ranges from $800 million to $1.5 billion. An appeal has
been filed.
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 monies be
returned. The loss to the State's General Fund could be up to $227 million.
In a similar case, Professional Engineers in California Government v. Wilson,
the petitioners are challenging several appropriations in the 1993, 1994, and
1995 Budget Acts. The appropriations mandate the transfer of approximately $262
million from the State Highway Account and $113 million from the Motor Vehicle
Account to the General Fund and appropriate approximately $6 million from the
State Highway Account to fund a highway-grade crossing program administered by
the Public Utilities Commission. Petitioners contend that the transfers violate
several constitutional provisions and request that the moneys be returned to the
State Highway Account and Motor Vehicle Account.
The State is a defendant in Just Say No To Tobacco Dough Campaign v. State of
California, where the petitioners challenge the appropriation of approximately
$166 million of Proposition 99 funds in the Cigarette and Tobacco Products
Surtax Fund for years ended June 30, 1990, through June 30, 1995 for programs
which were allegedly not health education or tobacco-related disease research.
If the State loses, the General Fund and funds from other sources would be used
to reimburse the Cigarette and Tobacco Products Surtax Fund for approximately
$166 million.
The State is a defendant in the case of Kurt Hathaway, et al. v. Wilson, et
al., where the plaintiffs are challenging the legality of various budget action
transfers and appropriations from particular special funds for years ended June
30, 1995, and June 30, 1996. The plaintiffs allege that the transfers and
appropriations are contrary to the substantive law establishing the funds and
providing for interest accruals to the fund, violate the single subject
requirement of the State Commission, and is an invalid "special law." Plaintiffs
seek to have monies totaling approximately $335 million returned to the special
funds.
The State is a defendant in two related cases, Beno vs. Sullivan (Beno) and
Welch vs. Anderson (Welch), concerning reductions in Aid to Families with
Dependent Children (AFDC) grant payments. In the Beno case, plaintiffs seek to
invalidate AFDC grant reductions and in the Welch case, plaintiffs contend that
AFDC grant reductions are not authorized by state law. The Beno case concerns
the total grant reductions while the Welch case concerns the period of time the
State did not have a waiver for those reductions. The State's potential
liability for retroactive AFDC grant reductions is estimated at $831 million if
the plaintiffs are awarded the full amount in both cases.
Recent Legislation. Recently, legislation has been enacted which (1)
increases, in limited instances, the abilities of both county boards of
supervisors and redevelopment agencies to impose new special taxes; (2) repeals
the existing limitations on the amount of notes of the State of California which
may be sold; (3) eliminates certain restrictions on repayment of general
obligations bonds; (4) allows revenue anticipation notes to be repaid in a
succeeding fiscal year and generally facilitates their issuance; (5) increases
the ability of community redevelopment agencies to issue revenue bonds for the
purpose of refunding bonds of other political subdivisions of the State; (6) cut
corporate tax rates by 5% a year; and (7) 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
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Commission on State Finance, certifies that revenues for such fiscal year were
not expected to meet programmed budgetary requirements.
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), issue bonds or other
debt instruments, or adopt State budgets with only a majority vote of the
legislature. It is not currently possible to predict the extent to which any
such legislation will be enacted. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Nor is it currently possible to determine the
impact of any recently enacted or proposed legislation on California municipal
securities in which the Fund may invest or future allocations of State revenues
to local governments.
INVESTMENT PRACTICES. If the Adviser deems it appropriate to seek to hedge
the Fund's portfolio against market value changes, the Fund may buy or sell
derivative instruments such as financial futures contracts and related options,
such as municipal bond index futures contracts and the related put or call
options contracts on such index futures. A tax exempt bond index fluctuates with
changes in the market values of the tax exempt bonds included in the index. An
index future is an agreement pursuant to which two parties agree to receive or
deliver at settlement an amount of cash equal to a specified dollar amount
multiplied by the difference between the value of the index at the close of the
last trading day of the contract and the price at which the future was
originally written. A financial future is an agreement between two parties to
buy and sell a security for a set price on a future date. An index future has
similar characteristics to a financial future except that settlement is made
through delivery of cash rather than the underlying securities. An example is
the Long-Term Municipal Bond futures contract traded on the Chicago Board of
Trade. It is based on the Bond Buyer's Municipal Bond Index, which represents an
adjusted average price of the forty most recent long-term municipal issues of
$50 million or more ($75 million in the instance of housing issues) rated A or
better by either Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Ratings Group ("S&P"), maturing in no less than nineteen years, having a
first call in no less than seven nor more than sixteen years, and callable at
par.
The Fund may engage in "when issued" and "delayed delivery" transactions and
utilize futures contracts and options thereon for hedging purposes. The
Securities and Exchange Commission ("SEC") generally requires that when mutual
funds, such as the Fund, effect transactions of the foregoing nature, such funds
must either segregate cash or readily marketable portfolio securities with its
custodian in an amount of its obligations under the foregoing transactions, or
cover such obligations by maintaining positions in portfolio securities, futures
contracts or options that would serve to satisfy or offset the risk of such
obligations. When effecting transactions of the foregoing nature, the Fund will
comply with such segregation or cover requirements.
STRATEGIC TRANSACTIONS. The Fund may, but is not required to, utilize various
other investment strategies as described below to hedge various market risks
(such as interest rates and broad or specific market movements) or to manage the
effective maturity or duration of the Fund's fixed-income securities. Such
strategies are generally accepted by modern portfolio managers and are regularly
utilized by many mutual funds and other institutional investors. Techniques and
instruments may change over time as new instruments and strategies are developed
or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities 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
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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 into 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.
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With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that, in general, OTC options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities "covering"
the amount of the Fund's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on investing no more than 15% of its assets
in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
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
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foreign securities exchanges and in the over-the-counter markets. All calls sold
by the Fund must be "covered" (i.e., the Fund must own the securities or futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The purchase of a futures contract
creates a firm obligation by the Fund, as purchaser, to take delivery from the
seller the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or 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,
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an amount of cash if the closing level of the index upon which the option is
based exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the excess of the
closing price of the index over the exercise price of the option, which also may
be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. The gain or
loss on an option on an index depends on price movements in the instruments
making up the market, market segment, industry or other composite on which the
underlying index is based, rather than price movements in individual securities,
as is the case with respect to options on securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or 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
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any regulatory restrictions, an amount of cash or liquid 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
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
securities 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 securities 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 securities having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Code for qualification as a regulated
investment company. See "Tax Status" in the Prospectus.
INSURANCE. As described in the Prospectus, the Fund will generally invest
only in municipal securities which are either pre-insured under a policy
obtained for such securities prior to the purchase of such securities or will be
insured under policies obtained by the Fund to cover otherwise uninsured
securities.
Original Issue Insurance. Original Issue Insurance is purchased with respect
to a particular issue of municipal securities by the issuer thereof or a third
party in conjunction with the original issuance of such municipal securities.
Under such insurance, the insurer unconditionally guarantees to the holder of
the insured 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
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mandatory sinking fund payment), default or otherwise, the payments insured may
be made in such amounts and at such times as payments of principal would have
been due had there not been such acceleration. The insurer is responsible for
such payments less any amounts received by the holder from any trustee for the
municipal security issuers or from any other source. Original Issue Insurance
generally does not insure payment on an accelerated basis, the payment of any
redemption premium (except with respect to certain premium payments in the case
of certain small issue industrial development and pollution control municipal
securities), the value of the Shares of the Fund or the market value of
municipal securities, or payments of any tender purchase price upon the tender
of the municipal securities. Original Issue Insurance also does not insure
against nonpayment of principal of or interest on municipal securities resulting
from the insolvency, negligence or any other act or omission of the trustee or
other paying agent for such obligations.
In the event that interest on or principal of a municipal security covered by
insurance is due for payment but is unpaid by reason of nonpayment by the issuer
thereof, the applicable insurer will make payments to its fiscal agent (the
"Fiscal Agent") equal to such unpaid amounts of principal and interest not later
than one business day after the insurer has been notified that such nonpayment
has occurred (but not earlier than the date such payment is due). The Fiscal
Agent will disburse to the Fund the amount of principal and interest which is
then due for payment but is unpaid upon receipt by the Fiscal Agent of (i)
evidence of the Fund's right to receive payment of such principal and interest
and (ii) evidence, including any appropriate instruments of assignment, that all
of the rights of payment of such principal or interest then due for payment
shall thereupon vest in the insurer. Upon payment by the insurer of any
principal or interest payments with respect to any municipal securities, the
insurer shall succeed to the rights of the Fund with respects to such payment.
Original Issue Insurance remains in effect as long as the municipal securities
covered thereby remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal securities.
Consequently, Original Issue Insurance may be considered to represent an element
of market value with respect to the municipal securities so insured, but the
exact effect, if any, of this insurance on such market value cannot be
estimated.
Secondary Market Insurance. Subsequent to the time of original issuance of a
municipal security, the Fund or a third party may, upon the payment of a single
premium, purchase insurance on such municipal security. Secondary Market
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance and, as is the case with Original Issue Insurance,
Secondary Market Insurance remains in effect as long as the municipal securities
covered thereby remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal securities.
All premiums respecting municipal securities covered by Original Issue Insurance
or Secondary Market Insurance are paid in advance by the issuer or other party
obtaining the insurance.
One of the purposes of acquiring Secondary Market Insurance with respect to a
particular municipal security would be to enable the Fund to enhance the value
of such municipal security. The Fund, for example, might seek to purchase a
particular municipal security and obtain Secondary Market Insurance with respect
thereto if, in the opinion of the Adviser, the market value of such municipal
security, as insured, would exceed the current value of the municipal security
without insurance plus the cost of the Secondary Market Insurance. Similarly, if
the Fund owns but wishes to sell a municipal security that is then covered by
Portfolio Insurance, the Fund might seek to obtain Secondary Market Insurance
with respect thereto if, in the opinion of the Adviser, the net proceeds of a
sale by the Fund of such obligation, as insured, would exceed the current value
of such obligation plus the cost of the Secondary Market Insurance.
Portfolio Insurance. The Portfolio Insurance policies obtained by the Fund
would insure the payment of principal and interest on specified eligible
municipal securities purchased by the Fund. Except as described below, Portfolio
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance or Secondary Market Insurance. Municipal securities
insured under one Portfolio Insurance policy generally would not be insured
under any other policy purchased by the Fund. A municipal security is eligible
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
B-20
<PAGE> 486
Issue Insurance of Secondary Market Insurance, the Fund is not required to
insure additionally any such municipal security under any policy of Portfolio
Insurance that the Fund may purchase.
Portfolio Insurance policies are effective only as to municipal securities
owned and held by the Fund, and do not cover municipal securities for which the
contract for purchase fails. A "when-issued" municipal security will be covered
under a Portfolio Insurance policy upon the settlement date of the issue of such
"when-issued" municipal security.
In determining whether to insure municipal securities held by the Fund, an
insurer will apply its own standards, which correspond generally to the
standards it has established for determining the insurability of new issues of
municipal securities. See "Original Issue Insurance" above.
Each Portfolio Insurance policy will be non-cancellable and will remain in
effect so long as the Fund is in existence, the municipal securities covered by
the policy continue to be held by the Fund, and the Fund pays the premiums for
the policy. Each insurer generally will reserve the right at any time upon 90
days written notice to the Fund to refuse to insure any additional securities
purchased by the Fund after the effective date of such notice. The Board of
Trustees of the Fund generally will reserve the right to terminate each policy
upon seven days written notice to an insurer if it determines that the cost of
such policy is not reasonable in relation to the value of the insurance to the
Fund.
Each Portfolio Insurance policy shall terminate as to any municipal security
that has been redeemed from or sold by the Fund on the date of such redemption
or the settlement date of such sale, and an insurer shall not have any liability
thereafter under a policy as to any such municipal security, except that if the
date of such redemption or the settlement date of such sale occurs after a
record date and before the related payment date with respect to any such
municipal security, the policy will terminate as to such municipal security on
the business day immediately following such payment date. Each policy will
terminate as to all municipal securities covered thereby on the date on which
the last of the covered municipal securities mature, are redeemed or are sold by
the Fund.
One or more policies of Portfolio Insurance may provide the Fund, pursuant to
an irrevocable commitment of the insurer, with the option to exercise the right
to obtain permanent insurance ("Permanent Insurance") with respect to a
municipal security that is to be sold by the Fund. The Fund would exercise the
right to obtain Permanent Insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such municipal
security. It is expected that the Fund will exercise the right to obtain
Permanent Insurance for a municipal security only if, in the opinion of the
Adviser, upon such exercise the net proceeds from the sale by the Fund of such
obligation, as insured, would exceed the proceeds from the sale of such
obligation without insurance. The Permanent Insurance premium with respect to
each such obligation is determined based upon the insurability of each such
obligation as of the date of purchase by the Fund and will not be increased or
decreased for any change in the creditworthiness of such obligation unless such
obligation is in default as to payment of principal or interest, or both. In
such event, the Permanent Insurance premium shall be subject to an increase
predetermined at the date of purchase by the Fund.
Because each Portfolio Insurance policy will terminate as to municipal
securities sold by the Fund on the date of sale, in which event the insurer will
be liable only for those payments of principal and interest that are then due
and owing (unless Permanent Insurance is obtained by the Fund), the provision
for this insurance will not enhance the marketability of securities held by the
Fund, whether or not the securities are in default or in significant risk of
default. On the other hand, since Original Issue Insurance and Secondary Market
Insurance will remain in effect as long as municipal securities covered thereby
are outstanding, such insurance may enhance the marketability of such securities
even when such securities are in default or in significant risk of default, but
the exact effect, if any, on the marketability cannot be estimated. Accordingly,
the Fund may determine to retain or, alternatively, to sell municipal securities
covered by Original Issue Insurance or Secondary Market Insurance that are in
default or in significant risk of default.
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
B-21
<PAGE> 487
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 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 or guarantor of the relevant municipal
securities for payments of principal and interest and such issuer 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.
B-22
<PAGE> 488
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 S&P 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, B Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as
CCC, CC, C having significant speculative characteristics with respect
to capacity to pay interest and repay principal. 'BB'
indicates the least degree of speculation and 'C' the
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 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' is more vulnerable to default than debt rated
'B' 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-23
<PAGE> 489
<TABLE>
<S> <C>
CCC Debt rated 'CCC' is currently vulnerable 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 Debt rated 'CC' is currently highly vulnerable to
nonpayment. The rating 'CC' is also used for debt
subordinated to senior debt that is assigned an actual or
implied 'CCC' rating.
C The 'C' rating may be used to cover a situation where a
bankruptcy petition has been filed, but debt service
payments are continued. The rating 'C' typically is applied
to debt subordinated to senior debt which is assigned an
actual or implied 'CCC-' debt rating.
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 or the taking of a similar action 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 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-24
<PAGE> 490
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> 491
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> 492
<TABLE>
<S> <C>
(P) (..) When applied to forward delivery bonds, indicates that the
rating is provisional pending the delivery of the bonds. The
rating may be revised prior to delivery if changes occur in
the legal documents or the underlying credit quality of the
bonds.
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 promissory obligations not having an original maturity
in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933,
nor does it represent that any specific note is a valid obligation of a
rated issuer or issued in conformity with any applicable law.
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 (for related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
- Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
B-27
<PAGE> 493
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
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 Fund and other
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with VK/AC
Holding, Inc. ("VKAC Holding"), Van Kampen American Capital, Inc. ("Van Kampen
American Capital" or "VKAC"), Van Kampen American Capital Investment Advisory
Corp. ("Advisory Corp."), Van Kampen American Capital Asset Management, Inc.
("Asset Management"), Van Kampen American Capital Distributors, Inc., the
distributor of the Fund's shares (the "Distributor"), Van Kampen American
Capital Advisors Corp., Van Kampen Merritt Equity Advisors Corp., Van Kampen
American Capital Insurance Agency of Illinois, Inc., VK/AC System, Inc., Van
Kampen American Capital Record Keeping Services, Inc., American Capital
Contractual Services, Inc., Van Kampen American Capital Trust Company, Van
Kampen American Capital Exchange Corporation, and ACCESS Investors Services
Inc., the Fund's transfer agent ("ACCESS"). Advisory Corp. and Asset Management
sometimes are referred to herein collectively as the "Advisers". For purposes
hereof, the term "Fund Complex" includes each of the open-end investment
companies advised by the Advisers (excluding the Van Kampen American Capital
Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee/Director of each of the
funds in the Fund Complex.
Richard M. DeMartini*..................... President and Chief Operating Officer, Individual Asset
Two World Trade Center Management Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Mr. DeMartini is a Director of InterCapital
New York, NY 10048 Funds, Dean Witter Distributors, Inc. and Dean Witter
Date of Birth: 10/12/52 Trust Company. Trustee of the TCW/DW Funds. Director of
the National Healthcare Resources, Inc. Formerly Vice
Chairman of the Board of the National Association of
Securities Dealers, Inc. and Chairman of the Board of the
Nasdaq Stock Market, Inc. Trustee/Director of each of the
funds in the Fund Complex.
</TABLE>
B-28
<PAGE> 494
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board, The
International House Board and the Women's Board of the
University of Chicago. Trustee/Director of each of the
funds in the Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont 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.
Trustee/Director of each of the funds in the Fund
Complex.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee/Director of each of
the funds in the Fund Complex.
Don G. Powell*............................ Chairman and a Director of VKAC. Chairman and a Director
2800 Post Oak Blvd. of the Advisers and the Distributor. Chairman and a
Houston, TX 77056 Director of ACCESS. Director or officer of certain other
Date of Birth: 10/19/39 subsidiaries of VKAC. Chairman of the Board of Governors
and the Executive Committee of the Investment Company
Institute. Prior to November 1996, President, Chief
Executive Officer and a Director of VKAC Holding.
Trustee/ Director of each of the funds in the Fund
Complex and other funds advised by the Advisers or Van
Kampen American Capital Management, Inc.
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer services company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company; the
Date of Birth: 07/08/44 Urban Shopping Centers Inc., a retail mall management
company; and Stone Container Corp., a paper manufacturing
company. Trustee, University of Notre Dame. Formerly,
President and Chief Executive Officer, Waste Management,
Inc., an environmental services company, and prior to
that President and Chief Operating Officer, Waste
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
</TABLE>
B-29
<PAGE> 495
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen American Capital
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex, and other open-end and closed-end funds
advised by the Advisers or Van Kampen American Capital
Management, Inc.
</TABLE>
- ---------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
respective positions with Morgan Stanley Dean Witter & Co. and its affiliates.
B-30
<PAGE> 496
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Wood, Sullivan, Dalmaso, Martin,
Wetherell and Hill are located at One Parkview Plaza, Oakbrook Terrace, IL
60181. The Fund's other officers are located at 2800 Post Oak Blvd., Houston, TX
77056.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Dennis J. McDonnell......... President Executive Vice President and a Director of
Date of Birth: 05/20/42 VKAC and VK/AC Holding, Inc. President,
Chief Operating Officer and a Director of
the Advisers, Van Kampen American Capital
Advisors, Inc., and Van Kampen American
Capital Management, Inc. President and a
Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he
was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996,
Mr. McDonnell was Chief Executive Officer
and Director of MCM Group, Inc., McCarthy,
Crisanti & Maffei, Inc. and Chairman and
Director of MCM Asia Pacific Company,
Limited and MCM (Europe) Limited. Prior to
November 1996, Executive Vice President and
a Director of VKAC Holding. Prior to July
of 1996, Mr. McDonnell was President, Chief
Operating Officer and Trustee of VSM Inc.
and VCJ Inc. President of each of the funds
in the Fund Complex. President, Chairman of
the Board and Trustee of other investment
companies advised by the Advisers or their
affiliates.
Peter W. Hegel.............. Vice President Executive Vice President of the Advisers,
Date of Birth: 06/25/56 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Prior to July of 1996, Mr.
Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of
McCarthy, Crisanti & Maffei, Inc. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Curtis W. Morell............ Vice President and Chief Senior Vice President of the Advisers, Vice
Date of Birth: 08/04/46 Accounting Officer President and Chief Accounting Officer of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
</TABLE>
B-31
<PAGE> 497
<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 Secretary Executive Vice President, General Counsel,
Date of Birth: 07/29/53 Secretary and Director of VKAC and VK/AC
Holding, Inc. Mr. Nyberg is also Executive
Vice President, General Counsel and a
Director of Van Kampen Merritt Equity
Holdings Corp. Executive Vice President,
General Counsel, Assistant Secretary and a
Director of the Advisers and the
Distributor, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Management, Inc., Van Kampen American
Capital Exchange Corporation, American
Capital Contractual Services, Inc. and Van
Kampen American Capital Trust Company.
Executive Vice President, General Counsel
and Assistant Secretary of ACCESS. Director
or officer of certain other subsidiaries of
VKAC. Prior to June of 1997, Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to April of 1997,
he was Executive Vice President, General
Counsel and Director of Van Kampen Merritt
Equity Advisors Corp. Prior to July of
1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc.
and Executive Vice President and General
Counsel of VCJ Inc. Prior to September of
1996, he was General Counsel of McCarthy,
Crisanti & Maffei, Inc. Vice President and
Secretary of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Alan T. Sachtleben.......... Vice President Executive Vice President of the Advisers,
Date of Birth: 04/20/42 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Vice President of each of
the funds in the Fund Complex and certain
other investment companies advised by the
Advisers or their affiliates.
Paul R. Wolkenberg.......... Vice President Executive Vice President and Director of
Date of Birth: 11/10/44 VKAC, and VK/AC Holding Inc. Executive Vice
President of the AC Adviser and the
Distributor. President and a Director of
ACCESS. President and Chief Operating
Officer of Van Kampen American Capital
Record Keeping Services, Inc. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
B-32
<PAGE> 498
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Edward C. Wood III.......... Vice President and Chief Senior Vice President of the Advisers and
Date of Birth: 01/11/56 Financial Officer Van Kampen American Capital Management,
Inc. Vice President and Chief Financial
Officer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
John L. Sullivan............ Treasurer First Vice President of the Advisers.
Date of Birth: 08/20/55 Treasurer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Tanya M. Loden.............. Controller Vice President of the Advisers. Controller
Date of Birth: 11/19/59 of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Nicholas Dalmaso............ Assistant Secretary Associate General Counsel and Assistant
Date of Birth: 03/01/65 Secretary of VKAC. Vice President,
Associate General Counsel and Assistant
Secretary of the Advisers, the Distributor,
Van Kampen American Capital Advisors, Inc.
and Van Kampen American Capital Management,
Inc. Assistant Secretary of each of the
funds in the Fund Complex and other
investment companies advised by the
Advisers or their affiliates.
Huey P. Falgout, Jr......... Assistant Secretary Vice President and a Senior Attorney of
Date of Birth: 11/15/63 VKAC. Vice President and Assistant
Secretary of the Advisers, the Distributor,
ACCESS, Van Kampen American Capital
Management, Inc., American Capital
Contractual Services, Inc., Van Kampen
American Capital Exchange Corporation and
Van Kampen American Capital Advisors, Inc.
Assistant Secretary of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
B-33
<PAGE> 499
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Scott E. Martin............. Assistant Secretary Senior Vice President, Deputy General
Date of Birth: 08/20/56 Counsel and Assistant Secretary of VKAC and
VKAC Holding, Inc. Senior Vice President,
Deputy General Counsel and Secretary of the
Advisers, the Distributor, ACCESS American
Capital Contractual Services, Inc., Van
Kampen American Capital Management, Inc.,
Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Insurance Agency of Illinois, Inc., VKAC
System, Inc., Van Kampen American Capital
Record Keeping Services, Inc. and Van
Kampen Merritt Equity Advisors Corp. Prior
to April of 1997, Senior Vice President,
Deputy General Counsel and Secretary of Van
Kampen American Capital Services, Inc. and
Van Kampen Merritt Holdings Corp. Prior to
September of 1996, Mr. Martin was Deputy
General Counsel and Secretary of McCarthy,
Crisanti & Maffei, Inc., and prior to July
of 1996, he was Senior Vice President,
Deputy General Counsel and Secretary of VSM
Inc. and VCJ Inc. Assistant Secretary of
each of the funds in the Fund Complex and
other investment companies advised by the
Advisers or their affiliates.
Weston B. Wetherell......... Assistant Secretary Vice President, Associate General Counsel
Date of Birth: 06/15/56 and Assistant Secretary of VKAC, the
Advisers, the Distributor, Van Kampen
American Capital Management, Inc. and Van
Kampen American Capital Advisors, Inc.
Prior to September of 1996, Mr. Wetherell
was Assistant Secretary of McCarthy,
Crisanti & Maffei, Inc. Assistant Secretary
of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Steven M. Hill.............. Assistant Treasurer Vice President of the Advisers. Assistant
Date of Birth: 10/16/64 Treasurer of each of the funds in the Fund
Complex and other investment companies
advised by the Advisers or their
affiliates.
Michael Robert Sullivan..... Assistant Controller Assistant Vice President of the Advisers.
Date of Birth: 03/30/33 Assistant Controller of each of the funds
in the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 64 operating funds in the Fund Complex. For purposes of the following
compensation and benefits discussion, the Fund Complex is divided into the
following three groups: the funds advised by Asset Management (the "AC Funds"),
the funds advised by Advisory Corp. excluding funds organized as series of the
Morgan Stanley Fund, Inc. (the "VK Funds") and the funds advised by Advisory
Corp. organized as series of the Morgan Stanley Fund, Inc. (the "MS Funds").
Each trustee/director who is not an affiliated person of VKAC, the Advisers, the
Distributor, ACCESS or Morgan
B-34
<PAGE> 500
Stanley Dean Witter & Co. (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 (except the money market series of the MS Funds)
provides a deferred compensation plan to its Non-Affiliated Trustees that allows
trustees/directors to defer receipt of their compensation and earn a return on
such deferred amounts. Deferring compensation has the economic effect as if the
Non-Affiliated Trustee reinvested his or her compensation into the funds. Each
fund in the Fund Complex (except the money market series of the MS Funds)
provides a retirement plan to its Non-Affiliated Trustees that provides
Non-Affiliated Trustees with compensation after retirement, provided that
certain eligibility requirements are met as more fully described below.
The trustees recently reviewed and adopted a standardized compensation and
benefits program for each fund in the Fund Complex. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes an annual retainer in
an amount equal to $50,000 per calendar year, due in four quarterly installments
on the first business day of each quarter. Payment of the annual retainer is
allocated among the funds in the Fund Complex (except the money market series of
the MS Funds) on the basis of the relative net assets of each fund as of the
last business day of the preceding calendar quarter. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes a per meeting fee from
each fund in the Fund Complex (except the money market series of the MS Funds)
in the amount of $200 per quarterly or special meeting attended by the
Non-Affiliated Trustee, due on the date of the 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.
For each AC Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from the AC
Funds includes an annual retainer in an amount equal to $35,000 per calendar
year, due in four quarterly installments on the first business day of each
calendar quarter. The AC Funds pay each Non-Affiliated Trustee a per meeting fee
in the amount of $2,000 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. Payment of the annual retainer and the regular meeting
fee is allocated among the AC Funds (i) 50% on the basis of the relative net
assets of each AC Fund to the aggregate net assets of all the AC Funds and (ii)
50% equally to each AC Fund, in each case as of the last business day of the
preceding calendar quarter. Each AC Fund which is the subject of a special
meeting of the trustees generally pays each Non-Affiliated Trustee a per meeting
fee 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.
For each VK Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from each VK
Fund includes an annual retainer 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 each VK
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 each VK 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.
For the period from July 2, 1997 up to and including December 31, 1997, the
compensation of each Non-Affiliated Trustee from the MS Funds was based
generally on the compensation amounts and methodology used by such funds prior
to their joining the current Fund Complex on July 2, 1997. Each trustee/director
was elected as a director of the MS Funds on July 2, 1997. Prior to July 2,
1997, the MS Funds were part of another fund complex (the "Prior Complex") and
the former directors of the MS Funds were paid an aggregate fee allocated among
the funds in the Prior Complex that resulted in individual directors receiving
total compensation between approximately $8,000 to $10,000 from the MS Funds
during such funds' last fiscal year.
B-35
<PAGE> 501
Under the deferred compensation plan, each Non-Affiliated Trustee generally
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 the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
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 the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
----------------------------------------------------------
AGGREGATE AGGREGATE TOTAL
YEAR FIRST PENSION OR ESTIMATED MAXIMUM COMPENSATION
APPOINTED OR AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
ELECTED TO THE BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) BOARD FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- -------------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
J. Miles Branagan 1991 $3,000 $30,328 $60,000 $111,197
Linda Hutton Heagy 1995 3,000 3,141 60,000 111,197
R. Craig Kennedy 1995 3,000 2,229 60,000 111,197
Jack E. Nelson 1995 3,000 15,820 60,000 104,322
Jerome L. Robinson* 1995 3,000 32,020 15,750 107,947
Phillip B. Rooney** 1997 2,250 0 60,000 74,697
Dr. Fernando Sisto 1973 3,000 60,208 60,000 111,197
Wayne W. Whalen 1995 3,000 10,788 60,000 111,197
</TABLE>
- ---------------
* Mr. Robinson retired from the Board of Trustees on December 31, 1997.
** Mr. Phillip B. Rooney became a member of the Board of Trustees effective
April 14, 1997 and thus does not have a full fiscal year of information to
report.
(1) Messrs. DeMartini, McDonnell and Powell, also trustees of the Fund during
all or a portion of the Fund's last fiscal year, are not included in the
compensation table because they are not eligible for compensation or
retirement benefits from the Fund. Mr. McDonnell resigned as a Trustee of
the Fund, effective May 31, 1997.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Fund's fiscal year ended December 31, 1997. The
details of aggregate compensation before deferral for each series, including
the Fund, are shown in Table A below. The details of amount deferred for
each series, including the Fund, are shown in Table B below. Amounts
deferred are retained by the Fund and earn a rate of return determined by
reference to either the return on the common shares of the Fund or other
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted
by the 1940 Act, each Fund may invest in securities of those funds selected
by the Non-Affiliated Trustees in order to match the deferred compensation
obligation. The details of cumulative
B-36
<PAGE> 502
deferred compensation (including interest) owed to current Trustees by each
series, including the Fund, are shown in Table C below. The deferred
compensation plan is described above the Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for each of the current trustees for their respective fiscal
years ended in 1997. The retirement plan is described above the Compensation
Table.
(4) For Mr. Robinson this is the sum of the actual annual benefits payable by
the operating investment companies in the Fund Complex as of the date of his
retirement for each year of the 10-year period since his retirement. For the
remaining trustees, this is the sum of the estimated maximum annual benefits
payable by the operating investment companies in the Fund Complex for each
year of the 10-year period commencing in the year of such trustee's
anticipated retirement. The Retirement Plan is described above the
Compensation Table. Each Non-Affiliated Trustee of the Board of Trustees has
served as a member of the Board of Trustees since he or she was first
appointed or elected in the year set forth in Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1997 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1997. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
Non-Affiliated Trustees were not trustees of such investment companies.
Combining the Fund Complex with other investment companies advised by the
Advisers and their affiliates, Mr. Whalen received Total Compensation of
$268,447 during the calendar year ended December 31, 1997.
As of April 6, 1998, the trustees and officers of the Fund as a group owned
less than 1% of the outstanding shares of the Fund.
B-37
<PAGE> 503
TABLE A
1997 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......... 12/31 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 2,250 $ 3,000 $ 3,000
Tax Free High Income Fund............ 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
California Insured Tax Free Income
Fund............................... 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
Municipal Income Fund*............... 12/31 4,125 4,125 4,125 4,125 4,125 3,250 4,125 4,125
Intermediate Term Municipal Income
Fund............................... 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
Florida Insured Tax Free Income
Fund............................... 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
New York Tax Free Income Fund........ 12/31 1,125 1,125 1,125 1,125 1,125 1,000 1,125 1,125
Trust Total........................ 20,250 20,250 20,250 20,250 20,250 15,500 20,250 20,250
</TABLE>
- ---------------
* Includes the deferred compensation balances from New Jersey Tax Free Income
Fund, which was merged into the Municipal Income Fund in November 1997.
TABLE B
1997 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund........ 12/31 $ 3,000 $ 3,000 $ 1,500 $ 3,000 $ 3,000 $ 1,500 $ 1,500 $ 3,000
Tax Free High Income Fund........... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
California Insured Tax Free Fund.... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Municipal Income Fund............... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Intermediate Term Municipal Income
Fund.............................. 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Florida Insured Tax Free Income
Fund.............................. 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
New York Tax Free Income Fund....... 12/31 1,125 1,125 563 1,125 1,125 875 563 1,125
New Jersey Tax Free Income Fund..... 12/31 1,125 1,125 563 1,125 1,125 875 563 1,125
Trust Total....................... 20,250 20,250 10,126 20,250 20,250 10,750 10,126 20,250
</TABLE>
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......... 12/31 $ 4,324 $ 6,482 $11,233 $15,086 $14,485 $ 1,513 $ 3,180 $12,966
Tax Free High Income Fund............ 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
California Insured Tax Free Fund..... 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
Municipal Income Fund*............... 12/31 5,170 7,878 14,033 19,758 18,928 1,765 8,110 17,020
Intermediate Term Municipal Income
Fund............................... 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
Florida Insured Tax Free Income
Fund............................... 12/31 4,324 6,482 6,853 10,650 10,391 1,513 1,622 9,946
New York Tax Free Income Fund........ 12/31 1,487 1,181 3,118 4,223 4,049 691 591 3,586
Trust Total........................ 28,277 41,469 68,936 94,975 91,308 10,221 18,369 82,416
</TABLE>
- ---------------
* Includes the deferred compensation balances from New Jersey Tax Free Income
Fund, which was merged into the Municipal Income Fund in November 1997.
B-38
<PAGE> 504
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
------------------------------------------------------------------------------------
FUND NAME BRANAGAN DEMARTINI HEAGY KENNEDY NELSON POWELL ROBINSON SISTO WHALEN
- --------- -------- --------- ----- ------- ------ ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund.............. 1995 1997 1995 1993 1984 1997 1997 1995 1984
Tax Free High Income Fund................. 1995 1997 1995 1993 1985 1997 1997 1995 1985
California Insured Tax Free Income Fund... 1995 1997 1995 1993 1985 1997 1997 1995 1985
Municipal Income Fund..................... 1995 1997 1995 1993 1990 1997 1997 1995 1990
Intermediate Term Municipal Income Fund... 1995 1997 1995 1993 1997 1993 1997 1995 1993
Florida Insured Tax Free Income Fund...... 1995 1997 1995 1994 1994 1997 1997 1995 1994
New Jersey Tax Free Income Fund........... 1995 1997 1995 1994 1994 1997 1997 1995 1994
New York Tax Free Income Fund............. 1995 1997 1995 1994 1994 1997 1997 1995 1994
</TABLE>
As of April 2, 1998, 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 2, 1998 SHARES OWNERSHIP
-------------------------- ------------- -------- ----------
<S> <C> <C> <C>
Bella Hess............................................... 29,577 C 13.02%
4960 Sancola Ave.
N. Hollywood, CA 91601-4838
NFSC FEBO # OBP-378755................................... 27,945 C 12.30%
Geraldine R. Frey TTEE
The Geraldine Frey Trust
U/A 11/4/96
22881 Via Orvieto
Monarch Beach, CA 92629-3457
Smith Barney Inc......................................... 15,164 C 6.68%
00167323876
388 Greenwich Street
New York, NY 10013-2339
Smith Barney Inc......................................... 13,539 C 5.96%
00139100894
388 Greenwich Street
New York, NY 10013-2339
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is the
Fund's investment adviser. The Adviser was incorporated as a Delaware
corporation in 1982 (and through December 31, 1987 transacted business under the
name of American Portfolio Advisory Service Inc.).
The Adviser, Van Kampen American Capital Distributors, Inc. (the
"Distributor") and ACCESS Investor Services ("ACCESS") are wholly-owned
subsidiaries of Van Kampen American Capital, Inc. ("VKAC"), which is an indirect
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The principal office
of the Fund, the Adviser, the Distributor and VKAC is located at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending.
B-39
<PAGE> 505
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, 1997, 1996 and 1995, the Fund paid advisory
expenses of $814,437, $827,860 and $538,373, respectively.
OTHER AGREEMENTS.
FUND ACCOUNTING AGREEMENT. The Fund has entered into an accounting services
agreement pursuant to which Asset Management provides accounting services to the
Fund. The Fund shares with the other Van Kampen American Capital mutual funds,
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, 1997, 1996 and 1995, the Fund paid expenses
of approximately $70,200, $14,700 and $11,000, respectively, representing Asset
Management's and its affiliates' cost of providing accounting services.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital funds advised by the 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
B-40
<PAGE> 506
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, 1997, 1996 and 1995, the Fund paid expenses
of approximately $9,100, $9,900 and $11,400, respectively, representing Van
Kampen American Capital, Inc.'s cost of providing legal services.
CUSTODIAN AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, 225 West 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 accountants for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent accountants 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 reduce its
expenses materially.
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
B-41
<PAGE> 507
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.
During the year ended December 31, 1997, the Fund paid $0 in brokerage
commissions on transactions totalling $0 to brokers selected primarily on the
basis of research services provided to the Adviser. The negotiated commission
paid to an affiliated broker on any transaction would be comparable to that
payable to a non-affiliated broker in a similar transaction.
Effective October 31, 1996, Morgan Stanley Group Inc. ("Morgan Stanley")
became an affiliate of the Adviser. Effective May 31, 1997, Dean Witter Discover
& Co. ("Dean Witter") became an affiliate of the Adviser. The negotiated
commission paid to an affiliated broker on any transaction would be comparable
to that payable to a non-affiliated broker in a similar transaction.
The Fund paid the following commissions to these brokers during the periods
shown:
<TABLE>
<CAPTION>
AFFILIATED
BROKERS
----------------
MORGAN DEAN
BROKERS STANLEY WITTER
------- ------- ------
<S> <C> <C> <C>
Fiscal year 1995............................................ $0 NA NA
Fiscal year 1996............................................ $0 $ 0 NA
Fiscal year 1997............................................ $0 $ 0 $ 0
Fiscal year 1997 Percentages:
Commissions with affiliate to total commissions........... -- NA NA
Value of brokerage transactions with affiliate to total
transactions........................................... -- NA NA
</TABLE>
TAX STATUS OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal 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.
CALIFORNIA
<TABLE>
<CAPTION>
FEDERAL STATE COMBINED
SINGLE RETURN JOINT RETURN TAX BRACKET TAX BRACKET* TAX BRACKET*
------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
$ 0-24,650 $ 0-41,200 15.00% 6.00% 20.10%
24,650-59,750 41,200-99,600 28.00% 9.30% 34.70%
59,750-124,650 99,600-151,750 31.00% 9.30% 37.40%
124,650-271,050 151,750-271,050 36.00% 9.30% 42.00%
Over 271,050 Over 271,050 39.60% 9.30% 45.20%
</TABLE>
- ---------------
* Please note that the table does not reflect (i) any federal or state
limitations on the amounts of allowable itemized deductions, phase-outs of
personal or dependent exemption credits or other allowable credits, (ii) any
local taxes imposed, or (iii) any taxes other than personal income taxes. 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 income within
that federal bracket is used.
B-42
<PAGE> 508
1997 CALIFORNIA INCOME TAX BRACKETS -- REFLECTING 1997 INDEXED BRACKETS
Married Filing Jointly -- 4 Personal Exemptions
<TABLE>
<CAPTION>
ADJUSTED FEDERAL STATE
TAXABLE INCOME GROSS INCOME TAX RATE TAX RATE
-------------- ------------ -------- --------
<S> <C> <C> <C>
$ 0-41,200 $ 0-121,200 15.00% 6.000%
41,200-99,600 0-121,200 28.00% 9.300%
121,200-181,800 28.84% 9.300%
99,600-151,750 0-121,200 31.00% 9.300%
121,200-181,800 31.93% 9.300%
181,800-228,305 34.56% 9.300%
228,305-255,805 34.56% 10.818%
255,805-304,300 34.56% 9.858%
151,750-271,050 121,200-181,800 37.08% 9.300%
181,800-228,305 40.13% 9.300%
228,305-255,805 40.13% 10.818%
255,805-304,300 40.13% 9.858%
Over 304,300 37.08% 9.858%
Over 271,050 181,800-228,305 44.15% 9.300%
228,305-255,805 44.15% 10.818%
255,805-304,300 44.15% 9.858%
Over 304,300 40.79% 9.858%
</TABLE>
Single -- 1 Personal Exemption
<TABLE>
<CAPTION>
ADJUSTED FEDERAL STATE
TAXABLE INCOME GROSS INCOME TAX RATE TAX RATE
-------------- ------------ -------- --------
<S> <C> <C> <C>
$ 0-24,650 $ 0-114,152 15.00% 6.000%
24,650-59,750 0-114,152 28.00% 9.300%
59,750-124,650 0-114,152 31.00% 9.300%
114,152-121,200 31.00% 10.098%
121,200-141,652 32.59% 10.098%
141,652-243,700 32.59% 9.858%
124,650-271,050 121,200-141,652 37.84% 10.098%
141,652-243,700 37.84% 9.858%
Over 243,700 37.08% 9.858%
Over 271,050 Over 243,700 40.79% 9.858%
</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. VKAC
manages or supervises more than $60 billion in mutual funds, closed-end funds
and unit investment trusts -- assets which have been entrusted to VKAC in more
than 2 million investor accounts. VKAC has one of the largest research teams
(outside of the rating agencies) in the country. Each of our high yield
analysts, based in San Francisco, Chicago, Houston or Boston, has the
responsibility to cover a specific region of the country. This regional focus
enables each high yield analyst to provide more specialized coverage of the
market and alert the portfolio manager to issues of local importance.
Shares of the Fund are offered on a continuous basis through Van Kampen
American Capital Distributors, Inc. Van Kampen American Capital Distributors,
Inc. is a wholly owned subsidiary of Van Kampen American Capital, Inc. ("VKAC"),
which is an indirect wholly owned subsidiary of Morgan Stanley Dean Witter & Co.
The principal office of the Fund, the Adviser, the Distributor and VKAC is
located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
B-43
<PAGE> 509
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending.
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.
Total underwriting commissions on the sale of shares of the Fund for the last
three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
AMOUNTS
TOTAL UNDERWRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------------ --------------
<S> <C> <C>
Fiscal Year Ended December 31, 1995......................... $268,451 $27,388
Fiscal Year Ended December 31, 1996......................... $279,148 $37,329
Fiscal Year Ended December 31, 1997......................... $212,285 $24,787
</TABLE>
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 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
B-44
<PAGE> 510
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 fiscal year ending December 31, 1997, the Fund's aggregate expenses
under the Class A Plan were $334,670 or 0.24% of the Class A shares' average net
assets. For the fiscal year ended December 31, 1997, the Fund's aggregate
expenses under the Class B Plan were $280,010 or 1.00%, of the Class B shares'
average net assets. Such expenses were paid to reimburse the Distributor for the
following payments: $201,407 for commissions and transaction fees paid to
financial intermediaries in respect of sales of Class B shares of the Fund and
$78,603 for fees paid to financial intermediaries for servicing Class B
shareholders and administering the Class B Plan. For the fiscal year ended
December 31, 1997, the Fund's aggregate expenses under the Class C Plan were
$22,700 or 1.00% of the Class C shares' average net assets. Such expenses were
paid to reimburse the Distributor for the following payments: $4,799 for the
commissions and transactions fees paid to financial intermediaries in respect of
sales of Class C shares of the Fund and $17,901 for fees paid to financial
intermediaries for servicing Class C shareholders and administering the Class C
Plan.
TRANSFER AGENT
During the fiscal years ended December 31, 1995, 1996 and 1997, ACCESS,
shareholder service agent and dividend disbursing agent for the Fund, received
fees approximating $68,000, $142,100 and $112,100, respectively, for these
services. The transfer agency prices are determined through negotiations with
the Fund's Board of Trustees and are based on competitive market benchmarks.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (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,
1997 was 5.19%; (ii) the five year period ended December 31, 1997 was 6.31%;
(iii) the ten year period ended December 31, 1997 was 7.87%; and (iv) the
approximately twelve year, one month period from December 13, 1985 (the
commencement of investment operations of the Fund) through December 31, 1997 was
7.97%.
B-45
<PAGE> 511
The Fund's yield with respect to the Class A Shares for the 30 day period
ending December 31, 1997 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.26%. The tax-equivalent yield for
the 30 day period ending December 31, 1997 (calculated in the manner described
in the Prospectus under the heading "Fund Performance" and assuming a 42% tax
rate) was 7.34%. The Fund's current distribution rate with respect to the Class
A Shares for the 31 day period ending December 31, 1997 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
4.67%. The Fund's taxable equivalent distribution rate with respect to Class A
Shares for the month ending December 31, 1997 was 8.05%.
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 151.90%.
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 160.39%.
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, 1997 was 5.19% and
(ii) the approximately three year, eight month period of May 1, 1993
(commencement of distribution) through December 31, 1997 was 5.34%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending December 31, 1997 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.61%. The tax-equivalent yield for
the 30 day period ending December 30, 1997 (calculated in the manner described
in the Prospectus under the heading "Fund Performance" and assuming a 43% tax
rate) was 6.22%. The Fund's current distribution rate with respect to the Class
B Shares for the 31 day period ending December 31, 1997 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
4.10%. The Fund's taxable equivalent distribution rate with respect to Class B
Shares for the month ending December 31, 1997 was 7.07%.
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 27.49%.
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 27.49%.
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, 1997 was 7.19%
and (ii) the approximately four year, five month period from August 13, 1993
(commencement of distribution) through December 31, 1997 was 4.77%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending December 30, 1997 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.57%. The tax-equivalent yield for
the 30 day period ending December 30, 1997 (calculated in the manner described
in the Prospectus under the heading "Fund Performance" and assuming a 42% tax
rate) was 6.16%. The Fund's current distribution rate with respect to the Class
C Shares for the 31 day period ending December 31, 1997 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
4.10%. The Fund's taxable equivalent distribution rate with respect to Class C
Shares for the month ending December 31, 1997 was 7.07%.
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 22.71%.
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 22.71%.
B-46
<PAGE> 512
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
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, 1997, 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, 1997, 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,
1997, 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 3, 1998
B-47
<PAGE> 513
PORTFOLIO OF INVESTMENTS
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS 99.6%
$2,000 Anaheim, CA Pub Fin Auth Tax Alloc Rev (Inverse
Fltg) (MBIA Insd)............................... 8.670% 12/28/18 $ 2,492,500
1,000 Antioch Area Pub Fac Fin Agy CA Spl Tax Cmnty
Fac Dist (FGIC Insd)............................ 5.000 08/01/18 983,550
840 Azusa CA Redev Agy Tax Alloc Merged Proj Area
Ser A Rfdg (MBIA Insd).......................... 5.250 08/01/22 842,134
3,675 Bakersfield, CA Ctfs Partn Convention Cent
Expansion Proj (MBIA Insd)...................... 5.800 04/01/17 3,922,842
3,000 Bakersfield, CA Ctfs Partn Convention Cent
Expansion Proj (MBIA Insd)...................... 5.875 04/01/22 3,205,770
1,000 Banning, CA Ctfs Partn Administration Bldg Proj
Ser A Rfdg (MBIA Insd).......................... 5.500 11/01/20 1,029,750
3,000 Bay Area Govt Assn CA Rev Tax Alloc CA Redev Agy
Pool Ser A2 (FSA Insd).......................... 6.400 12/15/14 3,375,390
750 Berkeley, CA Ctfs Partn Cap Imp Berkeley Civic
Impt (AMBAC Insd)............................... 7.500 06/01/19 775,590
1,000 Brea & Olinda, CA Uni Sch Dist Ctfs Partn Sr
High Sch Pgm Ser A Rfdg (FSA Insd).............. 6.000 08/01/09 1,086,510
1,000 California Edl Fac Auth Rev Loyola Marymount
Univ Rfdg (MBIA Insd)........................... 5.000 10/01/17 992,480
1,300 California Edl Fac Auth Rev Univ San Diego Proj
Stanford Univ Ser I (MBIA Insd)................. 6.750 10/01/15 1,407,978
2,000 California Hlth Fac Fin Auth Rev Insd Sutter
Hlth Ser A Rfdg (FSA Insd)...................... 5.250 08/15/27 1,999,880
2,000 California Hlth Fac Fin Auth Rev Adventist Hlth
Ser A Rfdg (MBIA Insd).......................... 6.500 03/01/14 2,153,880
2,000 California Hlth Fac Fin Auth Rev Kaiser
Permanente Ser A (FSA Insd)..................... 5.550 08/15/25 2,040,380
4,000 California Hsg Fin Agy Rev Home Mtg Ser A (MBIA
Insd)........................................... 5.850 08/01/16 4,227,120
15 California Hsg Fin Agy Rev Hsg Ser B (MBIA
Insd)........................................... 8.625 08/01/15 15,702
1,160 California Pub Cap Impt Fin Auth Rev Pooled Proj
Ser B (BIGI Insd)............................... 8.100 03/01/18 1,191,169
1,050 California Spl Dist Assn Fin Corp Ctfs Partn Spl
Dists Fin Pgm Ser DD (FSA Insd)................. 5.625 01/01/27 1,094,174
1,250 California St (FGIC Insd)....................... 6.250 09/01/12 1,453,575
1,000 California St Pub Wks Brd Lease Rev Ser A (AMBAC
Insd)........................................... 5.750 09/01/21 1,028,140
1,000 California St Univ Fresno Assn Inc Rev Auxiliary
Residence Student Proj (MBIA Insd).............. 6.250 02/01/17 1,102,800
4,500 California St Var Purp (MBIA Insd).............. 6.000 10/01/14 4,820,850
</TABLE>
See Notes to Financial Statements
B-48
<PAGE> 514
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$1,000 California Statewide Cmntys Dev Auth Ctfs Partn
San Diego St Univ Fndtn Rfdg (AMBAC Insd)....... 5.250% 03/01/22 $ 999,920
1,570 California Statewide Cmntys Dev Auth Rev Ctfs
Partn Insd Children's Hosps Rfdg (MBIA Insd).... 6.000 06/01/10 1,770,536
2,000 Castaic Lake Wtr Agy CA Ctfs Partn Wtr Sys Impt
Proj Ser A Rfdg (MBIA Insd)..................... 7.000 08/01/12 2,471,900
1,205 Channel Islands Beach CA Cmnty Svcs Dist Ctfs
Partn (FSA Insd)................................ 5.700 09/01/21 1,274,420
1,105 Chino, CA Ctfs Partn Redev Agy (MBIA Insd)...... 6.200 09/01/18 1,217,467
2,350 Chino, CA Uni Sch Dist Ctfs Partn Master Lease
Pgm (FSA Insd).................................. 6.250 03/01/09 2,611,602
1,500 Chino, CA Uni Sch Dist Ctfs Partn Master Lease
Pgm (FSA Insd).................................. 6.000 03/01/14 1,628,115
445 Colton, CA Jt Uni Sch Dist Cmnty Fac Dist Spl
Tax Southridge Vlg Rfdg (FSA Insd).............. 5.900 09/01/14 445,405
20 Concord, CA Redev Agy Tax Alloc Cent Concord
Redev Proj Ser 3 (BIGI Insd).................... 8.000 07/01/18 20,799
1,000 Contra Costa Cnty, CA Ctfs Partn Contra Costa
Cnty Pub Fac Co (BIGI Insd)..................... 7.800 06/01/06 1,071,780
500 Contra Costa Cnty, CA Ctfs Partn Contra Costa
Cnty Pub Fac Co (BIGI Insd)..................... 7.800 06/01/07 535,890
1,550 Contra Costa, CA Wtr Auth Wtr Treatment Rev Ser
A Rfdg (FGIC Insd).............................. 5.750 10/01/14 1,637,854
5,165 Corona, CA Redev Agy Tax Alloc Redev Proj Area A
Ser A Rfdg (FGIC Insd).......................... 6.250 09/01/13 5,741,207
1,150 El Centro, CA Redev Agy Tax El Centro Redev Proj
Rfdg (MBIA Insd)................................ 5.500 11/01/26 1,186,869
2,000 Fairfield Suisun, CA Swr Dist Swr Rev Ser A Rfdg
(MBIA Insd)..................................... 6.250 05/01/16 2,153,840
1,000 Folsom, CA Pub Fin Auth Rev Rfdg (AMBAC Insd)... 6.000 10/01/12 1,079,170
1,400 Folsom, CA Pub Fin Auth Rev Rfdg (AMBAC Insd)... 6.000 10/01/19 1,507,086
2,000 Folsom, CA Spl Tax Cmnty Fac Dist No 2 Rfdg
(Connie Lee Insd)............................... 5.250 12/01/19 2,003,420
1,745 Gilroy, CA Uni Sch Dist Ctfs Partn Measure J Cap
Projs Rfdg (FSA Insd)........................... 5.875 09/01/06 1,934,594
1,810 Gilroy, CA Uni Sch Dist Ctfs Partn Measure J Cap
Projs Rfdg (FSA Insd)........................... 6.250 09/01/12 2,006,385
20,000 Grossmont, CA Union High Sch Dist Ctfs Partn
(MBIA Insd)..................................... * 11/15/21 4,328,200
4,500 Hayward, CA Ctfs Partn Civic Cent Proj (MBIA
Insd)........................................... 5.250 08/01/26 4,510,665
1,250 Hemet, CA Uni Sch Dist Ctfs Partn Nutrition Cent
Proj (FSA Insd)................................. 5.875 04/01/27 1,342,012
1,500 Irwindale, CA Cmnty Redev Agy Tax Alloc City
Indl Dev Proj Rfdg (FSA Insd) (a)............... 5.000 08/01/25 1,466,985
1,225 Lincoln, CA Uni Sch Dist (MBIA Insd)............ 5.600 09/01/26 1,272,775
</TABLE>
See Notes to Financial Statements
B-49
<PAGE> 515
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$1,835 Local Govt Fin Auth CA Rev Cap Apprec San
Francisco Redev (MBIA Insd)..................... * 08/01/08 $ 1,065,328
850 Loma Linda, CA Hosp Rev Loma Linda Univ Med Cent
Proj B Rfdg (AMBAC Insd)........................ 7.000% 12/01/15 908,888
1,635 Long Beach, CA Redev Agy Tax Alloc Sub Redev
Proj Rfdg (AMBAC Insd).......................... 5.125 04/01/20 1,624,781
697 Los Angeles Cnty, CA Tran Comm Lease Rev Dia RR
Lease Ltd (FSA Insd)............................ 7.375 12/15/06 771,656
2,380 Los Angeles, CA Mtg Rev FHA Security 8 Asstd
Proj Ser A Rfdg (MBIA Insd)..................... 6.100 07/01/25 2,471,249
500 M-S-R Pub Pwr Agy CA San Juan Proj Rev Ser E
(MBIA Insd)..................................... 6.000 07/01/22 524,700
1,250 North City West, CA Sch Fac Fin Auth Spl Tax Ser
B Rfdg (FSA Insd)............................... 5.750 09/01/15 1,344,137
1,640 North City West, CA Sch Fac Fin Auth Spl Tax Ser
B Rfdg (FSA Insd)............................... 6.000 09/01/19 1,788,797
500 Northern CA Pwr Agy Pub Pwr Rev Combustion
Turbine Proj 1 Ser A Rfdg (MBIA Insd)........... 6.000 08/15/10 515,055
400 Northern CA Pwr Agy Pub Pwr Rev Hydro Elec Proj
1 Ser A Rfdg (Prerefunded @ 07/01/21) (AMBAC
Insd)........................................... 7.500 07/01/23 518,312
2,760 Oakland, CA Uni Sch Dist Alameda Cnty Cap Apprec
Ser A (FGIC Insd)............................... * 08/01/13 1,172,779
3,475 Oakland, CA Uni Sch Dist Alameda Cnty Cap Apprec
Ser A (FGIC Insd)............................... * 08/01/14 1,377,768
1,220 Oceanside, CA Cmnty Dev Mtg FHA North River Club
Ser A Rfdg (MBIA Insd).......................... 5.850 07/01/16 1,269,227
750 Oceanside, CA Ctfs Partn Corp Yd Proj Fin
(Prerefunded @ 08/01/02) (AMBAC Insd)........... 7.300 08/01/21 862,560
1,000 Pajaro Vly, CA Uni Sch Dist Ctfs Partn Sch Fac
Brdg Fdg Pgm (FSA Insd)......................... 5.850 09/01/32 1,073,460
3,000 Palm Desert, CA Fin Auth Tax Alloc Rev (Inverse
Fltg) (MBIA Insd)............................... 8.355 04/01/22 3,540,000
1,345 Palmdale CA Sch Dist Ctfs Partn Rfdg & Sch Bldg
Proj (FSA Insd)................................. 5.000 10/01/17 1,326,627
1,000 Perris, CA Sch Dist Ctfs Partn Rfdg (FSA
Insd)........................................... 6.100 03/01/16 1,085,210
1,945 Pittsburg, CA Uni Sch Dist Ctfs Partn (AMBAC
Insd)........................................... 6.300 09/01/15 2,147,455
1,360 Port Hueneme, CA Ctfs Partn Cap Impt Pgm Rfdg
(MBIA Insd)..................................... 6.000 04/01/19 1,542,036
1,000 Rancho Cucamonga, CA Redev Agy Tax Alloc Rancho
Redev Proj (MBIA Insd).......................... 7.125 09/01/19 1,067,540
</TABLE>
See Notes to Financial Statements
B-50
<PAGE> 516
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$1,235 Rancho Cucamonga, CA Redev Agy Tax Alloc Rancho
Redev Proj (MBIA Insd).......................... 6.750% 09/01/20 $ 1,311,027
1,680 Rancho, CA Wtr Dist Spl Tax Cmnty Fac Dist 883
Ser A Rfdg (AMBAC Insd)......................... 6.000 09/01/17 1,830,142
1,000 Redding, CA Elec Sys Rev Ctfs Partn (Inverse
Fltg) (MBIA Insd)............................... 8.396 07/08/22 1,301,250
2,000 Rialto, CA Spl Tax Cmnty Fac Dist 87-1 Rfdg (FSA
Insd)........................................... 5.625 09/01/18 2,095,480
3,000 Riverside Cnty, CA Ctfs Partn Historic
Courthouse Proj (MBIA Insd)..................... 5.875 11/01/27 3,229,320
2,000 Sacramento, CA Muni Util Dist Elec Rev Ser A
Rfdg (MBIA Insd)................................ 5.750 08/15/13 2,090,780
2,500 San Bernardino Cnty, CA Ctfs Partn Ser B
(Embedded Swap) (MBIA Insd)..................... 6.950 07/01/16 2,649,300
1,000 San Diego, CA Indl Dev Rev San Diego Gas & Elec
Ser A (MBIA Insd)............................... 6.400 09/01/18 1,099,350
1,110 San Francisco, CA St Bldg Auth Lease Rev (AMBAC
Insd)........................................... 5.250 12/01/16 1,128,593
1,000 San Gabriel, CA Uni Sch Dist Ctfs Partn (FSA
Insd)........................................... 6.000 09/01/15 1,089,570
5,000 San Joaquin Hills, CA Trns Corridor Agy Toll Rd
Rev Cap Apprec Ser A Rfdg (MBIA Insd)........... * 01/15/30 945,650
2,000 San Joaquin Hills, CA Trns Corridor Agy Toll Rd
Rev Ser A Rfdg (MBIA Insd)...................... 5.250 01/15/30 2,003,280
7,050 San Joaquin Hills, CA Tran Corridor Agy Toll Rd
Rev Ser A Rfdg (MBIA Insd)...................... 5.375 01/15/29 7,158,358
5,750 San Jose, CA Fin Auth Rev Convention Proj Ser C
(FSA Insd)...................................... 6.375 09/01/13 6,246,685
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 2,236,860
1,000 Santa Clara Cnty, CA Fin Auth Lease Rev VMC Fac
Replacement Proj Ser A (Prerefeunded @ 11/15/04)
(AMBAC Insd).................................... 6.875 11/15/14 1,174,270
1,000 Shasta Lake, CA Ctfs Partn (FSA Insd)........... 6.000 04/01/16 1,085,560
1,990 South Cnty, CA Regl Wastewtr Auth Rev Regl
Wastewtr Fac Proj Ser A (FGIC Insd)............. 6.000 08/01/14 2,129,678
3,735 South Orange Cnty, CA Pub Fin Auth Spl Tax Rev
Sr Lien Ser A Rfdg (MBIA Insd).................. 7.000 09/01/08 4,569,362
3,000 South Orange Cnty, CA Pub Fin Auth Spl Tax Rev
Sr Lien Ser A Rfdg (MBIA Insd) (b).............. 7.000 09/01/09 3,691,650
1,000 Stockton East Wtr Dist CA Ctfs Partn 1990 Proj
Ser A Rfdg (AMBAC Insd) (a)..................... 4.750 04/01/17 958,510
1,050 Stockton, CA Rev Ctfs Partn Wastewtr Treatment
Plant Expansion Ser A (FGIC Insd)............... 6.400 09/01/07 1,184,075
1,015 Stockton, CA Rev Ctfs Partn Wastewtr Treatment
Plant Expansion Ser A (FGIC Insd)............... 6.500 09/01/08 1,150,411
</TABLE>
See Notes to Financial Statements
B-51
<PAGE> 517
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$ 570 Temecula Vly, CA Uni Sch Dist Ctfs Partn Rfdg
(FSA Insd)...................................... 6.000% 09/01/18 $ 620,445
2,000 Torrance, CA Hosp Rev Torrance Mem Hosp Rfdg
(MBIA Insd)..................................... 6.750 01/01/12 2,024,380
2,000 University of CA Rev Multi Purp Proj Ser D
(Prerefunded @ 09/01/02) (MBIA Insd)............ 6.300 09/01/14 2,220,120
2,000 Yuba City, CA Uni Sch Dist Ctfs Partn Ser A Rfdg
(MBIA Insd)..................................... 5.250 02/01/22 2,004,200
------------
TOTAL LONG-TERM INVESTMENTS 99.6%
(Cost $159,057,106)........................................................ 174,686,931
SHORT-TERM INVESTMENTS 0.2%
(Cost 400,000)............................................................. 400,000
------------
TOTAL INVESTMENTS 99.8%
(Cost $159,457,106)........................................................ 175,086,931
OTHER ASSETS IN EXCESS OF LIABILITIES 0.2%.................................. 377,417
------------
NET ASSETS 100.0%........................................................... $175,464,348
-----------
</TABLE>
* Zero coupon bond
(a) Securities purchased on a when issued or delayed delivery basis.
(b) Assets segregated as collateral for when issued or delayed delivery purchase
commitments.
AMBAC--AMBAC Indemnity Corporation
BIGI--Bond Investor Guaranty Inc.
Connie Lee--Connie Lee Insurance Company
FGIC--Financial Guaranty Insurance Company
FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements
B-52
<PAGE> 518
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $159,457,106)....................... $175,086,931
Cash........................................................ 22,784
Receivables:
Interest.................................................. 2,795,659
Fund Shares Sold.......................................... 698,016
Other....................................................... 17,732
------------
Total Assets.......................................... 178,621,122
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 2,392,479
Income Distributions...................................... 265,973
Distributor and Affiliates................................ 144,783
Investment Advisory Fee................................... 70,425
Fund Shares Repurchased................................... 54,039
Trustees' Deferred Compensation and Retirement Plans........ 123,686
Accrued Expenses............................................ 105,389
------------
Total Liabilities..................................... 3,156,774
------------
NET ASSETS.................................................. $175,464,348
============
NET ASSETS CONSIST OF:
Capital..................................................... $163,231,857
Net Unrealized Appreciation................................. 15,629,825
Accumulated Undistributed Net Investment Income............. 486,148
Accumulated Net Realized Loss............................... (3,883,482)
------------
NET ASSETS.................................................. $175,464,348
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $140,654,610 and 7,688,471 shares of
beneficial interest issued and outstanding)............. $ 18.29
Maximum sales charge (3.25%* of offering price)......... .61
------------
Maximum offering price to public........................ $ 18.90
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $31,026,175 and 1,696,407 shares of
beneficial interest issued and outstanding)............. $ 18.29
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $3,783,563 and 206,908 shares of
beneficial interest issued and outstanding)............. $ 18.29
============
*On sales of $25,000 or more, the sales charge will be
reduced.
</TABLE>
See Notes to Financial Statements
B-53
<PAGE> 519
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $10,042,391
-----------
EXPENSES:
Investment Advisory Fee..................................... 814,437
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $332,822, $294,905
and $27,556, respectively)................................ 655,283
Shareholder Services........................................ 189,171
Trustees' Fees and Expenses................................. 40,111
Legal....................................................... 26,280
Custody..................................................... 22,085
Insurance................................................... 3,624
Other....................................................... 119,773
-----------
Total Expenses.......................................... 1,870,764
-----------
NET INVESTMENT INCOME....................................... $ 8,171,627
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 1,292,756
Futures................................................... (106,018)
-----------
Net Realized Gain........................................... 1,186,738
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 10,633,466
End of the Period:
Investments............................................. 15,629,825
-----------
Net Unrealized Appreciation During the Period............... 4,996,359
-----------
NET REALIZED AND UNREALIZED GAIN............................ $ 6,183,097
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $14,354,724
===========
</TABLE>
See Notes to Financial Statements
B-54
<PAGE> 520
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income........................... $ 8,171,627 $ 8,319,890
Net Realized Gain............................... 1,186,738 2,275,283
Net Unrealized Appreciation/Depreciation
During the Period............................. 4,996,359 (3,715,835)
----------- -----------
Change in Net Assets from Operations............ 14,354,724 6,879,338
----------- -----------
Distributions from Net Investment Income:
Class A Shares................................ (6,593,552) (7,012,876)
Class B Shares................................ (1,190,355) (1,094,958)
Class C Shares................................ (110,912) (79,245)
----------- -----------
Total Distributions............................. (7,894,819) (8,187,079)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES.................................... 6,459,905 (1,307,741)
----------- -----------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold....................... 21,168,004 25,623,230
Net Asset Value of Shares Issued Through
Dividend Reinvestment......................... 4,809,591 4,933,967
Cost of Shares Repurchased...................... (30,260,768) (29,969,162)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS.................................. (4,283,173) 588,035
----------- -----------
TOTAL INCREASE/DECREASE IN NET ASSETS........... 2,176,732 (719,706)
NET ASSETS:
Beginning of the Period......................... 173,287,616 174,007,322
----------- -----------
End of the Period (Including accumulated
undistributed net investment income of
$486,148 and $209,340, respectively).......... $175,464,348 $173,287,616
============ ============
</TABLE>
See Notes to Financial Statements
B-55
<PAGE> 521
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 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period................................ $17.605 $17.736 $15.802 $18.286 $16.858
------- ------- ------- ------- -------
Net Investment Income................... .880 .857 .884 .912 .967
Net Realized and Unrealized Gain/Loss... .658 (.145) 1.938 (2.484) 1.441
------- ------- ------- ------- -------
Total from Investment Operations........ 1.538 .712 2.822 (1.572) 2.408
Less Distributions from Investment
Income................................ .849 .843 .888 .912 .980
------- ------- ------- ------- -------
Net Asset Value, End of the Period...... $18.294 $17.605 $17.736 $15.802 $18.286
======= ======= ======= ======= =======
Total Return* (a)....................... 8.93% 4.20% 18.28% (8.75%) 14.54%
Net Assets at End of the Period (In
millions)............................. $140.7 $142.5 $147.6 $130.3 $151.1
Ratio of Expenses to Average Net
Assets*............................... .96% 1.02% .89% .78% .69%
Ratio of Net Investment Income to
Average Net Assets*................... 4.96% 4.94% 5.23% 5.46% 5.37%
Portfolio Turnover...................... 46% 35% 42% 56% 36%
* If certain expenses had not been reimbursed by VKAC, total return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets................................ N/A 1.03% 1.05% 1.08% 1.01%
Ratio of Net Investment Income to
Average Net Assets.................... N/A 4.94% 5.07% 5.16% 5.05%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
N/A = Not Applicable
See Notes to Financial Statements
B-56
<PAGE> 522
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
Year Ended December 31, (Commencement of
---------------------------------------- Distribution) to
Class B Shares 1997 1996 1995 1994 December 31, 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period.................. $17.603 $17.736 $15.805 $18.266 $17.570
------ ------ ------ ------ ------
Net Investment Income......... .741 .720 .766 .785 .549
Net Realized and Unrealized
Gain/Loss................... .662 (.142) 1.926 (2.482) .705
------ ------ ------ ------ ------
Total from Investment
Operations.................. 1.403 .578 2.692 (1.697) 1.254
Less Distributions from Net
Investment Income........... .717 .711 .761 .764 .558
------ ------ ------ ------ ------
Net Asset Value, End of the
Period...................... $18.289 $17.603 $17.736 $15.805 $18.266
====== ====== ====== ====== ======
Total Return* (a)............. 8.19% 3.35% 17.33% (9.39%) 7.25%**
Net Assets at End of the
Period (In millions)........ $31.0 $28.6 $24.6 $17.1 $15.3
Ratio of Expenses to Average
Net Assets*................. 1.72% 1.79% 1.61% 1.52% 1.45%
Ratio of Net Investment Income
to Average Net Assets*...... 4.18% 4.17% 4.51% 4.71% 4.06%
Portfolio Turnover............ 46% 35% 42% 56% 36%
* If certain expenses had not been reimbursed by VKAC, total return
would have been lower and the ratios would have been as follows:
Ratio of Expenses to Average
Net Assets.................. N/A 1.79% 1.77% 1.82% 1.77%
Ratio of Net Investment Income
to Average Net Assets....... N/A 4.16% 4.35% 4.41% 3.74%
</TABLE>
** Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
N/A = Not Applicable
See Notes to Financial Statements
B-57
<PAGE> 523
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
Year Ended December 31, (Commencement of
---------------------------------------- Distribution) to
Class C Shares 1997 1996 1995 1994 December 31, 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period.................. $17.602 $17.736 $15.798 $18.257 $18.010
------- ------- ------- ------- -------
Net Investment Income......... .727 .722 .758 .773 .307
Net Realized and Unrealized
Gain/Loss................... .674 (.145) 1.941 (2.468) .258
------- ------- ------- ------- -------
Total from Investment
Operations.................. 1.401 .577 2.699 (1.695) .565
Less Distributions from Net
Investment Income........... .717 .711 .761 .764 .318
------- ------- ------- ------- -------
Net Asset Value, End of the
Period...................... $18.286 $17.602 $17.736 $15.798 $18.257
======= ======= ======= ======= =======
Total Return* (a)............. 8.19% 3.35% 17.40% (9.40%) 3.17%**
Net Assets at End of the
Period
(In millions)............... $3.8 $2.2 $1.8 $2.8 $4.0
Ratio of Expenses to Average
Net Assets*................. 1.71% 1.79% 1.60% 1.51% 1.45%
Ratio of Net Investment Income
to Average Net Assets*...... 4.15% 4.16% 4.50% 4.71% 3.82%
Portfolio Turnover............ 46% 35% 42% 56% 36%
*If certain expenses had not been reimbursed by VKAC, total return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to Average
Net Assets.................. N/A 1.80% 1.75% 1.82% 1.76%
Ratio of Net Investment Income
to Average Net Assets....... N/A 4.16% 4.34% 4.39% 3.52%
</TABLE>
** Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
N/A = Not Applicable
See Notes to Financial Statements
B-58
<PAGE> 524
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
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. 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.
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 60 days or less 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. 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. Expenses of the Fund are allocated on a pro rata basis to
each class
B-59
<PAGE> 525
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
of shares, except for distribution and service fees and transfer agency costs
which are unique to each class of shares.
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, 1997, the Fund had an accumulated capital loss
carryforward for tax purposes of $3,883,482, which will expire between December
31, 2002 and December 31, 2003.
At December 31, 1997, for federal income tax purposes, cost of long- and
short-term investments is $159,457,106; the aggregate gross unrealized
appreciation is $15,629,825 and the aggregate gross unrealized depreciation is
$0, resulting in net unrealized appreciation of $15,629,825.
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.
For Federal income tax purposes, the following information is furnished with
respect to the distributions paid by the Fund during its taxable year ended
December 31, 1997. The Fund designated 99.9% of the income distributions as a
tax-exempt income distribution.
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.
B-60
<PAGE> 526
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
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>
For the year ended December 31, 1997, the Fund recognized expenses of
approximately $10,600 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended December 31, 1997, the Fund recognized expenses of
approximately $79,300, representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") cost of providing accounting,
cash management and legal services to the Fund.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the year ended
December 31, 1997, the Fund recognized expenses of approximately $112,100,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.
Additionally, for the year ended December 31, 1997, the Fund reimbursed VKAC
approximately $12,800 related to the direct cost of consolidating the VKAC
open-end fund complex. Payment was contingent upon the realization by the Fund
of cost efficiencies in certain expense categories resulting from the
consolidation.
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 provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Fund. The maximum annual
benefit per trustee under the plan is equal to $2,500.
B-61
<PAGE> 527
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of shares of beneficial interest, 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, 1997, capital aggregated $129,035,302, $30,132,501 and
$4,064,054 for Classes A, B and C, respectively. For the year ended December 31,
1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.......................................... 692,287 $ 12,283,098
Class B.......................................... 403,552 7,140,419
Class C.......................................... 97,375 1,744,487
---------- ------------
Total Sales........................................ 1,193,214 $ 21,168,004
========== ============
Dividend Reinvestment:
Class A.......................................... 224,209 $ 3,981,636
Class B.......................................... 43,062 765,183
Class C.......................................... 3,529 62,772
---------- ------------
Total Dividend Reinvestment........................ 270,800 $ 4,809,591
========== ============
Repurchases:
Class A.......................................... (1,319,813) $(23,254,943)
Class B.......................................... (375,548) (6,651,902)
Class C.......................................... (20,021) (353,923)
---------- ------------
Total Repurchases.................................. (1,715,382) $(30,260,768)
========== ============
</TABLE>
B-62
<PAGE> 528
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
At December 31, 1996, capital aggregated $136,025,511, $28,878,801 and
$2,610,718 for Classes A, B and C, respectively. For the year ended December 31,
1996, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.......................................... 986,895 $ 17,165,507
Class B.......................................... 439,621 7,596,970
Class C.......................................... 49,675 860,753
---------- ------------
Total Sales........................................ 1,476,191 $ 25,623,230
========== ============
Dividend Reinvestment:
Class A.......................................... 242,651 $ 4,210,865
Class B.......................................... 38,588 669,630
Class C.......................................... 3,082 53,472
---------- ------------
Total Dividend Reinvestment........................ 284,321 $ 4,933,967
========== ============
Repurchases:
Class A.......................................... (1,457,342) $(25,258,344)
Class B.......................................... (240,656) (4,180,690)
Class C.......................................... (30,329) (530,128)
---------- ------------
Total Repurchases.................................. (1,728,327) $(29,969,162)
========== ============
</TABLE>
Classes 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.
<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-63
<PAGE> 529
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
For the year ended December 31, 1997, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$24,400 and CDSC on redeemed shares of approximately $64,300. Sales charges do
not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $77,597,970 and $78,268,248,
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. Upon disposition, a realized gain or loss is
recognized accordingly, except when taking delivery of a security underlying a
futures contract. In this instance the recognition of gain or loss is postponed
until the disposal of the security underlying the futures 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.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin).
B-64
<PAGE> 530
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
Transactions in futures contracts for the year ended December 31, 1997, were
as follows:
<TABLE>
<CAPTION>
CONTRACTS
- ----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1996........................... -0-
Futures Opened............................................. 4,100
Futures Closed............................................. (4,100)
------
Outstanding at December 31, 1997........................... -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. 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 pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a 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 net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the year ended December 31, 1997, are payments retained by VKAC of
approximately $226,300.
B-65
<PAGE> 531
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 30, 1998 (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
writing or calling Van Kampen American Capital Distributors, Inc. at One
Parkview Plaza, Oakbrook Terrace, IL 60181 at (800) 421-5666 (or (800) 421-2833
for the hearing impaired). 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-29
Custodian and Independent Accountants....................... B-30
Portfolio Transactions and Brokerage Allocation............. B-30
Tax Status of the Fund...................................... B-32
The Distributor............................................. B-32
Distribution and Service Plans.............................. B-33
Transfer Agent.............................................. B-34
Legal Counsel............................................... B-34
Performance Information..................................... B-34
Report of Independent Accountants........................... B-37
Financial Statements........................................ B-38
Notes to Financial Statements............................... B-56
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1998.
B-1
<PAGE> 532
THE FUND AND THE TRUST
Van Kampen American Capital Municipal Income Fund (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 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> 533
issuer or, if, as a result, the Fund would hold more than 10% of the
outstanding voting securities of an issuer, except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
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), except that the Fund may purchase securities
of other investment companies to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
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, except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
9. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and extent permitted by
(i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
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
B-3
<PAGE> 534
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 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 normally will be less than 100%.
ADDITIONAL INVESTMENT CONSIDERATIONS
MUNICIPAL SECURITIES
Municipal securities include long-term obligations, which often are 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
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property in the event such property is no longer considered essential by the
municipality, (e) the legal recourse of the lease obligee in the event of such a
failure to appropriate funding and (f) any limitations which are imposed on the
lease obligor's ability to utilize substitute property or services than those
covered by the lease obligation.
Also included in the term municipal securities are participation certificates
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract. Some municipal
leases and participation certificates may not be readily marketable.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantee
of such payment obligations, of the municipal securities.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such 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.
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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.
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.
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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 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.
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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 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
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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 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
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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 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.
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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.
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
B-11
<PAGE> 542
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 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
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
securities 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 securities 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 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.
B-12
<PAGE> 543
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.
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 S&P 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,B, Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as
CCC having significant speculative characteristics with respect
CC,C to capacity to pay interest and repay principal. 'BB'
indicates the least degree of speculation and 'C' the
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 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> 544
<TABLE>
<S> <C>
B Debt rated 'B' is more vulnerable to default than debt rated
'BB' 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' is currently vulnerable 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 Debt rated 'CC' is currently highly vulnerable to non
payment. The rating 'CC' also is used for debt subordinated
to senior debt that is assigned an actual or implied 'CCC'
rating.
C The 'C' rating may be used to cover a situation where a
bankruptcy petition has been filed, but debt service
payments are continued. The rating 'C' typically is applied
to debt subordinated to senior debt which is assigned an
actual or implied 'CCC-' debt rating.
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 or the taking of a similar action 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-14
<PAGE> 545
<TABLE>
<S> <C>
NR Indicates that no public rating has been requested, that
there is insufficient information on which to base a rating,
or that S&P does not rate a particular type of obligation as
a matter of policy.
DEBT OBLIGATIONS OF ISSUERS OUTSIDE THE UNITED STATES AND
ITS TERRITORIES are rated on the same basis as domestic
corporate and municipal issues. The ratings measure the
creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
</TABLE>
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries generally.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity factors and market-access
risks unique to notes. Notes maturing in 3 years or less will likely
receive a note rating. Notes maturing beyond 3 years will most likely
receive a long-term debt rating.
The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note).
-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).
The note rating symbols and definitions are as follows:
<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are a plus
(+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes
over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from 'A-1' for the
highest-quality obligations to 'D' for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are
denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is
not as high as for issues designated 'A-1'.
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative
capacity for timely payment.
C This rating is assigned to short-term debt obligations with
a doubtful capacity for payment.
D Debt rated 'D' is in payment default. The 'D' rating
category is used when interest payments or principal
payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period.
</TABLE>
B-15
<PAGE> 546
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.
</TABLE>
B-16
<PAGE> 547
<TABLE>
<S> <C>
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
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.
(P) (..) When applied to forward delivery bonds, indicates that the
rating is provisional pending the delivery of the bonds. The
rating may be revised prior to delivery if changes occur in
the legal documents or the underlying credit quality of the
bonds.
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.
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.
B-17
<PAGE> 548
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 promissory obligations not having an original maturity
in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933,
nor does it represent that any specific note is a valid obligation of a
rated issuer or issued in conformity with any applicable law.
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 (for related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earning coverage of fixed financial charges
and high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
The effects of industry characteristics and market composition may be
more pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement
for relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
B-18
<PAGE> 549
TRUSTEES AND OFFICERS
The tables below list the trustees and officers of the Fund and other
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with VK/AC
Holding, Inc. ("VKAC Holding"), Van Kampen American Capital, Inc. ("Van Kampen
American Capital" or "VKAC"), Van Kampen American Capital Investment Advisory
Corp. ("Advisory Corp."), Van Kampen American Capital Asset Management, Inc.
("Asset Management"), Van Kampen American Capital Distributors, Inc., the
distributor of the Fund's shares (the "Distributor"), Van Kampen American
Capital Advisors Corp., Van Kampen Merritt Equity Advisors Corp., Van Kampen
American Capital Insurance Agency of Illinois, Inc., VK/AC System, Inc., Van
Kampen American Capital Record Keeping Services, Inc., American Capital
Contractual Services, Inc., Van Kampen American Capital Trust Company, Van
Kampen American Capital Exchange Corporation, and ACCESS Investors Services
Inc., the Fund's transfer agent ("ACCESS"). Advisory Corp. and Asset Management
sometimes are referred to herein collectively as the "Advisers". For purposes
hereof, the term "Fund Complex" includes each of the open-end investment
companies advised by the Advisers (excluding the Van Kampen American Capital
Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee/Director of each of the
funds in the Fund Complex.
Richard M. DeMartini*..................... President and Chief Operating Officer, Individual Asset
Two World Trade Center Management Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Mr. DeMartini is a Director of InterCapital
New York, NY 10048 Funds, Dean Witter Distributors, Inc. and Dean Witter
Date of Birth: 10/12/52 Trust Company. Trustee of the TCW/DW Funds. Director of
the National Healthcare Resources, Inc. Formerly Vice
Chairman of the Board of the National Association of
Securities Dealers, Inc. and Chairman of the Board of the
Nasdaq Stock Market, Inc. Trustee/Director of each of the
funds in the Fund Complex.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board, The
International House Board and the Women's Board of the
University of Chicago. Trustee/Director of each of the
funds in the Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont 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.
Trustee/Director of each of the funds in the Fund
Complex.
</TABLE>
B-19
<PAGE> 550
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee/Director of each of
the funds in the Fund Complex.
Don G. Powell*............................ Chairman and a Director of VKAC. Chairman and a Director
2800 Post Oak Blvd. of the Advisers and the Distributor. Chairman and a
Houston, TX 77056 Director of ACCESS. Director or officer of certain other
Date of Birth: 10/19/39 subsidiaries of VKAC. Chairman of the Board of Governors
and the Executive Committee of the Investment Company
Institute. Prior to November 1996, President, Chief
Executive Officer and a Director of VKAC Holding.
Trustee/Director of funds in the Fund Complex advised by
Advisory Corp. and prior to July 1996, President, Chief
Executive Officer and a Trustee of the funds in the Fund
Complex.
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer service company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company; the
Date of Birth: 07/08/44 Urban Shopping Centers Inc., a retail mall management
company; and Stone Container Corp., a paper manufacturing
company. Trustee, University of Notre Dame. Formerly,
President and Chief Executive Officer, Waste Management,
Inc., an environmental services company, and prior to
that President and Chief Operating Officer, Waste
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen American Capital
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex, and other open-end and closed-end funds
advised by the Advisers or Van Kampen American Capital
Management, Inc.
</TABLE>
- ---------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
position with Morgan Stanley Dean Witter & Co. and its affiliates.
B-20
<PAGE> 551
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Wood, Sullivan, Dalmaso, Martin,
Wetherell and Hill are located at One Parkview Plaza, Oakbrook Terrace, IL
60181. The Fund's other officers are located at 2800 Post Oak Blvd., Houston, TX
77056.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Dennis J. McDonnell......... President Executive Vice President and a Director of
Date of Birth: 05/20/42 VKAC and VK/AC Holding, Inc. President,
Chief Operating Officer and a Director of
the Advisers, Van Kampen American Capital
Advisors, Inc., and Van Kampen American
Capital Management, Inc. President and a
Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he
was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996,
Mr. McDonnell was Chief Executive Officer
and Director of MCM Group, Inc., McCarthy,
Crisanti & Maffei, Inc. and Chairman and
Director of MCM Asia Pacific Company,
Limited and MCM (Europe) Limited. Prior to
November 1996, Executive Vice President and
a Director of VKAC Holding. Prior to July
of 1996, Mr. McDonnell was President, Chief
Operating Officer and Trustee of VSM Inc.
and VCJ Inc. President of each of the funds
in the Fund Complex. President, Chairman of
the Board and Trustee of other investment
companies advised by the Advisers or their
affiliates.
Peter W. Hegel.............. Vice President Executive Vice President of the Advisers,
Date of Birth: 06/25/56 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Prior to July of 1996, Mr.
Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of
McCarthy, Crisanti & Maffei, Inc. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Curtis W. Morell............ Vice President and Chief Senior Vice President of the Advisers, Vice
Date of Birth: 08/04/46 Accounting Officer President and Chief Accounting Officer of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
</TABLE>
B-21
<PAGE> 552
<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 Secretary Executive Vice President, General Counsel,
Date of Birth: 07/29/53 Secretary and Director of VKAC and VK/AC
Holding, Inc. Mr. Nyberg is also Executive
Vice President, General Counsel and a
Director of Van Kampen Merritt Equity
Holdings Corp. Executive Vice President,
General Counsel, Assistant Secretary and a
Director of the Advisers and the
Distributor, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Management, Inc., Van Kampen American
Capital Exchange Corporation, American
Capital Contractual Services, Inc. and Van
Kampen American Capital Trust Company.
Executive Vice President, General Counsel
and Assistant Secretary of ACCESS. Director
or officer of certain other subsidiaries of
VKAC. Prior to June of 1997, Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to April of 1997,
he was Executive Vice President, General
Counsel and Director of Van Kampen Merritt
Equity Advisors Corp. Prior to July of
1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc.
and Executive Vice President and General
Counsel of VCJ Inc. Prior to September of
1996, he was General Counsel of McCarthy,
Crisanti & Maffei, Inc. Vice President and
Secretary of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Alan T. Sachtleben.......... Vice President Executive Vice President of the Advisers,
Date of Birth: 04/20/42 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Vice President of each of
the funds in the Fund Complex and certain
other investment companies advised by the
Advisers or their affiliates.
Paul R. Wolkenberg.......... Vice President Executive Vice President and Director of
Date of Birth: 11/10/44 VKAC, and VK/AC Holding Inc. Executive Vice
President of the AC Adviser and the
Distributor. President and a Director of
ACCESS. President and Chief Operating
Officer of Van Kampen American Capital
Record Keeping Services, Inc. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
B-22
<PAGE> 553
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Edward C. Wood III.......... Vice President and Chief Senior Vice President of the Advisers and
Date of Birth: 01/11/56 Financial Officer Van Kampen American Capital Management,
Inc. Vice President and Chief Financial
Officer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
John L. Sullivan............ Treasurer First Vice President of the Advisers.
Date of Birth: 08/20/55 Treasurer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Tanya M. Loden.............. Controller Vice President of the Advisers. Controller
Date of Birth: 11/19/59 of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Nicholas Dalmaso............ Assistant Secretary Associate General Counsel and Assistant
Date of Birth: 03/01/65 Secretary of VKAC. Vice President,
Associate General Counsel and Assistant
Secretary of the Advisers, the Distributor,
Van Kampen American Capital Advisors, Inc.
and Van Kampen American Capital Management,
Inc. Assistant Secretary of each of the
funds in the Fund Complex and other
investment companies advised by the
Advisers or their affiliates.
Huey P. Falgout, Jr......... Assistant Secretary Vice President and a Senior Attorney of
Date of Birth: 11/15/63 VKAC. Vice President and Assistant
Secretary of the Advisers, the Distributor,
ACCESS, Van Kampen American Capital
Management, Inc., American Capital
Contractual Services, Inc., Van Kampen
American Capital Exchange Corporation and
Van Kampen American Capital Advisors, Inc.
Assistant Secretary of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
B-23
<PAGE> 554
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Scott E. Martin............. Assistant Secretary Senior Vice President, Deputy General
Date of Birth: 08/20/56 Counsel and Assistant Secretary of VKAC and
VKAC Holding, Inc. Senior Vice President,
Deputy General Counsel and Secretary of the
Advisers, the Distributor, ACCESS American
Capital Contractual Services, Inc., Van
Kampen American Capital Management, Inc.,
Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Insurance Agency of Illinois, Inc., VKAC
System, Inc., Van Kampen American Capital
Record Keeping Services, Inc. and Van
Kampen Merritt Equity Advisors Corp. Prior
to April of 1997, Senior Vice President,
Deputy General Counsel and Secretary of Van
Kampen American Capital Services, Inc. and
Van Kampen Merritt Holdings Corp. Prior to
September of 1996, Mr. Martin was Deputy
General Counsel and Secretary of McCarthy,
Crisanti & Maffei, Inc., and prior to July
of 1996, he was Senior Vice President,
Deputy General Counsel and Secretary of VSM
Inc. and VCJ Inc. Assistant Secretary of
each of the funds in the Fund Complex and
other investment companies advised by the
Advisers or their affiliates.
Weston B. Wetherell......... Assistant Secretary Vice President, Associate General Counsel
Date of Birth: 06/15/56 and Assistant Secretary of VKAC, the
Advisers, the Distributor, Van Kampen
American Capital Management, Inc. and Van
Kampen American Capital Advisors, Inc.
Prior to September of 1996, Mr. Wetherell
was Assistant Secretary of McCarthy,
Crisanti & Maffei, Inc. Assistant Secretary
of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Steven M. Hill.............. Assistant Treasurer Vice President of the Advisers. Assistant
Date of Birth: 10/16/64 Treasurer of each of the funds in the Fund
Complex and other investment companies
advised by the Advisers or their
affiliates.
Michael Robert Sullivan..... Assistant Controller Assistant Vice President of the Advisers.
Date of Birth: 03/30/33 Assistant Controller of each of the funds
in the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 64 operating funds in the Fund Complex. For purposes of the following
compensation and benefits discussion, the Fund Complex is divided into the
following three groups: the funds advised by Asset Management (the "AC Funds"),
the funds advised by Advisory Corp. excluding funds organized as series of the
Morgan Stanley Fund, Inc. (the "VK Funds") and the funds advised by Advisory
Corp. organized as series of the Morgan Stanley Fund, Inc. (the "MS Funds").
Each trustee/director who is not an affiliated person of VKAC, the Advisers, the
Distributor, ACCESS or Morgan
B-24
<PAGE> 555
Stanley Dean Witter & Co. (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 (except the money market series of the MS Funds)
provides a deferred compensation plan to its Non-Affiliated Trustees that allows
trustees/directors to defer receipt of their compensation and earn a return on
such deferred amounts. Deferring compensation has the economic effect as if the
Non-Affiliated Trustee reinvested his or her compensation into the funds. Each
fund in the Fund Complex (except the money market series of the MS Funds)
provides a retirement plan to its Non-Affiliated Trustees that provides
Non-Affiliated Trustees with compensation after retirement, provided that
certain eligibility requirements are met as more fully described below.
The trustees recently reviewed and adopted a standardized compensation and
benefits program for each fund in the Fund Complex. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes an annual retainer in
an amount equal to $50,000 per calendar year, due in four quarterly installments
on the first business day of each quarter. Payment of the annual retainer is
allocated among the funds in the Fund Complex (except the money market series of
the MS Funds) on the basis of the relative net assets of each fund as of the
last business day of the preceding calendar quarter. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes a per meeting fee from
each fund in the Fund Complex (except the money market series of the MS Funds)
in the amount of $200 per quarterly or special meeting attended by the
Non-Affiliated Trustee, due on the date of the 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.
For each AC Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from the AC
Funds includes an annual retainer in an amount equal to $35,000 per calendar
year, due in four quarterly installments on the first business day of each
calendar quarter. The AC Funds pay each Non-Affiliated Trustee a per meeting fee
in the amount of $2,000 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. Payment of the annual retainer and the regular meeting
fee is allocated among the AC Funds (i) 50% on the basis of the relative net
assets of each AC Fund to the aggregate net assets of all the AC Funds and (ii)
50% equally to each AC Fund, in each case as of the last business day of the
preceding calendar quarter. Each AC Fund which is the subject of a special
meeting of the trustees generally pays each Non-Affiliated Trustee a per meeting
fee 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.
For each VK Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from each VK
Fund includes an annual retainer 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 each VK
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 each VK 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.
For the period from July 2, 1997 up to and including December 31, 1997, the
compensation of each Non-Affiliated Trustee from the MS Funds was based
generally on the compensation amounts and methodology used by such funds prior
to their joining the current Fund Complex on July 2, 1997. Each trustee/director
was elected as a director of the MS Funds on July 2, 1997. Prior to July 2,
1997, the MS Funds were part of another fund complex (the "Prior Complex") and
the former directors of the MS Funds were paid an aggregate fee allocated among
the funds in the Prior Complex that resulted in individual directors receiving
total compensation between approximately $8,000 to $10,000 from the MS Funds
during such funds' last fiscal year.
B-25
<PAGE> 556
Under the deferred compensation plan, each Non-Affiliated Trustee generally
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 the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
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 the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
----------------------------------------------------------
AGGREGATE AGGREGATE TOTAL
YEAR FIRST PENSION OR ESTIMATED MAXIMUM COMPENSATION
APPOINTED OR AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
ELECTED TO THE BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) BOARD FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- -------------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
J. Miles Branagan 1991 $4,125 $30,328 $60,000 $111,197
Linda Hutton Heagy 1995 4,125 3,141 60,000 111,197
R. Craig Kennedy 1995 4,125 2,229 60,000 111,197
Jack E. Nelson 1995 4,125 15,820 60,000 104,322
Jerome L. Robinson* 1995 4,125 32,020 15,750 107,947
Phillip B. Rooney** 1997 3,250 0 60,000 74,697
Dr. Fernando Sisto 1973 4,125 60,208 60,000 111,197
Wayne W. Whalen 1995 4,125 10,788 60,000 111,197
</TABLE>
- ---------------
* Mr. Robinson retired from the Board of Trustees on December 31, 1997.
** Mr. Phillip B. Rooney became a member of the Board of Trustees effective
April 14, 1997 and thus does not have a full fiscal year of information to
report.
(1) Messrs. DeMartini, McDonnell and Powell, trustees of the Fund during all or
a portion of the Fund's last fiscal year, are not included in the
compensation table because they are not eligible for compensation or
retirement benefits from the Fund. Mr. McDonnell resigned as a Trustee of
the Fund, effective May 31, 1997.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Fund's fiscal year ended December 31, 1997 and
includes the deferred compensation balances from New Jersey Tax Free Income
Fund which was merged into the Municipal Income Fund in November 1997. The
details of aggregate compensation before deferral for each series, including
the Fund, are shown in Table A below. The details of amounts deferred for
each series, including the Fund, are shown in Table B below. Amounts
deferred are retained by the Fund and earn a rate of return determined by
reference to either the return on the common shares of the Fund or other
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated
B-26
<PAGE> 557
Trustee had invested in one or more funds in the Fund Complex. To the extent
permitted by the 1940 Act, each Fund may invest in securities of those funds
selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The details of cumulative deferred compensation
(including interest) for each series, including the Fund, are shown in Table
C below. The deferred compensation plan is described above the Compensation
Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for their respective fiscal years ended in 1997. The retirement
plan is described above the Compensation Table.
(4) For Mr. Robinson this is the sum of the actual annual benefits payable by
the operating investment companies in the Fund Complex as of the date of
their retirement for each year of the 10-year period since such trustee's
retirement. For the remaining trustees, this is the sum of the estimated
maximum annual benefits payable by the operating investment companies in the
Fund Complex for each year of the 10-year period commencing in the year of
such trustee's anticipated retirement. The Retirement Plan is described
above the Compensation Table. Each Non-Affiliated Trustee of the Board of
Trustees has served as a member of the Board of Trustees since he or she was
first appointed or elected in the year set forth in Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1997 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1997. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
trustees were not trustees of such investment companies. Combining the Fund
Complex with other investment companies advised by the Advisers and their
affiliates, Mr. Whalen received Total Compensation of $268,447 during the
calendar year ended December 31, 1997.
As of April 2, 1998, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.
B-27
<PAGE> 558
TABLE A
1997 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL ------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund.......... 12/31 $ 3,000 $3,000 $3,000 $ 3,000 $3,000 $2,250 $3,000 $ 3,000
Tax Free High Income Fund............. 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
California Insured Tax Free Income
Fund................................ 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
Municipal Income Fund*................ 12/31 4,125 4,125 4,125 4,125 4,125 3,250 4,125 4,125
Intermediate Term Municipal Income
Fund................................ 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
Florida Insured Tax Free Income
Fund................................ 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
New York Tax Free Income Fund......... 12/31 1,125 1,125 1,125 1,125 1,125 1,000 1,125 1,125
Trust Total......................... 20,250 20,250 20,250 20,250 20,250 15,500 20,250 20,250
</TABLE>
*Includes the deferred compensation balances from New Jersey Tax Free Income
Fund, which was merged into the Municipal Income Fund in November 1997.
TABLE B
1997 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund........ 12/31 $ 3,000 $ 3,000 $ 1,500 $ 3,000 $ 3,000 $ 1,500 $ 1,500 $ 3,000
Tax Free High Income Fund........... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
California Insured Tax Free Fund.... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Municipal Income Fund............... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Intermediate Term Municipal Income
Fund.............................. 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Florida Insured Tax Free Income
Fund.............................. 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
New York Tax Free Income Fund....... 12/31 1,125 1,125 563 1,125 1,125 875 563 1,125
New Jersey Tax Free Income Fund..... 12/31 1,125 1,125 563 1,125 1,125 875 563 1,125
Trust Total....................... 20,250 20,250 10,126 20,250 20,250 10,750 10,126 20,250
</TABLE>
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund... 12/31 $ 4,324 $ 6,482 $11,233 $15,086 $14,485 $ 1,513 $ 3,180 $12,966
Tax Free High Income Fund...... 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
California Insured Tax Free
Fund......................... 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
Municipal Income Fund*......... 12/31 5,170 7,878 14,033 19,758 18,928 1,765 8,110 17,020
Intermediate Term Municipal
Income Fund.................. 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
Florida Insured Tax Free Income
Fund......................... 12/31 4,324 6,482 6,853 10,650 10,391 1,513 1,622 9,946
New York Tax Free Income
Fund......................... 12/31 1,487 1,181 3,118 4,223 4,049 891 591 3,586
Trust Total.................. 28,277 41,469 68,936 94,975 91,308 10,221 18,369 82,416
<CAPTION>
TRUSTEE
------------------------------------------------------
FUND NAME CARUSO GAUGHAN LIPSHIE MILLER REES VERNON
--------- ------ ------- ------- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund... $ 0 $2,939 $ 0 $10,015 $ 0 $ 0
Tax Free High Income Fund...... 0 2,939 0 10,015 0 0
California Insured Tax Free
Fund......................... 0 2,939 0 10,015 0 0
Municipal Income Fund*......... 8,243 3,624 1,873 13,531 7,875 2,508
Intermediate Term Municipal
Income Fund.................. 0 2,939 0 10,015 0 0
Florida Insured Tax Free Income
Fund......................... 0 1,371 0 6,357 0 0
New York Tax Free Income
Fund......................... 0 437 0 2,561 0 0
Trust Total.................. 8,243 17,188 1,873 62,509 7,875 2,508
</TABLE>
*Includes the deferred compensation balances from New Jersey Tax Free Income
Fund, which was merged into the Municipal Income Fund in November 1997.
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-----------------------------------------------------------------------------------
FUND NAME BRANAGAN DEMARTINI HEAGY KENNEDY NELSON POWELL ROONEY SISTO WHALEN
- --------- -------- --------- ----- ------- ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............... 1995 1997 1995 1993 1984 1997 1997 1995 1984
Tax Free High Income Fund.................. 1995 1997 1995 1993 1985 1997 1997 1995 1985
California Insured Tax Free Income Fund.... 1995 1997 1995 1993 1985 1997 1997 1995 1985
Municipal Income Fund...................... 1995 1997 1995 1993 1990 1997 1997 1995 1990
Intermediate Term Municipal Income Fund.... 1995 1997 1995 1993 1993 1997 1997 1995 1993
Florida Insured Tax Free Income Fund....... 1995 1997 1995 1994 1994 1997 1997 1995 1994
New Jersey Tax Free Income Fund............ 1995 1997 1995 1994 1994 1997 1997 1995 1994
New York Tax Free Income Fund.............. 1995 1997 1995 1994 1994 1997 1997 1995 1994
</TABLE>
As of April 2, 1998, 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:
B-28
<PAGE> 559
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP
OF CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER APRIL 2, 1998 SHARES OF OWNERSHIP
-------------------------- ------------- -------- ------------
<S> <C> <C> <C>
MLPF&S for the Sole Benefit of its Customers................ 71,889 C 7.44%
ATTN Fund Administration
4800 Deer Lake Dr E FL 3
Jacksonville, FL 32246-6484
Donald L. Reid & Eleanor W. Reid JTTEN...................... 64,945 C 6.72%
1875 S. Orlando
Maitland, FL 32751-6668
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser is the Fund's investment adviser. The Adviser was incorporated as
a Delaware corporation in 1982 (and through December 31, 1987 transacted
business under the name of American Portfolio Advisory Service Inc.).
The Adviser, Van Kampen American Capital Distributors, Inc. (the
"Distributor") and ACCESS Investor Services, Inc. ("ACCESS") are wholly-owned
subsidiaries of Van Kampen American Capital, Inc. ("VKAC"), which is an indirect
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The principal office
of the Fund, the Adviser, the Distributor and VKAC is located at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management, Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending.
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
B-29
<PAGE> 560
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, 1997, 1996 and 1995, the Fund paid advisory
expenses of $4,721,648, $4,825,272 and $3,765,225, respectively.
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which Asset Management provides accounting to the
Fund. The Fund shares together with the other Van Kampen American Capital mutual
funds 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% 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, 1997, 1996 and 1995, the Fund paid expenses
of approximately $207,300, $80,200 and $51,800, respectively, representing Asset
Management's and its affiliates cost of providing accounting services.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital funds advised by the 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, 1997, 1996 and 1995, the Fund paid expenses
of approximately $25,000, $27,900 and $30,700, respectively, representing Van
Kampen American Capital's cost of providing legal services.
CUSTODIAN AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, 225 West 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 accountants for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent accountants 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
B-30
<PAGE> 561
information is only supplementary to the research efforts of the Adviser to the
Fund and still must be analyzed and reviewed by its staff, the receipt of
research information is not expected to materially reduce its expenses.
If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
described above, even if it means the Fund will have to pay a higher commission
(or, if the broker's profit is part of the cost of the security, will have to
pay a higher price for the security), than would be the case if no weight were
given to the broker's furnishing of those research services. This will be done,
however, only if, in the opinion of the Fund's Adviser, the amount of additional
commission or increased cost is reasonable in relation to the value of such
services.
In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth above to the Fund or the Adviser, (ii) have sold or are selling shares
of the Fund and (iii) may select firms that are affiliated with the Fund, the
Adviser, or its distributor and other principal underwriters.
If purchases or sales of securities of the Fund and of one or more other
investment companies or clients supervised by the Adviser are considered at or
about the same time, transactions in such securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
the Adviser, taking into account the respective sizes of the Fund and other
investment companies and clients and the amount of securities to be purchased or
sold. Although it is possible that in some cases this procedure could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned, it is also possible that the ability to participate in volume
transactions and to negotiate lower brokerage commissions will be beneficial to
the Fund.
While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the trustees of
the Trust, of which the Fund is a separate series.
The trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the SEC under the 1940 Act which requires that the commissions
paid to the Distributor and other affiliates of the Fund must be reasonable and
fair compared to the commissions, fees or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time. The rule and procedures
also contain review requirements and require the Adviser to furnish reports to
the trustees and to maintain records in connection with such reviews. After
consideration of all factors deemed relevant, the trustees will consider from
time to time whether the advisory fee for the Fund will be reduced by all or a
portion of the brokerage commission given to affiliated brokers.
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.
During the year ended December 31, 1997, the Fund paid $0 in brokerage
commissions on transactions totalling $0 to brokers selected primarily on the
basis of research services provided to the Adviser. The negotiated commission
paid to an affiliated broker on any transaction would be comparable to that
payable to a non-affiliated broker in a similar transaction.
Effective October 31, 1996, Morgan Stanley Group Inc. ("Morgan Stanley")
became an affiliate of the Adviser. Effective May 31, 1997, Dean Witter Discover
& Co. ("Dean Witter") became an affiliate of the Adviser. The negotiated
commission paid to an affiliated broker on any transaction would be comparable
to that payable to a non-affiliated broker in a similar transaction.
B-31
<PAGE> 562
The Fund paid the following commissions to these brokers during the periods
shown:
<TABLE>
<CAPTION>
AFFILIATED BROKERS
------------------
MORGAN DEAN
BROKERS STANLEY WITTER
-------- ------- -------
<S> <C> <C> <C>
Fiscal year 1995....................................... $ 0 N/A N/A
Fiscal year 1996....................................... $ 0 0 N/A
Fiscal year 1997....................................... $868,930 $ 0 $ 0
Fiscal year 1997 Percentages:
Commissions with affiliate to total commissions...... -- N/A% N/A%
Value of brokerage transactions with affiliate to
total transactions................................ -- N/A% N/A%
</TABLE>
TAX STATUS OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal 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. VKAC
manages or supervises more than $60 billion in mutual funds, closed-end funds
and unit investment trusts -- assets which have been entrusted to VKAC in more
than 2 million investor accounts. VKAC has one of the largest research teams
(outside of the rating agencies) in the country. Each of our high yield
analysts, based either in San Francisco, Chicago, Houston or Boston, has the
responsibility to cover a specific region of the country. This regional focus
enables each high yield analyst to provide more specialized coverage of the
market and alert the portfolio manager to issues of local importance.
Shares of the Fund are offered on a continuous basis through Van Kampen
American Capital Distributors, Inc. ("the Distributor"). The Distributor is a
wholly owned subsidiary of Van Kampen American Capital, Inc. ("VKAC"), which is
an indirect wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The
principal office of the Fund, the Adviser, the Distributor and VKAC is located
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc. an investment
adviser, Morgan Stanley & Co. Incorporated, a registered broker-dealer and
investment adviser, and Morgan Stanley International, are engaged in a wide
range of financial services. Their principal businesses include securities
underwriting, distribution and trading; merger, acquisition, restructuring and
other corporate finance advisory activities; merchant banking; stock brokerage
and research services; credit services; asset management; trading of futures,
options, foreign
B-32
<PAGE> 563
exchange, commodities and swaps (involving foreign exchange, commodities,
indices and interest rates); real estate advice, financing and investing; and
global custody, securities clearance services and securities lending.
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.
Total underwriting commissions on the sale of shares of the Fund for the last
three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
AMOUNTS
TOTAL UNDERWRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------------ --------------
<S> <C> <C>
Fiscal Year Ended December 31, 1995......................... $1,312,992 $164,972
Fiscal Year Ended December 31, 1996......................... $1,088,499 $125,602
Fiscal Year Ended December 31, 1997......................... $ 939,551 $111,895
</TABLE>
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 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 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
B-33
<PAGE> 564
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 fiscal year ending December 31, 1997, the Fund's aggregate expenses
under the Class A Plan were $1,749,575, or .24% of the Class A shares' average
net assets. For the fiscal year ended December 31, 1997, the Fund's aggregate
expenses under the Class B Plan were $1,986,552, or 1.00%, of the Class B
shares' average net assets. Such expenses were paid to reimburse the Distributor
for the following payments: $1,418,231 for commissions and transaction fees paid
to financial intermediaries in respect of sales of Class B shares of the Fund
and $568,321 for fees paid to financial intermediaries for servicing Class B
shareholders and administering the Class B Plan. For the fiscal year ended
December 31, 1997, the Fund's aggregate expenses under the Class C Plan were
$112,863 or 1.00% of the Class C shares' average net assets. Such expenses were
paid to reimburse the Distributor for the following payments: $24,469 for the
commissions and transactions fees paid to financial intermediaries in respect of
sales of Class C shares of the Fund and $88,394 for fees paid to financial
intermediaries for servicing Class C shareholders and administering the Class C
Plan.
TRANSFER AGENT
During the fiscal years ended December 31, 1995, 1996 and 1997, ACCESS,
shareholder service agent and dividend disbursing agent for the Fund, received
fees aggregating approximately $379,500, $892,000 and $649,000, respectively,
for these services. The transfer agency prices are determined through
negotiations with the Fund's Board of Trustees and are based on competitive
market benchmarks.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (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
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
B-34
<PAGE> 565
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. 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,
1997 was 3.96%; (ii) the 5 year period ended December 31, 1997 was 5.61%; (iii)
the approximately seven year, five month period from August 1, 1990 (the
commencement of investment operations of the Fund) through December 31, 1997 was
7.28%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending December 30, 1997 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.45%. The tax-equivalent yield with
respect to Class A Shares for the 30 day period ending December 31, 1997
(Calculated in the manner described in The Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 6.95%. The Fund's current
distribution rate with respect to the Class A Shares for the month ending
December 31, 1997 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 5.11%. The Fund's taxable equivalent
distribution rate with respect to the Class A Shares for the month ending
December 31, 1997 was 7.98%
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 68.50%.
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
the end of the current period was 76.90%.
B-35
<PAGE> 566
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, 1997 was 4.27%;
(ii) the five year period ended December 31, 1997 was 5.61%; and (iii) the
approximately five year, five month period of August 24, 1992 (commencement of
distribution) through December 31, 1997 was 5.67%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending December 31, 1997 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.87%. The tax-equivalent yield with
respect to Class B Shares for the 30 day period ending December 31, 1997
(Calculated in the manner described in The Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 6.05%. The Fund's current
distribution rate with respect to the Class B Shares for the month ending
December 31, 1997 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 4.64%. The Fund's taxable equivalent
distribution rate with respect to the Class B Shares for the month ending
December 31, 1997 was 7.25%
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 34.42%.
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 35.42%.
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, 1997 was 7.34% and
(ii) the approximately four year, five month period of August 13, 1993
(commencement of distribution) through December 31, 1997 was 4.80%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending December 31, 1997 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.86%. The tax-equivalent yield with
respect to Class C Shares for the 30 day period ending December 31, 1997
(calculated in the manner described in the Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 6.03%. The Fund's current
distribution rate with respect to the Class C Shares for the month ending
December 31, 1997 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 4.65%. The Fund's taxable equivalent
distribution rate with respect to the Class C Shares for the month ending
December 31, 1997 was 7.27%
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 22.84%.
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 22.84%.
B-36
<PAGE> 567
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1997, 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, 1997, 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,
1997, 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 4, 1998
B-37
<PAGE> 568
PORTFOLIO OF INVESTMENTS
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS 103.6%
ALABAMA 1.6%
$ 2,100 Alabama St Indl Dev Auth Rev UNR-ROHN Inc Expansion Proj.... 7.500% 09/15/11 $ 2,213,547
3,000 Alabama Wtr Pollutn Ctl Auth Revolving Fund Ln Ser A (AMBAC
Insd)....................................................... 6.750 08/15/17 3,365,490
700 Bessemer, AL Indl Dev Brd ROHN Inc Proj..................... 9.000 09/15/01 752,878
1,750 Bessemer, AL Indl Dev Brd ROHN Inc Proj..................... 9.500 09/15/11 2,167,777
1,000 Mobile, AL Indl Dev Brd Solid Waste Disp Rev Mobile Energy
Svcs Co Proj Rfdg........................................... 6.950 01/01/20 1,105,230
1,000 Montgomery, AL Med Clinic Brd Jackson Hosp & Clinic (AMBAC
Insd)....................................................... 5.875 03/01/16 1,073,290
5,150 West Jefferson Cnty, AL Amusement & Pub Pk Auth First Mtg
Visionland Proj............................................. 8.000 12/01/26 5,429,851
--------------
16,108,063
--------------
ALASKA 0.7%
2,500 Alaska Energy Auth Pwr Rev Bradley Lake Proj Ser 1 (BIGI
Insd)....................................................... 6.250 07/01/21 2,574,500
1,000 Alaska Indl Dev and Expt Auth Pwr Rev Upper Lynn Canal Regl
Pwr......................................................... 5.700 01/01/12 997,230
1,800 Alaska Indl Dev and Expt Auth Pwr Rev Upper Lynn Canal Regl
Pwr......................................................... 5.875 01/01/32 1,814,490
1,000 Valdez, AK Marine Term Rev Sohio Pipeline Rfdg.............. 7.125 12/01/25 1,124,630
--------------
6,510,850
--------------
ARIZONA 2.0%
1,000 Maricopa Cnty, AZ Indl Dev Auth Multi-Family Hsg Rev Rfdg... 6.500 07/01/09 1,074,920
625 Pima Cnty, AZ Indl Dev Auth Single Family Mtg Rev (GNMA
Collateralized)............................................. 6.625 11/01/14 663,294
5,220 Pinal Cnty, AZ Sch Dist No 8 Mammoth Ser A.................. 9.500 07/01/10 6,070,495
500 Scottsdale, AZ Indl Dev Auth Rev First Mtg Westminster Vlg
Ser A Rfdg.................................................. 8.250 06/01/15 562,700
1,875 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp Ser A Rfdg
(AMBAC Insd)................................................ 6.000 09/01/12 2,080,219
1,750 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp Ser A Rfdg
(AMBAC Insd)................................................ 6.125 09/01/17 1,943,882
7,000 Tucson, AZ Arpt Auth Inc Spl Fac Rev Lockheed Aermod Cent
Inc......................................................... 8.700 09/01/19 7,871,290
--------------
20,266,800
--------------
ARKANSAS 0.9%
5,355 Dogwood Addition PRD Muni Ppty Owners Multi-Purp Impt Dist
No 8 AR Impt Ser A (e)...................................... 7.500 01/31/06 5,140,800
5,470 Dogwood Addition PRD Muni Ppty Owners Multi-Purp Impt Dist
No 8 AR Impt Ser B (e)...................................... 7.500 01/31/06 1,641,000
2,000 Jackson Cnty, AR Hlthcare Fac Brd First Mtg Hosp Rev Newport
Hosp & Clinic Inc........................................... 7.375 11/01/11 2,063,860
--------------
8,845,660
--------------
CALIFORNIA 6.8%
5,230 California Edl Fac Auth Rev College of Osteopathic Med
Pacific (Prerefunded @ 06/01/03)............................ 7.500 06/01/18 6,062,041
2,880 California Edl Fac Auth Rev Univ of La Verne................ 6.300 04/01/09 3,075,869
21,785 California Statewide Cmntys Dev Auth Spl Fac United Airls... 5.625 10/01/34 21,943,159
4,285 Delano, CA Ctfs Partn Ser A................................. 9.250 01/01/22 5,034,404
2,660 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd)....... * 09/01/10 1,350,668
5,875 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd)....... * 09/01/11 2,770,709
3,890 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd)....... * 09/01/13 1,597,234
5,430 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd)....... * 09/01/14 2,075,129
3,500 Escondido, CA Union High Sch Dist Cap Apprec (MBIA Insd).... * 11/01/19 1,141,035
5,000 Escondido, CA Union High Sch Dist Cap Apprec (MBIA Insd).... * 11/01/20 1,548,500
925 Fairfield, CA Hsg Auth Mtg Rev Creekside Estates Proj
Rfdg........................................................ 7.875 02/01/15 963,082
8,075 Los Angeles, CA Elec Plant Rev Rfdg (MBIA Insd)............. 4.750 11/15/19 7,694,344
1,000 Madera Cnty, CA Ctfs Partn Vly Children's Hosp (MBIA
Insd)....................................................... 6.125 03/15/23 1,092,750
2,825 Midpeninsula Regl Dist CA Fin Auth Rev (AMBAC Insd)......... * 09/01/15 1,130,847
1,155 Midpeninsula Regl Open Space CA (AMBAC Insd)................ * 09/01/19 367,937
1,265 Midpeninsula Regl Open Space CA (AMBAC Insd)................ * 09/01/22 341,487
1,380 Midpeninsula Regl Open Space CA (AMBAC Insd)................ * 09/01/25 316,144
900 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract
Rev (FSA Insd).............................................. * 06/01/10 486,270
800 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract
Rev (FSA Insd).............................................. * 06/01/11 405,992
700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract
Rev (FSA Insd).............................................. * 06/01/12 335,363
700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract
Rev (FSA Insd).............................................. * 06/01/13 315,847
</TABLE>
See Notes to Financial Statements
B-38
<PAGE> 569
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALIFORNIA (CONTINUED)
$ 700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract
Rev (FSA Insd).............................................. * 06/01/14 $ 297,549
500 Norco, CA Swr & Wtr Rev Rfdg................................ 7.200% 10/01/19 554,265
4,000 Riverside Cnty, CA Air Force Vlg West Inc Ser A Rfdg........ 8.125 06/15/20 4,397,560
2,000 Santa Ana, CA Cmnty Redev Agy Tax Alloc Ser B Rfdg.......... 7.500 09/01/16 2,121,940
--------------
67,420,125
--------------
COLORADO 5.7%
2,840 Adams Cnty, CO Single Family Mtg Rev Ser A.................. 8.875 08/01/11 3,939,620
3,985 Adams Cnty, CO Single Family Mtg Rev Ser A.................. 8.875 08/01/12 5,675,437
10,500 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy Rev E-470Proj Ser
C (Prerefunded @ 08/31/05).................................. * 08/31/26 1,561,455
775 Arapahoe Cnty, CO Single Family Mtg Rev Ser A (GNMA
Collateralized)............................................. 8.375 08/01/19 798,738
500 Berry Creek Metro Dist CO Rfdg & Impt....................... 8.250 12/01/11 554,660
500 Boulder Cnty, CO Indl Dev Rev Boulder Med Cent Proj......... 8.875 01/01/17 514,780
1,000 Bowles Metro Dist CO........................................ 7.750 12/01/15 1,059,650
2,000 Denver, CO City & Cnty Arpt Rev Ser A....................... 7.000 11/15/99 2,101,160
7,810 Denver, CO City & Cnty Arpt Rev Ser A....................... 8.500 11/15/23 8,775,238
4,570 Denver, CO City & Cnty Arpt Rev Ser A....................... 8.000 11/15/25 5,047,793
740 Denver, CO City & Cnty Arpt Rev Ser A (Prerefunded @
11/15/00)................................................... 8.500 11/15/23 840,988
430 Denver, CO City & Cnty Arpt Rev Ser A (Prerefunded @
11/15/00)................................................... 8.000 11/15/25 482,916
2,200 Denver, CO City & Cnty Spl Fac Arpt Rev United Airls Proj
Ser A....................................................... 6.875 10/01/32 2,412,960
1,000 Edgewater, CO Redev Auth Tax Increment Rev.................. 6.750 12/01/08 1,098,240
1,320 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (MBIA
Insd)....................................................... * 12/15/14 531,260
1,420 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (MBIA
Insd)....................................................... * 12/15/15 536,618
1,420 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (MBIA
Insd)....................................................... * 12/15/16 501,558
1,330 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (MBIA
Insd)....................................................... * 12/15/18 412,420
3,690 Jefferson Cnty, CO Residential Mtg Rev...................... 11.500 09/01/12 6,259,089
5,000 Meridian Metro Dist CO Peninsular & Oriental Steam Navig Co
Rfdg........................................................ 7.500 12/01/11 5,513,750
2,000 Northern Metro Dist CO Adams Cnty Rfdg...................... 6.500 12/01/16 2,036,900
5,000 University of CO Hosp Auth Hosp Rev Ser A (Prerefunded @
11/15/02) (AMBAC Insd)...................................... 6.400 11/15/22 5,561,000
--------------
56,216,230
--------------
CONNECTICUT 1.4%
5,005 Connecticut St Hlth & Edl Fac Auth Rev Nursing Home Pgm
AHF/Hartford................................................ 7.125 11/01/14 5,767,111
2,530 Mashantucket Western Pequot Tribe CT Spl Rev Ser A (a)...... 6.400 09/01/11 2,825,555
2,470 Mashantucket Western Pequot Tribe CT Spl Rev Ser A
(Prerefunded @ 09/01/07).................................... 6.400 09/01/11 2,845,835
495 Mashantucket Western Pequot Tribe CT Spl Rev Ser A 144A --
Private Placement (a)....................................... 6.500 09/01/06 566,433
505 Mashantucket Western Pequot Tribe CT Spl Rev Ser A 144A --
Private Placement (a)....................................... 6.500 09/01/06 566,383
1,500 Mashantucket Western Pequot Tribe CT Spl Rev Ser B, 144A --
Private Placement (a)....................................... 5.750 09/01/27 1,535,220
--------------
14,106,537
--------------
DISTRICT OF COLUMBIA 0.3%
2,500 District of Columbia Rev Natl Pub Radio Ser A............... 7.700 01/01/23 2,750,350
--------------
FLORIDA 5.1%
430 Atlantic Beach, FL Rev Fleet Landing Proj Ser A Rfdg &
Impt........................................................ 7.500 10/01/02 451,737
500 Atlantic Beach, FL Rev Fleet Landing Proj Ser A Rfdg &
Impt........................................................ 7.875 10/01/08 568,335
1,565 Broward Cnty, FL Res Recovery Rev Waste Energy North Proj... 7.950 12/01/08 1,706,726
2,045 Broward Cnty, FL Res Recovery Rev Waste Energy South Proj... 7.950 12/01/08 2,230,195
24,000 Dade Cnty, FL Gtd Entitlement Rev Cap Apprec Ser A Rfdg
(MBIA Insd)................................................. * 02/01/18 7,838,640
14,465 Dade Cnty, FL Spl Oblig Cap Apprec Ser B Rfdg (AMBAC
Insd)....................................................... * 10/01/21 4,014,616
560 Florida St Brd Edl Cap Outlay Pub Edl Ser A Rfdg............ 7.250 06/01/23 606,536
590 Florida St Brd Edl Cap Outlay Pub Edl Ser A Rfdg
(Prerefunded @ 06/01/00).................................... 7.250 06/01/23 645,053
6,500 Florida St Muni Pwr Agy Rev (AMBAC Insd).................... 4.500 10/01/27 5,878,145
2,255 Greater Orlando Aviation Auth Orlando, FL Arpt Fac Rev...... 8.375 10/01/16 2,364,413
</TABLE>
See Notes to Financial Statements
B-39
<PAGE> 570
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FLORIDA (CONTINUED)
$ 2,875 Martin Cnty, FL Indl Dev Auth Indl Dev Rev Indiantown
Cogeneration Proj A Rfdg.................................... 7.875% 12/15/25 $ 3,365,101
1,500 Orange Cnty, FL Hlth Fac Auth Rev First Mtg Orlando Lutheran
Twr Rfdg.................................................... 8.750 07/01/26 1,763,400
595 Orange Cnty, FL Tourist Dev Tax Rev (AMBAC Insd)............ 6.000 10/01/16 619,669
405 Orange Cnty, FL Tourist Dev Tax Rev (Prerefunded @ 10/01/00)
(AMBAC Insd)................................................ 6.000 10/01/16 426,080
5,000 Saint John's River Wtr Mgmt Dist FL Land Acquisition Rev
Rfdg (FSA Insd)............................................. 5.125 07/01/16 5,023,500
4,185 Sarasota Cnty, FL Hlth Fac Auth Rev Hlthcare
Kobernick/Meadow Pk (Prerefunded @ 07/01/02) (b)............ 10.000 07/01/22 5,222,671
5,000 Sarasota Cnty, FL Public Hosp Brd Miles Sarasota Mem Hosp
Proj Ser A (MBIA Insd)...................................... * 10/01/21 4,900,000
1,000 Tampa Palms, FL Open Space & Transn Cmnty Dev Dist Rev Cap
Impt Area 7 Proj............................................ 7.500 05/01/18 1,052,730
900 Tampa Palms, FL Open Space & Transn Cmnty Dev Dist Rev Cap
Impt Area 7 Proj............................................ 8.500 05/01/17 992,556
670 Tampa, FL Cap Impt Pgm Rev Ser A............................ 8.250 10/01/18 689,604
--------------
50,359,707
--------------
GEORGIA 0.5%
3,000 Atlanta, GA Arpt Fac Rev.................................... 6.250 01/01/21 3,157,590
1,500 Georgia Muni Elec Auth Pwr Rev Ser X (MBIA Insd)............ 6.500 01/01/20 1,810,650
--------------
4,968,240
--------------
HAWAII 2.7%
4,055 Hawaii St Arpts Sys Rev Ser 1993 (MBIA Insd)................ 6.350 07/01/07 4,495,089
14,100 Hawaii St Dept Budget & Fin Spl Purp Rev Hawaiian Elec Co
(MBIA Insd)................................................. 6.550 12/01/22 15,542,148
2,350 Hawaii St Dept Tran Spl Fac Rev Continental Airls Inc....... 9.700 06/01/20 2,632,822
1,475 Hawaii St Harbor Cap Impt Rev (FGIC Insd)................... 6.350 07/01/07 1,635,082
1,560 Hawaii St Harbor Cap Impt Rev (FGIC Insd)................... 6.400 07/01/08 1,733,082
500 Hawaii St Harbor Cap Impt Rev (MBIA Insd)................... 7.000 07/01/17 537,825
--------------
26,576,048
--------------
ILLINOIS 11.6%
4,425 Bedford Park, IL Tax Increment Rev Sr Lien Bedford City Sq
Proj........................................................ 9.250 02/01/12 5,107,955
1,350 Bridgeview, IL Tax Increment Rev Rfdg....................... 9.000 01/01/11 1,566,648
6,790 Broadview, IL Tax Increment Rev Sr Lien..................... 8.250 07/01/13 7,706,650
1,000 Chicago, IL Gas Supply Rev Ser A............................ 8.100 05/01/20 1,100,120
1,000 Chicago, IL Metro Wtr Reclamation Dist Gtr Chicago.......... 7.000 01/01/11 1,220,200
4,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc... 8.500 05/01/18 4,404,040
4,865 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc
Ser B....................................................... 8.950 05/01/18 5,535,640
1,945 Chicago, IL Single Family Mtg Rev Ser A (GNMA
Collateralized)............................................. 7.000 09/01/27 2,171,028
500 Chicago, IL Tax Increment Alloc San Drain & Ship Canal Ser
A........................................................... 7.375 01/01/05 530,715
1,000 Chicago, IL Tax Increment Alloc San Drain & Ship Canal Ser
A........................................................... 7.750 01/01/14 1,095,420
1,000 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd)................................................. 8.750 01/01/07 1,308,650
1,000 Crestwood, IL Tax Increment Rev Rfdg........................ 7.250 12/01/08 1,069,750
1,600 DuPage Cnty, IL Fst Presv Dist.............................. 5.000 10/01/17 1,586,000
1,200 Hodgkins, IL Tax Increment.................................. 9.500 12/01/09 1,418,004
3,300 Hodgkins, IL Tax Increment (Prerefunded @ 12/01/01)......... 9.500 12/01/09 4,044,612
1,500 Hodgkins, IL Tax Increment Ser A Rfdg....................... 7.625 12/01/13 1,650,630
9,310 Hoffman Estates, IL Tax Increment Rev Econ Dev Proj Area
Rfdg (AMBAC Insd)........................................... 5.000 11/15/07 9,540,609
5,000 Hoffman Estates, IL Tax Increment Rev Econ Dev Proj Area
Rfdg (AMBAC Insd)........................................... 5.150 11/15/08 5,135,000
1,500 Huntley, IL Increment Alloc Rev Huntley Redev Proj Ser A.... 8.500 12/01/15 1,671,660
1,000 Illinois Dev Fin Auth Elderly Hsg Rev Libertyville Towers
Ser A....................................................... 6.500 09/01/09 1,055,380
605 Illinois Dev Fin Auth Rev Cmnty Fac Clinic Altgeld Proj..... 8.000 11/15/06 676,202
1,000 Illinois Edl Fac Auth Rev Lake Forest College (FSA Insd).... 6.750 10/01/21 1,098,050
2,575 Illinois Edl Fac Auth Rev Lewis Univ Rfdg................... 6.000 10/01/24 2,634,508
1,000 Illinois Edl Fac Auth Rev Northwestern Univ Ser 1985
(Prerefunded @ 12/01/01).................................... 6.900 12/01/21 1,116,420
1,000 Illinois Edl Fac Auth Rev Peace Mem Ministries Proj......... 7.500 08/15/26 1,070,200
2,000 Illinois Hlth Fac Auth Rev Ancilla Sys Inc Ser B (MBIA
Insd)....................................................... 5.250 07/01/22 1,986,360
</TABLE>
See Notes to Financial Statements
B-40
<PAGE> 571
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 3,000 Illinois Hlth Fac Auth Rev Sherman Hlth Sys (AMBAC Insd).... 5.250% 08/01/17 $ 2,999,850
4,100 Illinois Hlth Fac Auth Rev Fairview Oblig Group Proj A
(Prerefunded @ 10/01/02).................................... 9.500 10/01/22 5,062,680
2,000 Illinois Hlth Fac Auth Rev Fairview Oblig Group Proj B
(Prerefunded @ 10/01/02).................................... 9.000 10/01/22 2,429,540
1,500 Illinois Hlth Fac Auth Rev Fairview Oblig Group Ser A
Rfdg........................................................ 7.400 08/15/23 1,663,005
505 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D.......... 9.500 11/15/15 597,657
425 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D
(Prerefunded @ 11/15/00).................................... 9.500 11/15/15 494,220
1,000 Illinois Hlth Fac Auth Rev IL Masonic Med Cent Ser B
(Prerefunded @ 10/01/99).................................... 7.700 10/01/19 1,081,300
1,000 Illinois Hlth Fac Auth Rev Mem Hosp......................... 7.250 05/01/22 1,085,190
1,000 Illinois Hlth Fac Auth Rev Northwestern Mem Hosp............ 6.750 08/15/11 1,098,450
2,600 Illinois Hlth Fac Auth Rev Utd Med Cent (Prerefunded @
07/01/03)................................................... 8.375 07/01/12 3,102,138
4,850 Illinois Hsg Dev Auth Residential Mtg Rev (Inverse Fltg).... 9.319 11/28/97 5,486,563
1,250 Mill Creek Wtr Reclamation Dist IL Sewage Rev............... 8.000 03/01/10 1,408,300
750 Mill Creek Wtr Reclamation Dist IL Wtrwrks Rev.............. 8.000 03/01/10 844,980
1,000 Palatine, IL Tax Increment Rev Rand/Dundee Cent Proj........ 7.750 01/01/17 1,049,170
2,800 Regional Tran Auth IL Ser A (AMBAC Insd).................... 8.000 06/01/17 3,816,960
7,500 Robbins, IL Res Recovery Rev................................ 8.375 10/15/16 7,828,275
3,000 Robbins, IL Res Recovery Rev Recreation Robbins Res Partn
Ser B....................................................... 8.375 10/15/16 3,131,310
820 Round Lake Beach, IL Tax Increment Rev Rfdg................. 7.200 12/01/04 891,151
500 Round Lake Beach, IL Tax Increment Rev Rfdg................. 7.500 12/01/13 545,580
1,575 Saint Charles, IL Indl Dev Rev Tri-City Cent Proj........... 7.500 11/01/13 1,667,122
1,240 Southern IL Univ Rev Hsg & Aux Fac Sys Ser A (MBIA Insd).... 5.800 04/01/10 1,328,375
--------------
115,112,267
--------------
INDIANA 2.4%
1,000 East Chicago, IN Exempt Fac Inland Steel Co Proj No 14...... 6.700 11/01/12 1,124,860
2,750 Elkhart Cnty, IN Hosp Auth Rev Elkhart Genl Hosp Inc........ 7.000 07/01/12 3,041,417
1,650 Indiana Bond Bank Spl Pgm Hendricks Redev Ser B............. 6.125 02/01/17 1,785,943
3,125 Indiana Bond Bank Spl Pgm Hendricks Redev Ser B............. 6.200 02/01/23 3,374,625
1,000 Indiana Hlth Fac Fin Auth Rev Ancilla Sys Inc Oblig Grp
(MBIA Insd)................................................. 5.250 07/01/17 1,000,000
7,920 Indiana St Dev Fin Auth Environmental USX Corp Proj Rfdg &
Impt........................................................ 6.250 07/15/30 8,470,757
550 Indianapolis, IN Loc Pub Impt Bond Bank Ser D............... 6.750 02/01/14 660,924
450 Indianapolis, IN Loc Pub Impt Bond Bank Ser D............... 6.500 02/01/22 450,770
1,075 Marion Cnty, IN Convention & Rectl Cap Apprec Sub Lease Rent
B (MBIA Insd) (c)........................................... * 06/01/12 520,848
1,000 Marion Cnty, IN Convention & Rectl Cap Apprec Sub Lease Rent
B (MBIA Insd) (c)........................................... * 06/01/16 382,970
1,000 Marion Cnty, IN Hosp Auth Hosp Fac Rev...................... 6.500 09/01/13 1,119,840
140 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B.... * 06/30/11 51,145
140 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B.... * 06/30/12 47,377
135 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B.... * 06/30/13 42,320
130 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B.... * 06/30/14 37,751
130 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B.... * 06/30/15 35,003
135 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B.... * 06/30/16 33,672
225 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B.... * 06/30/17 51,986
1,500 Wells Cnty, IN Hosp Auth Rev Caylor-Nickel Med Cent Inc
Rfdg........................................................ 8.500 04/15/03 1,700,880
--------------
23,933,088
--------------
IOWA 1.0%
2,045 Iowa Fin Auth Hosp Fac Rev Trinity Regl Hosp Proj (FSA
Insd)....................................................... 6.000 07/01/07 2,270,830
2,500 Iowa Fin Auth Hosp Fac Rev Trinity Regl Hosp Proj (FSA
Insd)....................................................... 5.750 07/01/17 2,660,225
2,000 Iowa Fin Auth Multi-Family Rev Hsg Hamlet Apts Proj A Rfdg
(GNMA Collateralized)....................................... 6.150 05/01/32 2,099,760
2,855 Muscatine, IA Elec Rev Rfdg................................. 5.000 01/01/08 2,855,371
--------------
9,886,186
--------------
</TABLE>
See Notes to Financial Statements
B-41
<PAGE> 572
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
KANSAS 0.1%
$ 1,000 Newton, KS Hosp Rev Newton Hlthcare Corp Ser A.............. 7.750% 11/15/24 $ 1,125,060
--------------
KENTUCKY 2.2%
1,000 Bowling Green, KY Indl Dev Rev Coltec Inds Inc Rfdg......... 6.550 03/01/09 1,063,900
10,950 Jefferson Cnty, KY Cap Projs Corp Rev Muni Multi-Lease Ser
A........................................................... * 08/15/14 3,519,877
4,000 Jefferson Cnty, KY Hosp Rev Alliant Hlth Sys Proj (Inverse
Fltg) (MBIA Insd)........................................... 8.566 10/09/08 4,780,000
1,250 Kentucky Econ Dev Fin Auth Med Cent Rev Ashland Hosp Corp
Ser A Rfdg & Impt (FSA Insd)................................ 6.125 02/01/12 1,362,038
1,490 Kentucky Hsg Corp Hsg Rev Ser D (FHA/VA Gtd)................ 7.450 01/01/23 1,594,702
8,000 Kentucky St Tpk Auth Res Recovery Rd Rev Ser A.............. 5.000 07/01/08 8,001,040
1,000 Kentucky St Tpk Auth Toll Rd Rev Ser A...................... 5.500 07/01/07 1,005,680
--------------
21,327,237
--------------
LOUISIANA 0.7%
500 Hodge, LA Util Rev Stone Container Corp Ser 1990............ 9.000 03/01/10 544,780
1,990 Lafayette, LA Econ Dev Auth Indl Dev Rev Advanced Polymer
Proj Ser 1985............................................... 10.000 11/15/04 2,530,185
1,000 Lake Charles, LA Harbor & Terminal Dist Port Fac Rev
Trunkline Rfdg.............................................. 7.750 08/15/22 1,156,110
425 Louisiana Pub Fac Auth Rev Indl Dev Beverly Enterprises Inc
Rfdg........................................................ 8.250 09/01/08 473,837
900 Port New Orleans, LA Indl Dev Rev Avondale Inds Inc Proj
Rfdg........................................................ 8.250 06/01/04 996,030
1,400 West Feliciana Parish, LA Pollutn Ctl Rev Gulf States Util
Co Proj Ser A............................................... 7.500 05/01/15 1,572,718
--------------
7,273,660
--------------
MARYLAND 0.2%
1,500 Baltimore Cnty, MD Pollutn Ctl Rev Bethlehem Steel Corp Proj
Ser A Rfdg.................................................. 7.550 06/01/17 1,672,665
--------------
MASSACHUSETTS 3.6%
1,000 Boston, MA Rev Boston City Hosp Ser A (FHA Gtd) (Prerefunded
@ 08/15/00)................................................. 7.625 02/15/21 1,105,980
1,455 Massachusetts Edl Ln Auth Rev Edl Ln Rev Muni Forwards Issue
E Ser A (AMBAC Insd)........................................ 7.000 01/01/10 1,555,191
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 4,006,254
1,000 Massachusetts St Hsg Fin Agy Multi-Family Residential Hsg
Ser A....................................................... 8.750 08/01/08 1,022,180
1,500 Massachusetts St Indl Fin Agy Hillcrest Edl Cent Inc Proj... 8.450 07/01/18 1,697,700
5,000 Massachusetts St Indl Fin Agy Rev First Mtg Reeds Landing
Proj........................................................ 8.625 10/01/23 5,639,550
980 Massachusetts St Indl Fin Agy Rev Gtr Lynn Mental Hlth Assoc
Proj........................................................ 8.800 06/01/14 1,171,649
1,000 Massachusetts St Indl Fin Agy Rev Wtr Treatment American
Hingham..................................................... 6.600 12/01/15 1,088,520
5,000 Massachusetts St Turnpike Auth Metro Ser B (MBIA Insd)...... 5.125 01/01/37 4,921,200
11,000 Massachusetts St Wtr Resources Auth Genl Ser D Rfdg (MBIA
Insd)....................................................... 5.000 08/01/24 10,762,070
2,000 Plymouth Cnty, MA Ctfs Partn Ser A.......................... 7.000 04/01/22 2,255,820
--------------
35,226,114
--------------
MICHIGAN 2.9%
1,000 Detroit, MI Area No 1 Ser A (Prerefunded @ 07/01/99)........ 7.600 07/01/10 1,071,900
3,500 Detroit, MI Downtown Dev Auth Tax Increment Rev............. 6.200 07/01/17 3,798,165
1,000 Detroit, MI Local Dev Fin Auth Ser C........................ 6.850 05/01/21 1,027,080
2,000 Grand Traverse Cnty, MI Hosp Fin Auth Hosp Rev Munson
Hlthcare Ser A Rfdg (AMBAC Insd)............................ 6.250 07/01/12 2,167,060
1,750 Michigan St Hosp Fin Auth Rev Mercy Hlth Svcs Ser R (AMBAC
Insd)....................................................... 5.375 08/15/26 1,764,682
5,600 Michigan St Hsg Dev Auth Rental Hsg Rev Ser B (Embedded
Swap) (AMBAC Insd).......................................... 4.510 04/01/04 5,625,480
11,000 Michigan St Strategic Fd Ltd Oblig Rev Great Lakes Pulp &
Fibre Proj (d) (e).......................................... 10.250 12/01/16 6,105,000
4,500 Michigan St Strategic Fd Solid Waste Disp Rev Genesee Pwr
Station Proj................................................ 7.500 01/01/21 4,898,340
1,000 Mount Clemens, MI Hsg Corp Multi-Family Rev Hsg Ser A Rfdg
(FHA Gtd)................................................... 6.600 06/01/13 1,065,290
1,000 Royal Oak, MI Hosp Fin Auth Hosp Rev Ser D (Prerefunded @
01/01/01)................................................... 6.750 01/01/20 1,092,540
--------------
28,615,537
--------------
MINNESOTA 0.4%
1,000 North Saint Paul, MN Multi-Family Rev Hsg Cottages North
Saint Paul Rfdg............................................. 9.250 02/01/22 1,076,610
2,000 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser A Rfdg...... 5.000 01/01/16 1,955,900
1,250 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser C........... 5.000 01/01/17 1,217,113
--------------
4,249,623
--------------
</TABLE>
See Notes to Financial Statements
B-42
<PAGE> 573
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MISSISSIPPI 0.7%
$ 5,000 Lowndes Cnty, MS Solid Waste Disp & Pollutn Ctl Rev
Weyerhaeuser Co Rfdg (Inverse Fltg)......................... 8.290% 04/01/22 $ 6,120,550
1,155 Ridgeland, MS Urban Renewal Rev the Orchard Ltd Proj Ser A
Rfdg........................................................ 7.750 12/01/15 1,262,380
--------------
7,382,930
--------------
MISSOURI 1.6%
2,835 Kansas City, MO Port Auth Fac Riverfront Park Proj Ser A.... 5.750 10/01/06 3,039,999
2,000 Lees Summit, MO Indl Dev Auth Hlth Fac Rev John Knox Vlg
Proj Rfdg & Impt............................................ 7.125 08/15/12 2,144,200
1,500 Missouri St Econ Dev Export & Infrastructure Brd Med Office
Fac Rev (MBIA Insd)......................................... 7.250 06/01/04 1,733,310
3,920 Missouri St Econ Dev Export & Infrastructure Brd Med Office
Fac Rev (MBIA Insd)......................................... 7.250 06/01/14 4,502,629
1,000 Missouri St Hlth & Edl Fac Auth Rfdg & Impt................. 8.125 10/01/10 1,091,740
2,165 Saint Louis Cnty, MO Indl Dev Auth Nursing Home Rev Mary
Queen & Mother Proj Rfdg (GNMA Collateralized).............. 7.125 03/20/23 2,357,512
880 Saint Louis, MO Tax Increment Rev Scullin Redev Area Ser
A........................................................... 10.000 08/01/10 1,110,657
--------------
15,980,047
--------------
NEBRASKA 0.7%
1,200 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg)
(GNMA Collateralized)....................................... 11.287 09/10/30 1,354,500
800 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg)
(GNMA Collateralized)....................................... 9.341 09/15/24 894,000
4,400 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg)
(GNMA Collateralized)....................................... 9.913 10/17/23 4,933,500
--------------
7,182,000
--------------
NEVADA 0.7%
4,000 Clark Cnty, NV Indl Dev Rev NV Pwr Co Proj Ser A (FGIC
Insd)....................................................... 6.700 06/01/22 4,402,600
2,300 Henderson, NV Loc Impt Dist No T-4 Ser A.................... 8.500 11/01/12 2,409,319
--------------
6,811,919
--------------
NEW HAMPSHIRE 0.8%
1,555 New Hampshire Higher Edl & Hlth Fac Auth Rev................ 8.800 06/01/09 1,846,936
2,000 New Hampshire Higher Edl & Hlth Fac Auth Rev Daniel Webster
College Issue Rfdg.......................................... 7.625 07/01/16 2,204,600
1,000 New Hampshire Higher Edl & Hlth Fac Auth Rev New London Hosp
Assn Proj................................................... 7.500 06/01/05 1,125,650
1,000 New Hampshire St Business Fin Auth Elec Fac Rev Plymouth
Cogeneration................................................ 7.750 06/01/14 1,074,480
1,000 New Hampshire St Tpk Sys Rev Ser A Rfdg (FGIC Insd)......... 6.750 11/01/11 1,157,620
--------------
7,409,286
--------------
NEW JERSEY 5.1%
400 Atlantic City, NJ Brd Edl Sch (Prerefunded @ 12/01/02)
(AMBAC Insd)................................................ 6.125 12/01/11 440,708
250 Camden Cnty, NJ Impt Auth Lease Rev Cnty Gtd (MBIA Insd).... 6.150 10/01/14 274,133
2,000 Camden Cnty, NJ Impt Auth Lease Rev Dockside Refrigerated... 8.400 04/01/24 2,263,540
500 Essex Cnty, NJ Impt Auth Lease Cnty Jail Proj A (MBIA
Insd)....................................................... 5.600 12/01/16 528,170
250 Essex Cnty, NJ Impt Auth Lease Jail & Youth House Proj
(Prerefunded @ 12/01/04) (AMBAC Insd)....................... 6.600 12/01/07 288,062
375 Essex Cnty, NJ Impt Auth Lease Jail & Youth House Proj Rfdg
(AMBAC Insd)................................................ 5.350 12/01/24 379,935
370 Essex Cnty, NJ Ser A1 Rfdg (AMBAC Insd)..................... 5.375 09/01/10 389,580
250 Hudson Cnty, NJ Ctfs Partn Correctional Fac Rfdg (MBIA
Insd)....................................................... 6.600 12/01/21 273,045
250 Lacey Muni Util Auth NJ Wtr Rev (Prerefunded @ 12/01/04)
(MBIA Insd)................................................. 6.250 12/01/24 282,873
250 Mercer Cnty, NJ Impt Auth Rev Cap Apprec.................... * 04/01/11 130,958
250 Mercer Cnty, NJ Impt Auth Rev Ewing Brd Edl Lease Proj Rfdg
(MBIA Insd)................................................. 5.000 11/15/16 249,410
6,130 Middlesex Cnty, NJ Util Auth Swr Rev Ser A Rfdg (MBIA
Insd)....................................................... 7.450 08/15/10 7,105,896
500 Millburn Twp, NJ Brd Ed..................................... 5.350 07/15/12 532,855
1,000 New Jersey Bldg Auth St Bldg Rev............................ 5.000 06/15/18 979,900
500 New Jersey Econ Dev Auth Dist Heating & Cooling Rev Trigen
Trenton Ser A............................................... 6.200 12/01/10 529,920
2,000 New Jersey Econ Dev Auth Holt Hauling & Warehsg Rev Ser G
Rfdg........................................................ 8.400 12/15/15 2,199,280
300 New Jersey Econ Dev Auth Mkt Transition Fac Rev Sr Lien Ser
A (MBIA Insd)............................................... 5.800 07/01/09 324,723
210 New Jersey Econ Dev Auth Pollutn Ctl Rev Pub Svcs Elec & Gas
Co Proj A (MBIA Insd)....................................... 6.400 05/01/32 230,288
1,900 New Jersey Econ Dev Auth Rev First Mtg Winchester Gardens
Ser A....................................................... 8.500 11/01/16 2,038,909
350 New Jersey Econ Dev Auth Rev RWJ Hlthcare Corp (FSA Insd)... 6.250 07/01/14 386,298
1,000 New Jersey Econ Dev Auth Rev United Methodist Homes......... 7.500 07/01/20 1,115,240
</TABLE>
See Notes to Financial Statements
B-43
<PAGE> 574
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEW JERSEY (CONTINUED)
$ 1,000 New Jersey Econ Dev Auth Rev United Methodist Homes Oblig
Ser A....................................................... 7.500% 07/01/25 $ 1,115,240
300 New Jersey Econ Dev Auth Wtr Fac Rev Hackensack Wtr Co Proj
B Rfdg (MBIA Insd).......................................... 5.900 03/01/24 320,385
490 New Jersey Hlthcare Fac Fin Auth Rev Atlantic City Med Cent
Ser C Rfdg.................................................. 6.800 07/01/11 541,146
700 New Jersey Hlthcare Fac Fin Auth Rev Christ Hosp Group Issue
(Connie Lee Insd)........................................... 7.000 07/01/04 802,557
400 New Jersey Hlthcare Fac Fin Auth Rev Christ Hosp Group Issue
(Connie Lee Insd)........................................... 7.000 07/01/06 470,296
250 New Jersey Hlthcare Fac Fin Auth Rev Englewood Hosp & Med
Cent........................................................ 6.700 07/01/15 275,060
250 New Jersey Hlthcare Fac Fin Auth Rev Genl Hosp Cent at
Passaic (FSA Insd).......................................... 6.000 07/01/06 278,488
250 New Jersey Hlthcare Fac Fin Auth Rev Genl Hosp Cent at
Passaic (FSA Insd).......................................... 6.750 07/01/19 293,577
400 New Jersey Hlthcare Fac Fin Auth Rev Jersey Shore Med Cent
Rfdg (AMBAC Insd)........................................... 6.250 07/01/21 441,484
500 New Jersey Hlthcare Fac Fin Auth Rev Southern Ocean Cnty
Hosp Ser A.................................................. 6.125 07/01/13 523,685
400 New Jersey Sports & Exposition Auth Convention Cent Luxury
Tax Rev Ser A Rfdg (MBIA Insd).............................. 6.250 07/01/20 436,836
200 New Jersey St Edl Fac Auth Rev Caldwell College Ser A....... 7.250 07/01/25 217,744
250 New Jersey St Edl Fac Auth Rev Glassboro St College Ser A
(Prerefunded @ 07/01/01) (MBIA Insd)........................ 6.700 07/01/21 275,460
270 New Jersey St Hsg & Mtg Fin Agy Rev Home Buyer Ser K (MBIA
Insd)....................................................... 6.375 10/01/26 286,435
500 New Jersey St Hsg & Mtg Fin Agy Rev Home Buyer Ser O (MBIA
Insd)....................................................... 6.300 10/01/23 532,445
500 New Jersey St Hsg & Mtg Fin Agy Rev Home Buyer Ser S........ 6.000 10/01/21 524,570
3,480 New Jersey St Tpk Auth Tpk Rev Ser C Rfdg (MBIA Insd)....... 6.500 01/01/16 4,138,590
15,335 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev Pub Svc Elec &
Gas Co Proj C Rfdg (MBIA Insd) (b).......................... 6.200 08/01/30 16,987,960
300 Union City, NJ (FSA Insd)................................... 6.375 11/01/10 351,957
715 University Med & Dentistry NJ Ctfs Partn Ser A (MBIA
Insd)....................................................... 5.000 09/01/22 703,009
--------------
50,460,647
--------------
NEW MEXICO 0.8%
5,000 Farmington, NM Pollutn Ctl Rev Southern CA Edison Co Ser A
Rfdg (MBIA Insd)............................................ 5.875 06/01/23 5,283,950
2,500 New Mexico St Hosp Equip Ln Council Hosp Rev San Juan Regl
Med Cent Inc Proj (Prerefunded @ 06/01/01).................. 7.900 06/01/11 2,836,950
--------------
8,120,900
--------------
NEW YORK 13.1%
2,805 Clifton Springs, NY Hosp & Clinic Hosp Rev Rfdg............. 8.000 01/01/20 3,104,097
2,500 Herkimer Cnty, NY Indl Dev Agy Indl Dev Rev Burrows Paper
Corp Recycling.............................................. 8.000 01/01/09 2,610,775
3,640 Metropolitan Tran Auth NY Commuter Fac Rev Svcs Contract Ser
R Rfdg (c).................................................. 5.500 07/01/17 3,632,720
5,000 Metropolitan Tran Auth NY Svcs Contract Tran Fac Ser 5
Rfdg........................................................ 7.000 07/01/12 5,469,150
3,500 Metropolitan Tran Auth NY Svcs Contract Tran Fac Ser 7
Rfdg........................................................ 4.750 07/01/19 3,225,215
1,500 Metropolitan Tran Auth NY Tran Fac Rev Ser G (MBIA Insd)
(b)......................................................... 5.500 07/01/15 1,500,585
1,500 New York City Indl Dev Agy Brooklyn Navy Yard............... 5.650 10/01/28 1,519,875
1,000 New York City Indl Dev Agy Civic Fac Marymount Manhattan
College Proj................................................ 7.000 07/01/23 1,075,820
4,500 New York City Indl Dev Agy Spl Fac United Airls Inc Proj.... 5.650 10/01/32 4,557,825
4,100 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev Ser B..... 5.000 06/15/17 4,024,888
5,000 New York City Ser A......................................... 7.000 08/01/07 5,804,550
2,500 New York City Ser B......................................... 7.500 02/01/07 2,809,050
5,000 New York City Ser C Rfdg.................................... 6.500 08/01/04 5,442,700
640 New York City Ser C SubSer C1............................... 7.500 08/01/20 726,803
2,000 New York City Ser D Rfdg.................................... 8.000 02/01/05 2,389,640
2,200 New York City Ser E......................................... 5.700 08/01/08 2,325,224
17,530 New York City Ser F (c)..................................... 5.250 08/01/12 17,544,725
5,000 New York St Dorm Auth Rev City Univ Ser F................... 5.500 07/01/12 5,104,600
2,750 New York St Dorm Auth Rev Court Fac Lease Ser A............. 5.500 05/15/10 2,828,622
2,295 New York St Dorm Auth Rev Mental Hlth Svcs Fac Ser A........ 5.750 02/15/11 2,463,660
2,285 New York St Dorm Auth Rev Mental Hlth Svcs Fac Ser A........ 5.750 02/15/12 2,442,802
3,400 New York St Dorm Auth Rev Mental Hlth Svcs Fac Ser B........ 5.500 08/15/17 3,476,466
</TABLE>
See Notes to Financial Statements
B-44
<PAGE> 575
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$ 2,500 New York St Energy Resh & Dev Auth Gas Fac Rev (Inverse
Fltg)....................................................... 8.406% 04/01/20 $ 3,087,500
3,000 New York St Energy Resh & Dev Auth Gas Fac Rev Brooklyn
Union Gas Co Ser B (Inverse Fltg)........................... 9.747 07/01/26 3,918,750
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 2,303,200
1,955 New York St Med Care Fac Fin Agy Rev Hosp & Nursing Home Mtg
(Prerefunded @ 02/15/99) (FHA Gtd).......................... 7.250 02/15/09 2,065,888
185 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Ser A....................................................... 7.750 08/15/11 207,326
1,625 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Ser A (Prerefunded @ 02/15/01).............................. 7.750 08/15/11 1,827,995
175 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Ser C....................................................... 7.300 02/15/21 194,549
1,825 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Ser C (Prerefunded @ 08/15/01).............................. 7.300 02/15/21 2,051,446
1,000 New York St Med Care Fac Fin Agy Rev North Genl Hosp........ 7.400 02/15/19 1,059,200
2,400 New York St Urban Dev Corp Rev Correctional Cap Fac Rfdg.... 5.625 01/01/07 2,522,376
20,500 New York St Urban Dev Corp Rev Correctional Cap Fac Ser A
Rfdg (FSA Insd)............................................. 5.250 01/01/14 21,452,020
2,000 New York St Urban Dev Corp Rev Fac (Prerefunded @
04/01/01)................................................... 7.500 04/01/20 2,244,720
1,200 Port Auth NY & NJ Cons 95th Ser............................. 6.125 07/15/22 1,283,172
500 Port Auth NY & NJ Spl Oblig Rev Spl Proj JFK Intl Arpt
Terminal 6 (MBIA Insd)...................................... 5.750 12/01/25 522,255
1,500 Suffolk Cnty, NY Indl Dev Agy Indl Dev Rev.................. 6.375 12/01/17 1,503,495
--------------
130,323,684
--------------
NORTH CAROLINA 0.8%
2,500 Martin Cnty, NC Indl Fac & Pollutn Ctl Fin Auth Rev Solid
Waste Weyerhaeuser Co....................................... 5.650 12/01/23 2,538,725
4,000 University of NC Chapel Hill Rev Utils Sys Rfdg............. * 08/01/12 1,977,320
4,000 University of NC Chapel Hill Rev Utils Sys Rfdg............. * 08/01/15 1,667,080
4,265 University of NC Chapel Hill Rev Utils Sys Rfdg............. * 08/01/18 1,509,597
--------------
7,692,722
--------------
OHIO 2.9%
1,250 Cleveland Cuyahoga Cnty, OH Port Auth Rev Dev Port Cleveland
Bond Fund Ser A............................................. 5.750 05/15/20 1,250,950
755 Cleveland Cuyahoga Cnty, OH Port Auth Rev Dev Port Cleveland
Bond Fund Ser A............................................. 5.800 05/15/27 753,883
500 Cleveland, OH Pkg Fac Rev Impt (Prerefunded @ 09/15/02)..... 8.000 09/15/12 586,915
1,000 Cuyahoga Cnty, OH Hlthcare Fac Rev Jennings Hall............ 7.300 11/15/23 1,074,860
370 Fairfield, OH Econ Dev Rev Beverly Enterprises Inc Proj
Rfdg........................................................ 8.500 01/01/03 403,093
1,750 Franklin Cnty, OH Hlthcare Friendship Vlg Dublin, OH Rfdg... 5.625 11/01/22 1,767,132
4,000 Mahoning Cnty, OH Hosp Facs Rev Forum Hlth Oblig Group Ser A
(MBIA Insd)................................................. 5.000 11/15/25 3,894,160
7,240 Ohio Hsg Fin Agy Single Family Mtg Rev Ser B (Inverse Fltg)
(GNMA Collateralized)....................................... 9.770 03/31/31 8,145,000
1,000 Ohio St Air Quality Dev Auth Rev JMG Funding Ltd Partnership
Proj Rfdg (AMBAC Insd)...................................... 6.375 04/01/29 1,101,280
1,300 Ohio St Dept Admin Svcs Ctfs Partn (AMBAC Insd)............. 5.000 06/15/17 1,290,380
1,000 Ohio St Solid Waste Rev CSC Ltd Poj......................... 8.500 08/01/22 1,058,910
4,000 Ohio St Solid Waste Rev Republic Engineered Steels Proj..... 8.250 10/01/14 4,078,640
2,000 Ohio St Solid Waste Rev Republic Engineered Steels Proj..... 9.000 06/01/21 2,109,960
1,500 Sandusky Cnty, OH Hosp Fac Rev Mem Hosp Proj Rfdg........... 7.750 12/01/09 1,502,250
--------------
29,017,413
--------------
OKLAHOMA 1.4%
7,685 Grand River Dam Auth OK Rev (b)............................. 5.000 06/01/12 7,684,769
1,980 McAlester, OK Pub Wks Auth Rev Rfdg & Impt (FSA Insd)....... 5.250 12/01/22 1,985,722
2,640 Oklahoma Hsg Fin Agy Single Family Rev Mtg Class B (GNMA
Collateralized)............................................. 7.997 08/01/18 3,064,565
1,000 Tulsa, OK Muni Arpt Tran Rev American Airls Inc............. 7.600 12/01/30 1,108,900
--------------
13,843,956
--------------
OREGON 0.3%
2,000 Oregon St Econ Dev Rev Georgia Pacific Corp................. 6.350 08/01/25 2,128,800
475 Salem, OR Hosp Fac Auth Rev Cap Manor Inc................... 7.500 12/01/24 511,851
--------------
2,640,651
--------------
</TABLE>
See Notes to Financial Statements
B-45
<PAGE> 576
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PENNSYLVANIA 5.4%
$ 500 Chartiers Vly, PA Indl & Commercial Dev Auth First Mtg
Rev......................................................... 7.250% 12/01/11 $ 519,865
5,000 Chester Cnty, PA Hlth & Edl Fac Auth Hlth Sys Rev (AMBAC
Insd) (b)................................................... 5.650 05/15/20 5,150,650
150 Delaware River Port Auth PA (FGIC Insd)..................... 5.500 01/01/26 155,012
1,750 Emmaus, PA Genl Auth Rev Ser A (BIGI Insd).................. 8.150 05/15/18 1,803,427
2,500 Emmaus, PA Genl Auth Rev Ser C (BIGI Insd).................. 7.900 05/15/18 2,610,275
2,500 Harrisburg, PA Auth Wtr Rev (Inverse Fltg) (FGIC Insd)...... * 06/18/15 2,818,750
1,320 Harrisburg, PA Cap Apprec Nts Ser D Rfdg.................... * 09/15/16 507,131
1,535 Harrisburg, PA Cap Apprec Nts Ser D Rfdg.................... * 09/15/19 503,726
1,000 Lebanon Cnty, PA Hlth Fac Auth Hlth Cent Rev United Church
of Christ Homes Rfdg........................................ 6.750 10/01/10 1,017,950
930 Lehigh Cnty, PA Indl Dev Auth Rev Rfdg...................... 8.000 08/01/12 999,080
1,275 Luzerne Cnty, PA Indl Dev Auth First Mtg Gross Rev Rfdg..... 7.875 12/01/13 1,392,466
1,500 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp Proj
(Crossover Rfdg @ 10/01/00)................................. 8.875 10/01/20 1,701,465
2,000 McKeesport, PA Hosp Auth Rev McKeesport Hosp Proj Rfdg...... 6.500 07/01/08 2,118,100
3,000 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp Rev
(Embedded Swap) (AMBAC Insd)................................ 7.710 11/28/97 3,272,160
1,000 Montgomery Cnty, PA Indl Dev Auth Retirement Cmnty Rev...... 6.300 01/01/13 1,007,490
1,000 Montgomery Cnty, PA Indl Dev Auth Rev Res Recovery.......... 7.500 01/01/12 1,106,050
7,940 Pennsylvania St Ctfs Partn Ser A Rfdg (AMBAC Insd).......... 5.000 07/01/15 7,799,224
500 Pennsylvania St Higher Edl Fac Auth College & Univ Rev
Hahnemann Univ Proj (Prerefunded @ 07/01/99) (MBIA Insd).... 7.200 07/01/19 533,365
3,150 Philadelphia, PA Auth for Indl Dev Rev Coml Dev RMK Rfdg.... 7.750 12/01/17 3,563,154
685 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp Rev........ 7.250 03/01/24 725,072
5,000 Philadelphia, PA Wtr & Wstwtr Ser A (AMBAC Insd)............ 5.000 08/01/15 4,967,400
5,000 Philadelphia, PA Wtr & Wstwtr Ser A (AMBAC Insd)............ 5.000 08/01/22 4,895,850
1,450 Ridley Park, PA Hosp Auth Rev Taylor Hosp Ser A Rfdg Hosp
Auth Rev Ser 1993A.......................................... 6.000 12/01/13 1,500,648
1,000 Scranton Lackawanna, PA Hlth & Welfare Auth Rev Allied Svcs
Rehab Hosp Ser A............................................ 7.375 07/15/08 1,112,890
500 Scranton Lackawanna, PA Hlth & Welfare Auth Rev Moses Taylor
Hosp Proj (Prerefunded @ 07/01/01).......................... 8.250 07/01/09 574,190
1,000 Washington Cnty, PA Hosp Auth Rev Hosp Canonsburg Genl Hosp
Rfdg........................................................ 7.350 06/01/13 1,062,590
--------------
53,417,980
--------------
RHODE ISLAND 0.5%
2,000 Providence, RI Redev Agy Ctfs Partn Ser A................... 8.000 09/01/24 2,206,880
2,345 Rhode Island Hsg & Mtg Fin Corp Rental Hsg Pgm Ser B (FHA
Gtd)........................................................ 7.950 10/01/30 2,473,881
600 West Warwick, RI Ser A...................................... 7.300 07/15/08 664,386
--------------
5,345,147
--------------
SOUTH CAROLINA 0.4%
3,000 Charleston Cnty, SC Arpt Dist Rfdg (MBIA Insd).............. 4.750 07/01/15 2,911,500
1,070 Piedmont Muni Pwr Agy SC Elec Rev........................... 5.000 01/01/25 1,000,910
--------------
3,912,410
--------------
SOUTH DAKOTA 0.1%
1,000 South Dakota St Hlth & Edl Fac Auth Rev Huron Regl Med
Cent........................................................ 7.250 04/01/20 1,122,770
150 South Dakota St Hlth & Edl Fac Auth Rev Sioux Vly Hosp
(Prerefunded @ 11/01/98).................................... 7.625 11/01/13 169,535
--------------
1,292,305
--------------
TENNESSEE 0.2%
2,000 Springfield, TN Hlth & Edl Jesse Holman Jones Hosp Proj..... 8.500 04/01/24 2,334,460
--------------
TEXAS 4.9%
1,000 Austin, TX Arpt Sys Rev Prior Lien Ser A (MBIA Insd)........ 6.125 11/15/25 1,080,270
500 Baytown, TX Pptys Mgmt & Dev Corp Ser A (FNMA
Collateralized)............................................. 6.100 08/15/21 515,030
150 Bell Cnty, TX Hlth Fac Dev Corp Rev Hosp Proj............... 9.250 07/01/08 162,209
2,000 Bell Cnty, TX Indl Dev Corp Solid Waste Disposal Rev (c).... 7.600 12/01/17 2,006,180
500 Bexar Cnty, TX Hlth Fac Dev Corp Hosp Rev Saint Luke's
Lutheran Hosp............................................... 7.000 05/01/21 630,630
</TABLE>
See Notes to Financial Statements
B-46
<PAGE> 577
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEXAS (CONTINUED)
$ 1,500 Bexar Cnty, TX Hlth Fac Dev Corp Hosp Rev Saint Luke's
Lutheran Hosp (Prerefunded @ 05/01/03)...................... 7.900% 05/01/18 $ 1,748,190
337 Bexar Cnty, TX Hsg Fin Corp Rev Ser A (GNMA
Collateralized)............................................. 8.200 04/01/22 353,847
375 Bexar Cnty, TX Hsg Fin Corp Rev Ser B (GNMA
Collateralized)............................................. 9.250 04/01/16 386,587
1,000 Big Oaks Muni Util Dist TX Wtrwks & Sewer Sys............... 5.750 09/01/19 987,710
1,675 Cedar Hill, TX Indpt Sch Dist Cap Apprec Rfdg............... * 08/15/15 641,558
625 Clear Creek, TX Indpt Sch Dist (Prerefunded @ 02/01/01)..... 6.250 02/01/11 664,606
250 Coastal Wtr Auth TX Conveyance Sys Rev (AMBAC Insd)......... 6.250 12/15/17 277,778
940 Dallas-Fort Worth, TX Intl Arpt Fac Impt Corp Rev American
Airls Inc................................................... 7.500 11/01/25 1,026,640
250 El Paso, TX Hsg Auth Multi-Family Rev Ser A................. 6.250 12/01/09 264,143
105 Galveston, TX Ppty Fin Auth Single Family Mtg Rev Ser A..... 8.500 09/01/11 114,223
250 Guadalupe Blanco River Auth TX Indl Dev Corp Pollutn Ctl
Rev......................................................... 6.350 07/01/22 271,708
1,250 Harris Cnty, TX Hlth Fac Dev Corp Mem Hosp Sys Proj Rfdg.... 7.125 06/01/15 1,445,300
100 Harris Cnty, TX Hsg Fin Corp Single Family Hsg Rev 1983 Ser
A........................................................... 10.375 07/15/14 100,476
250 Harris Cnty, TX Muni Util Dist No 120 (Prerefunded @
08/01/01)................................................... 8.000 08/01/14 281,417
375 Harris Cnty, TX Sch Hlthcare Corp Sys Rev (Prerefunded @
07/01/01)................................................... 7.100 07/01/21 417,517
650 Houston, TX Hsg Fin Corp Single Family Mtg Rev Ser A Rfdg
(FSA Insd).................................................. 5.950 12/01/10 678,840
1,690 Irving, TX Indpt Sch Dist................................... * 02/15/15 702,871
1,250 Irving, TX Indpt Sch Dist................................... * 02/15/17 465,750
1,000 Irving, TX Indpt Sch Dist Cap Apprec Ser A Rfdg............. * 02/15/18 351,780
250 Lockhart, TX Correctional Fac Fin Corp Rev (MBIA Insd)...... 6.625 04/01/12 267,200
5,500 Lower CO Rvr Auth TX Polltn Ctl Rev Samsung Austin
Semiconductor............................................... 6.375 04/01/27 5,225,000
500 Mission Bend Muni Util Dist No 2 TX......................... 10.000 09/01/98 519,860
145 Montgomery Cnty, TX Hlth Fac Dev Corp Hosp Mtg Rev Woodlands
Med Cent Proj Rfdg (Prerefunded @ 08/15/99)................. 8.850 08/15/14 157,775
3,500 North Central TX Hlth Fac Dev Corp Rev Presbyterian Hlthcare
Sys Ser C (Inverse Fltg) (Prerefunded @ 06/19/01) (MBIA
Insd)....................................................... 9.345 05/01/97 4,178,125
750 Northwest Harris Cnty, TX Muni Util Dist No 23 (Prerefunded
@ 04/01/01)................................................. 8.100 10/01/15 839,737
250 San Antonio, TX Hlth Fac Dev Corp Rev Encore Nursing Cent
Partn....................................................... 8.250 12/01/19 280,033
525 Sportsmans World Muni Util Dist TX Rfdg..................... 6.000 08/01/13 534,922
1,105 Sportsmans World Muni Util Dist TX Rfdg..................... 6.000 08/01/19 1,095,696
250 Tarrant Cnty, TX Hlth Fac Dev Corp Hosp Rev Rfdg & Impt..... 7.000 05/15/28 274,323
250 Tarrant Cnty, TX Hlth Fac Dev Corp Hosp Rev Rfdg & Impt
(Prerefunded @ 05/15/03).................................... 7.000 05/15/28 285,580
257 Texas Genl Svcs Cmnty Partn Interests Office Bldg & Land
Acquisition Proj............................................ 7.000 08/01/09 264,194
500 Texas Genl Svcs Cmnty Partn Interests Office Bldg & Land
Acquisition Proj............................................ 7.000 08/01/19 513,530
500 Texas Genl Svcs Cmnty Partn Interests Office Bldg & Land
Acquisition Proj............................................ 7.000 08/01/24 513,530
919 Texas Genl Svcs Cmnty Partn Lease Purchase Ctfs............. 7.500 02/15/13 940,610
115 Texas Hsg Agy Single Family Mtg Rev Ser A Rfdg.............. 7.150 09/01/12 122,307
5,250 Texas St Dept Hsg & Cmnty Affairs Home Mtg Rev Coll Ser C
Rfdg (Inverse Fltg) (GNMA Collateralized)................... 9.612 07/31/97 6,601,875
285 Texas St Higher Edl Brd College Sr Lien..................... 7.700 10/01/25 308,179
4,025 Texas St Higher Edl Coordinating Brd College Student Ln..... * 10/01/25 3,992,800
1,000 Texas St Veterans Hsg Assist................................ 6.800 12/01/10 1,077,440
1,300 Texas St Veterans Hsg Assist (MBIA Insd).................... 6.800 12/01/23 1,394,965
1,190 University Houston TX Univ Rev (AMBAC Insd)................. 5.000 02/15/17 1,181,242
2,250 West Side Calhoun Cnty, TX Navig Dist Solid Waste Disp Union
Carbide Chem & Plastics..................................... 8.200 03/15/21 2,512,485
--------------
48,656,668
--------------
UTAH 2.8%
3,100 Bountiful, UT Hosp Rev South Davis Cmnty Hosp Proj.......... 9.500 12/15/18 3,722,170
1,340 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 7.800 09/01/15 1,398,893
1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 8.000 09/01/20 1,054,940
</TABLE>
See Notes to Financial Statements
B-47
<PAGE> 578
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UTAH (CONTINUED)
$ 1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 7.800% 09/01/25 $ 1,039,830
1,850 Intermountain Pwr Agy UT Pwr Supply Rev Ser 86B............. 5.000 07/01/16 1,789,301
3,650 Intermountain Pwr Agy UT Pwr Supply Rev Ser B Rfdg.......... 7.750 07/01/20 3,788,116
11,000 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg (Embedded
Swap)....................................................... 7.190 12/03/97 12,334,190
945 Utah St Hsg Fin Agy Single Family Mtg Sr Ser A1 (FHA Gtd)... 7.100 07/01/14 1,019,589
1,280 Utah St Hsg Fin Agy Single Family Mtg Sr Ser A2 (FHA Gtd)... 7.200 01/01/27 1,379,866
--------------
27,526,895
--------------
VIRGINIA 2.1%
2,000 Fairfax Cnty, VA Park Auth Park Fac Rev..................... 6.625 07/15/14 2,167,700
3,500 Fredericksburg, VA Indl Dev Auth Hosp Fac Rev (Prerefunded @
08/15/01) (FGIC Insd)....................................... 6.600 08/15/23 3,844,995
2,080 Loudoun Cnty, VA Ctfs Partn (FSA Insd)...................... 6.800 03/01/14 2,336,589
1,000 Loudoun Cnty, VA Ctfs Partn (FSA Insd)...................... 6.900 03/01/19 1,128,650
5,000 Roanoke, VA Indl Dev Auth Hosp Rev Roanoke Mem Hosp Carilion
Hlth Sys Ser B Rfdg (MBIA Insd) (b)......................... 4.700 07/01/20 5,183,600
1,000 Tazewell Cnty, VA Indl Dev Auth Lease Rev Tazewell Cnty Ct
Hse Proj (MBIA Insd)........................................ 5.300 01/01/22 1,009,130
1,715 Upper Occoquan Sewage Auth VA Reg Sew Rev Rfdg (FGIC
Insd)....................................................... 5.000 07/01/21 1,680,168
1,000 Virginia Port Auth Comwlth Port Fund Rev (Prerefunded @
07/01/98)................................................... 8.200 07/01/08 1,041,110
2,650 Virginia St Pub Bldg Auth Ser A............................. 5.500 08/01/16 2,782,845
--------------
21,174,787
--------------
WASHINGTON 3.4%
2,000 King Cnty, WA Ser D......................................... 5.700 12/01/10 2,206,600
2,000 Washington St Hlthcare Fac Virginia Mason Med Cent Ser A
Rfdg (MBIA Insd)............................................ 5.125 08/15/17 1,976,720
10,000 Washington St Pub Pwr Supply Ser A Rfdg (c)................. 5.000 07/01/12 9,863,100
1,250 Washington St Pub Pwr Supply Sys Nuclear Proj No 1 Rev (FGIC
Insd)....................................................... 7.125 07/01/16 1,556,700
3,555 Washington St Pub Pwr Supply Sys Nuclear Proj No 1 Rev Ser C
Rfdg (FSA Insd)............................................. 5.375 07/01/15 3,603,135
2,000 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev
(Prerefunded @ 01/01/01).................................... 7.625 07/01/10 2,234,040
1,000 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev
(Prerefunded @ 07/01/00).................................... 7.375 07/01/12 1,096,520
2,500 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev Rfdg
(Prerefunded @ 07/01/00).................................... 7.000 07/01/12 2,719,225
3,750 Washington St Pub Pwr Supply Sys Nuclear Proj No 3 Rev Ser C
Rfdg (FSA Insd)............................................. 5.375 07/01/15 3,800,775
5,000 Washington St Public Pwr Supply Series A Rfdg (c)........... 5.125 07/01/18 4,897,500
--------------
33,954,315
--------------
WEST VIRGINIA 0.7%
6,750 South Charleston, WV Indl Dev Rev Union Carbide Chem &
Plastics Ser A.............................................. 8.000 08/01/20 7,312,005
--------------
WISCONSIN 1.2%
750 Jefferson, WI Swr Sys Wtrwrks & Elec Sys Mtg Rev
(Prerefunded @ 07/01/01).................................... 7.400 07/01/16 830,325
1,000 Oconto Falls, WI Cmnty Dev Oconto Falls Tissue Inc Proj..... 7.750 12/01/22 1,042,600
1,250 Southeast WI Professional Baseball Pk Dist Sales Tax Rev
(MBIA Insd)................................................. * 12/15/21 357,013
1,250 Southeast WI Professional Baseball Pk Dist Sales Tax Rev
(MBIA Insd)................................................. * 12/15/22 338,825
1,250 Southeast WI Professional Baseball Pk Dist Sales Tax Rev.... * 12/15/23 321,550
1,000 Southeast WI Professional Baseball Pk Dist Sales Tax Rev
(MBIA Insd)................................................. * 12/15/26 219,200
3,500 Southeast WI Professional Baseball Pk Dist Sales Tax Rev
(MBIA Insd)................................................. * 12/15/27 727,615
3,500 Southeast WI Professional Baseball Pk Dist Sales Tax Rev.... * 12/15/28 690,235
3,500 Southeast WI Professional Baseball Pk Dist Sales Tax Rev
(MBIA Insd)................................................. * 12/15/29 654,535
2,150 Wisconsin Hsg & Econ Dev Auth Home Ownership Rev Rfdg
(Inverse Fltg).............................................. 10.057 10/23/97 2,424,125
600 Wisconsin St Hlth & Edl Fac Auth Rev Hess Mem Hosp Assn..... 7.200 11/01/05 637,860
1,000 Wisconsin St Hlth & Edl Fac Auth Rev United Lutheran Proj
Aging Inc................................................... 8.500 03/01/19 1,044,330
2,000 Wisconsin St Hlth & Edl Milwaukee Catholic Home Proj........ 7.500 07/01/26 2,170,820
--------------
11,459,033
--------------
GUAM 0.0%
250 Guam Govt Ser A............................................. 5.750 09/01/04 253,183
--------------
</TABLE>
See Notes to Financial Statements
B-48
<PAGE> 579
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PUERTO RICO 0.2%
$ 200 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev Ser V Rfdg...... 6.625% 07/01/12 $ 220,282
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser T..................... 6.375 07/01/24 276,917
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser U Rfdg................ 6.000 07/01/14 268,513
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser Z Rfdg................ 5.500 07/01/14 257,455
465 Puerto Rico Hsg Bank & Fin Agy Single Family Mtg Rev (GNMA
Collateralized)............................................. 6.250 04/01/29 491,700
300 Puerto Rico Pub Bldgs Auth Gtd Pub Edl & Hlth Fac Ser M Rfdg
(FSA Insd).................................................. 5.750 07/01/15 317,325
--------------
1,832,192
--------------
TOTAL LONG-TERM INVESTMENTS 103.6%
(Cost $943,198,738)..................................................................... 1,027,887,582
LIABILITIES IN EXCESS OF OTHER ASSETS (3.6%)............................................. (35,277,327)
--------------
NET ASSETS 100.0%........................................................................ $ 992,610,255
==============
</TABLE>
*Zero coupon bond
(a) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
(b) Assets segregated as collateral for when issued or delayed delivery purchase
commitments and open futures transactions.
(c) Securities purchased on a when issued or delayed delivery basis.
(d) Non-Income producing security.
(e) Market value is determined in accordance with procedures established in good
faith by the Board of Trustees.
AMBAC--AMBAC Indemnity Corporation
BIGI--Bond Investor Guaranty Inc.
CAPMAC--Capital Markets Assurance Corp.
Connie Lee--Connie Lee Insurance Company
FGIC--Financial Guaranty Insurance Company
FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements
B-49
<PAGE> 580
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $943,198,738)....................... $1,027,887,582
Receivables:
Interest.................................................. 17,270,804
Investments Sold.......................................... 4,902,065
Fund Shares Sold.......................................... 258,838
Variation Margin on Futures............................... 22,912
Other....................................................... 892
--------------
Total Assets.......................................... 1,050,343,093
--------------
LIABILITIES:
Payables:
Investments Purchased..................................... 39,387,246
Custodian Bank............................................ 13,963,794
Income Distributions...................................... 2,152,003
Distributor and Affiliates................................ 995,280
Fund Shares Repurchased................................... 450,889
Investment Advisory Fee................................... 404,899
Accrued Expenses............................................ 229,442
Trustees' Deferred Compensation and Retirement Plans........ 149,285
--------------
Total Liabilities..................................... 57,732,838
--------------
NET ASSETS.................................................. $ 992,610,255
==============
NET ASSETS CONSIST OF:
Capital..................................................... $ 925,305,676
Net Unrealized Appreciation................................. 84,570,511
Accumulated Undistributed Net Investment Income............. 535,106
Accumulated Net Realized Loss............................... (17,801,038)
--------------
NET ASSETS.................................................. $ 992,610,255
==============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $766,164,906 and 48,593,827 shares of
beneficial interest issued and outstanding)............ $ 15.77
Maximum sales charge (4.75%* of offering price)......... .79
--------------
Maximum offering price to public........................ $ 16.56
==============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $211,166,349 and 13,395,856 shares of
beneficial interest issued and outstanding)............ $ 15.76
==============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $15,279,000 and 970,252 shares of
beneficial interest issued and outstanding)............ $ 15.75
==============
</TABLE>
* On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
B-50
<PAGE> 581
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $63,871,998
-----------
EXPENSES:
Investment Advisory Fee..................................... 4,721,648
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $1,886,256, $2,047,073 and $125,940,
respectively)............................................. 4,059,269
Shareholder Services........................................ 991,321
Legal....................................................... 106,117
Custody..................................................... 71,024
Trustees' Fees and Expenses................................. 25,979
Other....................................................... 483,245
-----------
Total Expenses.......................................... 10,458,603
-----------
NET INVESTMENT INCOME....................................... $53,413,395
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments (Including reorganization and restructuring
costs of $126,429)...................................... $17,322,192
Options................................................... (575,046)
Futures................................................... (6,420,032)
-----------
Net Realized Gain........................................... 10,327,114
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 60,847,273
-----------
End of the Period:
Investments............................................. 84,688,844
Futures................................................. (118,333)
-----------
84,570,511
-----------
Net Unrealized Appreciation During the Period............... 23,723,238
-----------
NET REALIZED AND UNREALIZED GAIN............................ $34,050,352
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $87,463,747
===========
</TABLE>
See Notes to Financial Statements
B-51
<PAGE> 582
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income....................................... $ 53,413,395 $ 58,599,526
Net Realized Gain........................................... 10,327,114 15,529,569
Net Unrealized Appreciation/Depreciation During the
Period.................................................... 23,723,238 (34,930,300)
-------------- --------------
Change in Net Assets from Operations........................ 87,463,747 39,198,795
-------------- --------------
Distributions from Net Investment Income:
Class A Shares............................................ (43,085,857) (46,362,424)
Class B Shares............................................ (9,834,294) (10,564,184)
Class C Shares............................................ (604,662) (607,911)
-------------- --------------
Total Distributions..................................... (53,524,813) (57,534,519)
-------------- --------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES......... 33,938,934 (18,335,724)
-------------- --------------
FROM CAPITAL TRANSACTIONS
Proceeds from Shares Sold................................... 535,028,913 448,529,529
Net Asset Value of Shares Issued Through Dividend
Reinvestment.............................................. 27,237,798 29,896,737
Cost of Shares Repurchased.................................. (619,837,342) (511,329,514)
-------------- --------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.......... (57,570,631) (32,903,248)
-------------- --------------
TOTAL DECREASE IN NET ASSETS................................ (23,631,697) (51,238,972)
NET ASSETS:
Beginning of the Period..................................... 1,016,241,952 1,067,480,924
-------------- --------------
End of the Period (Including accumulated undistributed net
investment income of $535,106 and $662,245,
respectively)............................................. $ 992,610,255 $1,016,241,952
============== ==============
</TABLE>
See Notes to Financial Statements
B-52
<PAGE> 583
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 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $15.267 $15.549 $14.261 $16.164 $15.310
------- ------- ------- ------- -------
Net Investment Income..................................... .852 .898 .874 .886 .964
Net Realized and Unrealized Gain/Loss..................... .500 (.298) 1.296 (1.907) .862
------- ------- ------- ------- -------
Total from Investment Operations............................ 1.352 .600 2.170 (1.021) 1.826
Less Distributions from Net Investment Income............... .852 .882 .882 .882 .972
------- ------- ------- ------- -------
Net Asset Value, End of the Period.......................... $15.767 $15.267 $15.549 $14.261 $16.164
======= ======= ======= ======= =======
Total Return (a)............................................ 9.14% 4.07% 15.61% (6.37%) 12.20%
Net Assets at End of the Period (In millions)............... $ 766.2 $ 792.3 $ 839.7 $ 495.8 $ 597.6
Ratio of Expenses to Average Net Assets (b)................. .89% .94% .99% .99% .87%
Ratio of Net Investment Income to Average Net Assets (b).... 5.54% 5.93% 5.86% 5.93% 6.08%
Portfolio Turnover.......................................... 104% 73% 61% 75% 82%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1996 and 1995, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to VKAC
reimbursement of certain expenses was less than 0.01%. For the year ended
December 31, 1993, if certain expenses had not been assumed by VKAC, the
Ratios of Expenses to Average Net Assets and Net Investment Income to
Average Net Assets would have been .98% and 5.97%, respectively.
See Notes to Financial Statements
B-53
<PAGE> 584
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one common share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
Class B Shares 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $15.267 $15.549 $14.261 $16.139 $15.308
------- ------- ------- ------- -------
Net Investment Income..................................... .734 .783 .762 .780 .852
Net Realized and Unrealized Gain/Loss..................... .501 (.297) 1.294 (1.890) .845
------- ------- ------- ------- -------
Total from Investment Operations............................ 1.235 .486 2.056 (1.110) 1.697
------- ------- ------- ------- -------
Less Distributions from Net Investment Income............... .738 .768 .768 .768 .866
------- ------- ------- ------- -------
Net Asset Value, End of the Period.......................... $15.764 $15.267 $15.549 $14.261 $16.139
======= ======= ======= ======= =======
Total Return (a)............................................ 8.27% 3.29% 14.74% (6.96%) 11.33%
Net Assets at End of the Period (In millions)............... $ 211.2 $ 211.0 $ 216.6 $ 158.7 $ 168.2
Ratio of Expenses to Average Net Assets (b)................. 1.65% 1.70% 1.73% 1.70% 1.65%
Ratio of Net Investment Income to Average Net Assets (b).... 4.78% 5.17% 5.09% 5.22% 5.19%
Portfolio Turnover.......................................... 104% 73% 61% 75% 82%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1996 and 1995, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to VKAC
reimbursement of certain expenses was less than 0.01%. For the year ended
December 31, 1993, if certain expenses had not been assumed by VKAC, the
Ratios of Expenses to Average Net Assets and Net Investment Income to
Average Net Assets would have been 1.73% and 5.11%, respectively.
See Notes to Financial Statements
B-54
<PAGE> 585
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one common share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
August 13, 1993
Year Ended December 31, (Commencement of
------------------------------------- Distribution) to
Class C Shares 1997 1996 1995 1994 December 31, 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period................ $15.254 $15.545 $14.262 $16.141 $15.990
------- ------- ------- ------- -------
Net Investment Income................................. .730 .782 .771 .783 .300
Net Realized and Unrealized Gain/Loss................. .501 (.305) 1.280 (1.894) .171
------- ------- ------- ------- -------
Total from Investment Operations........................ 1.231 .477 2.051 (1.111) .471
------- ------- ------- ------- -------
Less Distributions from Net Investment Income........... .738 .768 .768 .768 .320
------- ------- ------- ------- -------
Net Asset Value, End of the Period...................... $15.747 $15.254 $15.545 $14.262 $16.141
======= ======= ======= ======= =======
Total Return (a)........................................ 8.34% 3.16% 14.74% (6.97%) 2.96%*
Net Assets at End of the Period (In millions)........... $ 15.3 $ 12.9 $ 11.2 $ 3.9 $ 4.1
Ratio of Expenses to Average Net Assets (b)............. 1.66% 1.70% 1.72% 1.74% 1.85%
Ratio of Net Investment Income to Average Net Assets
(b)................................................... 4.75% 5.17% 5.24% 5.19% 3.95%
Portfolio Turnover...................................... 104% 73% 61% 75% 82%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended December 31, 1996 and 1995, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to VKAC
reimbursement of certain expenses was less than 0.01%.
* Non-Annualized
See Notes to Financial Statements
B-55
<PAGE> 586
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
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.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. 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.
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 60 days or less 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. 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. Expenses of the Fund are allocated on a pro rata basis to
each class of shares, except for distribution and service fees and transfer
agency costs which are unique to each class of shares.
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, 1997, the Fund had an accumulated
capital loss carryforward for tax purposes of $17,738,846 which will expire
between December 31, 2002 and December 31, 2003. Net realized gains or losses
differ for financial reporting and tax purposes primarily as a result of the
deferral of losses for tax purposes resulting from wash sale transactions and
gains or losses recognized for tax purposes on open futures positions.
B-56
<PAGE> 587
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
At December 31, 1997, for federal income tax purposes, cost of long-term
investments is $943,204,103; the aggregate gross unrealized appreciation is
$93,832,244 and the aggregate gross unrealized depreciation is $9,148,765,
resulting in net unrealized appreciation of $84,683,479.
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.
For Federal income tax purposes, the following information is furnished
with respect to the distributions paid by the Fund during its taxable year ended
December 31, 1997. The Fund designated 99.8% of the income distributions as a
tax-exempt income distribution.
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
- ------------------------------------------------------------------------
<S> <C>
First $500 million.......................................... .50 of 1%
Over $500 million........................................... .45 of 1%
</TABLE>
For the year ended December 31, 1997, the Fund recognized expenses of
approximately $32,500 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended December 31, 1997, the Fund recognized expenses of
approximately $232,300 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") cost of providing accounting,
cash management and legal services to the Fund.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the year ended
December 31, 1997, the Fund recognized expenses of approximately $649,000,
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 provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Fund. The maximum annual
benefit per trustee under the plan is equal to $2,500.
At December 31, 1997, VKAC owned 6,992 Class A shares and 98 shares each
of Class B and C shares.
B-57
<PAGE> 588
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of shares of beneficial interest, 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, 1997, capital aggregated $708,060,131, $202,573,952 and
$14,671,593 for Classes A, B and C, respectively. For the year ended December
31, 1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A................................................... 33,152,701 $ 506,790,274
Class B................................................... 1,551,226 23,205,097
Class C................................................... 328,583 5,033,542
----------- -------------
Total Sales................................................. 35,032,510 $ 535,028,913
=========== =============
Dividend Reinvestment:
Class A................................................... 1,410,217 $ 21,710,873
Class B................................................... 338,503 5,210,731
Class C................................................... 20,537 316,194
----------- -------------
Total Dividend Reinvestment................................. 1,769,257 $ 27,237,798
=========== =============
Repurchases:
Class A................................................... (37,868,614) $(580,864,995)
Class B................................................... (2,313,649) (35,527,835)
Class C................................................... (225,699) (3,444,512)
----------- -------------
Total Repurchases........................................... (40,407,962) ($619,837,342)
=========== =============
</TABLE>
B-58
<PAGE> 589
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
At December 31, 1996, capital aggregated $760,254,848, $209,639,832 and
$12,761,976 for Classes A, B and C, respectively. For the year ended December
31, 1996, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A................................................... 27,650,131 $ 418,053,766
Class B................................................... 1,641,964 24,779,007
Class C................................................... 375,923 5,696,756
----------- -------------
Total Sales................................................. 29,668,018 $ 448,529,529
=========== =============
Dividend Reinvestment:
Class A................................................... 1,572,959 $ 23,855,458
Class B................................................... 375,855 5,699,914
Class C................................................... 22,531 341,365
----------- -------------
Total Dividend Reinvestment................................. 1,971,345 $ 29,896,737
=========== =============
Repurchases:
Class A................................................... (31,326,699) $(474,926,518)
Class B................................................... (2,128,006) (32,268,288)
Class C................................................... (272,810) (4,134,708)
----------- -------------
Total Repurchases........................................... (33,727,515) $(511,329,514)
=========== =============
</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.
<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, 1997, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$112,900 and CDSC on redeemed shares of approximately $435,200. Sales charges do
not represent expenses of the Fund.
On October 25, 1996, the Fund acquired all of the assets and liabilities
of the Van Kampen American Capital Texas Tax Free Income Fund (the "TX Fund"),
through a tax free reorganization approved by TX Fund shareholders on October
15, 1996. The Fund issued 605,902, 421,195 and 53,444 shares of Classes A, B
B-59
<PAGE> 590
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
and C valued at $9,179,415, $6,381,107 and $809,140, respectively, in exchange
for TX Fund's net assets. Shares issued in connection with this reorganization
are included in common share sales for the current period. Combined net assets
on the day of acquisition were $1,003,018,474.
On December 19, 1997, the Fund acquired all of the assets and liabilities
of the Van Kampen American Capital New Jersey Tax Free Income Fund (the 'NJ
Fund"), through a tax free reorganization approved by NJ Fund shareholders on
December 18, 1997. The Fund issued 468,278, 621,329 and 62,562 shares of Classes
A, B and C valued at $7,384,748, $9,798,388 and $985,356, respectively, in
exchange for NJ Fund's net assets. Included in these net assets was a capital
loss carryforward of $203,930 which is included in accumulated net realized
gain/loss and cumulative book and tax basis differences related to expenses not
yet deductible for tax purposes of $15,721 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 day of acquisition were $1,013,024,339.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $1,036,342,353 and $1,065,534,056,
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
unrealized appreciation/depreciation. Upon disposition, a realized gain or loss
is recognized accordingly, except when exercising a call option contract or
taking delivery of a security underlying a futures contract. In these instances
the recognition of gain or loss is postponed until the disposal of the security
underlying the option or futures 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, 1997, were as
follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
- --------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1996............................ 750 $ (659,624)
Options Written and Purchased (Net)......................... 47,054 (2,413,147)
Options Terminated in Closing Transactions (Net)............ (29,290) 1,569,073
Options Expired (Net)....................................... (18,514) 1,503,698
------- -----------
Outstanding at December 31, 1997............................ -0- $ -0-
======= ===========
</TABLE>
B-60
<PAGE> 591
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
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.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin).
Transactions in futures contracts for the year ended December 31, 1997,
were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- ----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1996............................ 251
Futures Opened.............................................. 36,006
Futures Closed.............................................. (36,146)
-------
Outstanding at December 31, 1997............................ 111
=======
</TABLE>
The futures contracts outstanding at December 31, 1997, and the
descriptions and unrealized appreciation/depreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION/
CONTRACTS DEPRECIATION
- ------------------------------------------------------------------------------------
<S> <C> <C>
Long Contracts -- U.S. Treasury Bond Futures
March 1998
(Current notional value $120,469 per contract)............ 36 $ 41,334
Short Contracts -- Municipal Bond Index Futures
March 1998 (Current notional value $123,125 per
contract).............................................. 75 (159,668)
------ ---------
111 $(118,333)
====== =========
</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. These instruments
are typically used by the Fund to enhance the yield of the portfolio.
B-61
<PAGE> 592
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
6. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a 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 net assets and
1.00% each for Class B and Class C net assets are accrued daily. Included in
these fees for the year ended December 31, 1997, are payments retained by VKAC
of approximately $1,464,900.
B-62
<PAGE> 593
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 65% 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 30, 1998 (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
writing or calling Van Kampen American Capital Distributors, Inc. at One
Parkview Plaza, Oakbrook Terrace, IL 60187 at (800) 421-5666 (or (800) 421-2833
for the hearing impaired). 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-30
Custodian and Independent Accountants....................... B-32
Portfolio Transactions and Brokerage Allocation............. B-32
Tax Status of the Fund...................................... B-33
The Distributor............................................. B-33
Distribution and Service Plans.............................. B-33
Transfer Agent.............................................. B-34
Legal Counsel............................................... B-34
Performance Information..................................... B-34
Report of Independent Accountants........................... B-37
Financial Statements........................................ B-38
Notes to Financial Statements............................... B-47
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1998.
B-1
<PAGE> 594
THE FUND AND THE TRUST
Van Kampen American Capital Intermediate Term Municipal Income Fund (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 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 as Van Kampen American Capital Limited Term Municipal Income Fund and was
renamed Van Kampen American Capital Intermediate Term Municipal Income Fund 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
B-2
<PAGE> 595
Fund's total assets (determined at the time of investment) 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 an
issuer, except that the Fund may purchase securities of other investment
companies to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC under
the 1940 Act, as amended from time to time, or (iii) an exemption or other
relief from the provisions of the 1940 Act.
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, except that the Fund
may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
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, except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
9. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and extent permitted by
(i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
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.
B-3
<PAGE> 596
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 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"
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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 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 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.
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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
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.
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
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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 Standard and Poor's Ratings Group ("S&P"), Moody's Investor Service,
Inc. ("Moody's") or another nationally recognized statistical rating
organization ("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.
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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.
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
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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 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.
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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 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
B-10
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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) 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
B-11
<PAGE> 604
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 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
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
securities 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 securities 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
B-12
<PAGE> 605
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 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 S&P 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> 606
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, B Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as
CCC, CC, C having significant speculative characteristics with respect
to capacity to pay interest and repay principal. 'BB'
indicates the least degree of speculation and 'C' the
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 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' is more vulnerable to default than debt rated
"B" 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' is currently vulnerable 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 Debt rating 'CC' is currently highly vulnerable to
nonpayment. The rating 'CC' is also used for debt
subordinated to senior debt that is assigned an actual or
implied 'CCC' rating.
C The 'C' rating may be used to cover a situation where a
bankruptcy petition has been filed, but debt service
payments are continued. The rating 'C' typically is applied
to debt subordinated to senior debt which is assigned an
actual or implied 'CCC-' debt rating.
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 or the taking of a similar action if debt service
payments are jeopardized.
</TABLE>
B-14
<PAGE> 607
<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> 608
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
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<PAGE> 609
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.
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.
</TABLE>
B-17
<PAGE> 610
<TABLE>
<S> <C>
(P) (..) When applied to forward delivery bonds, indicates that the
rating is provisional pending the delivery of the bonds. The
rating may be revised prior to delivery if changes occur in
the legal documents or the underlying credit quality of the
bonds.
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 promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933,
nor does it represent that any specific note is a valid obligation of a
rated issuer or issued in conformity with any applicable law. 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 (for related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
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<PAGE> 611
- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
- Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
The effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement
for relatively high financial leverage. Adequate alternate liquidity is
maintained.
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 Fund and other
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with VK/AC
Holding, Inc. ("VKAC Holding"), Van Kampen American Capital, Inc. ("Van Kampen
American Capital" or "VKAC"), Van Kampen American Capital Investment Advisory
Corp. ("Advisory Corp."), Van Kampen American Capital Asset Management, Inc.
("Asset Management"), Van Kampen American Capital Distributors, Inc., the
distributor of the Fund's shares (the "Distributor"), Van Kampen American
Capital Advisors Corp., Van Kampen Merritt Equity Advisors Corp., Van Kampen
American Capital Insurance Agency of Illinois, Inc., VK/AC System, Inc., Van
Kampen American Capital Record Keeping Services, Inc., American Capital
Contractual Services, Inc., Van Kampen American Capital Trust Company, Van
Kampen American Capital Exchange Corporation, and ACCESS Investors Services
Inc., the Fund's transfer agent ("ACCESS"). Advisory Corp. and Asset Management
sometimes are referred to herein collectively as the "Advisers". For purposes
hereof, the term "Fund Complex" includes each of the open-end investment
companies advised by the Advisers (excluding the Van Kampen American Capital
Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee/Director of each of the
funds in the Fund Complex.
</TABLE>
B-19
<PAGE> 612
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Richard M. DeMartini*..................... President and Chief Operating Officer, Individual Asset
Two World Trade Center Management Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Mr. DeMartini is a Director of InterCapital
New York, NY 10048 Funds, Dean Witter Distributors, Inc. and Dean Witter
Date of Birth: 10/12/52 Trust Company. Trustee of the TCW/DW Funds. Director of
the National Healthcare Resources, Inc. Formerly Vice
Chairman of the Board of the National Association of
Securities Dealers, Inc. and Chairman of the Board of the
Nasdaq Stock Market, Inc. Trustee/Director of each of the
funds in the Fund Complex.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board, The
International House Board and the Women's Board of the
University of Chicago. Trustee/Director of each of the
funds in the Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont 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.
Trustee/Director of each of the funds in the Fund
Complex.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee/Director of each of
the funds in the Fund Complex.
Don G. Powell*............................ Chairman and a Director of VKAC. Chairman and a Director
2800 Post Oak Blvd. of the Advisers and the Distributor. Chairman and a
Houston, TX 77056 Director of ACCESS. Director or officer of certain other
Date of Birth: 10/19/39 subsidiaries of VKAC. Chairman of the Board of Governors
and the Executive Committee of the Investment Company
Institute. Prior to November 1996, President, Chief
Executive Officer and a Director of VKAC Holding.
Trustee/Director of funds in the Fund Complex advised by
Advisory Corp. and prior to July 1996, President, Chief
Executive Officer and a Trustee of the funds in the Fund
Complex.
</TABLE>
B-20
<PAGE> 613
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer service company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company; the
Date of Birth: 07/08/44 Urban Shopping Centers Inc., a retail mall management
company; and Stone Container Corp., a paper manufacturing
company. Trustee, University of Notre Dame. Formerly,
President and Chief Executive Officer, Waste Management,
Inc., an environmental services company, and prior to
that President and Chief Operating Officer, Waste
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen American Capital
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex, and other open-end and closed-end funds
advised by the Advisers or Van Kampen American Capital
Management, Inc.
</TABLE>
- ---------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
position with Morgan Stanley Dean Witter & Co. and its affiliates.
B-21
<PAGE> 614
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Wood, Sullivan, Dalmaso, Martin,
Wetherell and Hill are located at One Parkview Plaza, Oakbrook Terrace, IL
60181. The Fund's other officers are located at 2800 Post Oak Blvd., Houston, TX
77056.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Dennis J. McDonnell......... President Executive Vice President and a Director of
Date of Birth: 05/20/42 VKAC and VK/AC Holding, Inc. President,
Chief Operating Officer and a Director of
the Advisers, Van Kampen American Capital
Advisors, Inc., and Van Kampen American
Capital Management, Inc. President and a
Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he
was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996,
Mr. McDonnell was Chief Executive Officer
and Director of MCM Group, Inc., McCarthy,
Crisanti & Maffei, Inc. and Chairman and
Director of MCM Asia Pacific Company,
Limited and MCM (Europe) Limited. Prior to
November 1996, Executive Vice President and
a Director of VKAC Holding. Prior to July
of 1996, Mr. McDonnell was President, Chief
Operating Officer and Trustee of VSM Inc.
and VCJ Inc. President of each of the funds
in the Fund Complex. President, Chairman of
the Board and Trustee of other investment
companies advised by the Advisers or their
affiliates.
Peter W. Hegel.............. Vice President Executive Vice President of the Advisers,
Date of Birth: 06/25/56 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Prior to July of 1996, Mr.
Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of
McCarthy, Crisanti & Maffei, Inc. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Curtis W. Morell............ Vice President and Chief Senior Vice President of the Advisers, Vice
Date of Birth: 08/04/46 Accounting Officer President and Chief Accounting Officer of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
</TABLE>
B-22
<PAGE> 615
<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 Secretary Executive Vice President, General Counsel,
Date of Birth: 07/29/53 Secretary and Director of VKAC and VK/AC
Holding, Inc. Mr. Nyberg is also Executive
Vice President, General Counsel and a
Director of Van Kampen Merritt Equity
Holdings Corp. Executive Vice President,
General Counsel, Assistant Secretary and a
Director of the Advisers and the
Distributor, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Management, Inc., Van Kampen American
Capital Exchange Corporation, American
Capital Contractual Services, Inc. and Van
Kampen American Capital Trust Company.
Executive Vice President, General Counsel
and Assistant Secretary of ACCESS. Director
or officer of certain other subsidiaries of
VKAC. Prior to June of 1997, Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to April of 1997,
he was Executive Vice President, General
Counsel and Director of Van Kampen Merritt
Equity Advisors Corp. Prior to July of
1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc.
and Executive Vice President and General
Counsel of VCJ Inc. Prior to September of
1996, he was General Counsel of McCarthy,
Crisanti & Maffei, Inc. Vice President and
Secretary of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Alan T. Sachtleben.......... Vice President Executive Vice President of the Advisers,
Date of Birth: 04/20/42 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Vice President of each of
the funds in the Fund Complex and certain
other investment companies advised by the
Advisers or their affiliates.
Paul R. Wolkenberg.......... Vice President Executive Vice President and Director of
Date of Birth: 11/10/44 VKAC, and VK/AC Holding Inc. Executive Vice
President of the AC Adviser and the
Distributor. President and a Director of
ACCESS. President and Chief Operating
Officer of Van Kampen American Capital
Record Keeping Services, Inc. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
B-23
<PAGE> 616
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Edward C. Wood III.......... Vice President and Chief Senior Vice President of the Advisers and
Date of Birth: 01/11/56 Financial Officer Van Kampen American Capital Management,
Inc. Vice President and Chief Financial
Officer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
John L. Sullivan............ Treasurer First Vice President of the Advisers.
Date of Birth: 08/20/55 Treasurer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Tanya M. Loden.............. Controller Vice President of the Advisers. Controller
Date of Birth: 11/19/59 of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Nicholas Dalmaso............ Assistant Secretary Associate General Counsel and Assistant
Date of Birth: 03/01/65 Secretary of VKAC. Vice President,
Associate General Counsel and Assistant
Secretary of the Advisers, the Distributor,
Van Kampen American Capital Advisors, Inc.
and Van Kampen American Capital Management,
Inc. Assistant Secretary of each of the
funds in the Fund Complex and other
investment companies advised by the
Advisers or their affiliates.
Huey P. Falgout, Jr......... Assistant Secretary Vice President and a Senior Attorney of
Date of Birth: 11/15/63 VKAC. Vice President and Assistant
Secretary of the Advisers, the Distributor,
ACCESS, Van Kampen American Capital
Management, Inc., American Capital
Contractual Services, Inc., Van Kampen
American Capital Exchange Corporation and
Van Kampen American Capital Advisors, Inc.
Assistant Secretary of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
B-24
<PAGE> 617
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Scott E. Martin............. Assistant Secretary Senior Vice President, Deputy General
Date of Birth: 08/20/56 Counsel and Assistant Secretary of VKAC and
VKAC Holding, Inc. Senior Vice President,
Deputy General Counsel and Secretary of the
Advisers, the Distributor, ACCESS American
Capital Contractual Services, Inc., Van
Kampen American Capital Management, Inc.,
Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Insurance Agency of Illinois, Inc., VKAC
System, Inc., Van Kampen American Capital
Record Keeping Services, Inc. and Van
Kampen Merritt Equity Advisors Corp. Prior
to April of 1997, Senior Vice President,
Deputy General Counsel and Secretary of Van
Kampen American Capital Services, Inc. and
Van Kampen Merritt Holdings Corp. Prior to
September of 1996, Mr. Martin was Deputy
General Counsel and Secretary of McCarthy,
Crisanti & Maffei, Inc., and prior to July
of 1996, he was Senior Vice President,
Deputy General Counsel and Secretary of VSM
Inc. and VCJ Inc. Assistant Secretary of
each of the funds in the Fund Complex and
other investment companies advised by the
Advisers or their affiliates.
Weston B. Wetherell......... Assistant Secretary Vice President, Associate General Counsel
Date of Birth: 06/15/56 and Assistant Secretary of VKAC, the
Advisers, the Distributor, Van Kampen
American Capital Management, Inc. and Van
Kampen American Capital Advisors, Inc.
Prior to September of 1996, Mr. Wetherell
was Assistant Secretary of McCarthy,
Crisanti & Maffei, Inc. Assistant Secretary
of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Steven M. Hill.............. Assistant Treasurer Vice President of the Advisers. Assistant
Date of Birth: 10/16/64 Treasurer of each of the funds in the Fund
Complex and other investment companies
advised by the Advisers or their
affiliates.
Michael Robert Sullivan..... Assistant Controller Assistant Vice President of the Advisers.
Date of Birth: 03/30/33 Assistant Controller of each of the funds
in the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 64 operating funds in the Fund Complex. For purposes of the following
compensation and benefits discussion, the Fund Complex is divided into the
following three groups: the funds advised by Asset Management (the "AC Funds"),
the funds advised by Advisory Corp. excluding funds organized as series of the
Morgan Stanley Fund, Inc. (the "VK Funds") and the funds advised by Advisory
Corp. organized as series of the Morgan Stanley Fund, Inc. (the "MS Funds").
Each trustee/director who is not an affiliated person of VKAC, the Advisers, the
Distributor, ACCESS or Morgan
B-25
<PAGE> 618
Stanley Dean Witter & Co. (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 (except the money market series of the MS Funds)
provides a deferred compensation plan to its Non-Affiliated Trustees that allows
trustees/directors to defer receipt of their compensation and earn a return on
such deferred amounts. Deferring compensation has the economic effect as if the
Non-Affiliated Trustee reinvested his or her compensation into the funds. Each
fund in the Fund Complex (except the money market series of the MS Funds)
provides a retirement plan to its Non-Affiliated Trustees that provides
Non-Affiliated Trustees with compensation after retirement, provided that
certain eligibility requirements are met as more fully described below.
The trustees recently reviewed and adopted a standardized compensation and
benefits program for each fund in the Fund Complex. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes an annual retainer in
an amount equal to $50,000 per calendar year, due in four quarterly installments
on the first business day of each quarter. Payment of the annual retainer is
allocated among the funds in the Fund Complex (except the money market series of
the MS Funds) on the basis of the relative net assets of each fund as of the
last business day of the preceding calendar quarter. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes a per meeting fee from
each fund in the Fund Complex (except the money market series of the MS Funds)
in the amount of $200 per quarterly or special meeting attended by the
Non-Affiliated Trustee, due on the date of the 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.
For each AC Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from the AC
Funds includes an annual retainer in an amount equal to $35,000 per calendar
year, due in four quarterly installments on the first business day of each
calendar quarter. The AC Funds pay each Non-Affiliated Trustee a per meeting fee
in the amount of $2,000 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. Payment of the annual retainer and the regular meeting
fee is allocated among the AC Funds (i) 50% on the basis of the relative net
assets of each AC Fund to the aggregate net assets of all the AC Funds and (ii)
50% equally to each AC Fund, in each case as of the last business day of the
preceding calendar quarter. Each AC Fund which is the subject of a special
meeting of the trustees generally pays each Non-Affiliated Trustee a per meeting
fee 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.
For each VK Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from each VK
Fund includes an annual retainer 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 each VK
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 each VK 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.
For the period from July 2, 1997 up to and including December 31, 1997, the
compensation of each Non-Affiliated Trustee from the MS Funds was based
generally on the compensation amounts and methodology used by such funds prior
to their joining the current Fund Complex on July 2, 1997. Each trustee/director
was elected as a director of the MS Funds on July 2, 1997. Prior to July 2,
1997, the MS Funds were part of another fund complex (the "Prior Complex") and
the former directors of the MS Funds were paid an aggregate fee allocated among
the funds in the Prior Complex that resulted in individual directors receiving
total compensation between approximately $8,000 to $10,000 from the MS Funds
during such funds' last fiscal year.
B-26
<PAGE> 619
Under the deferred compensation plan, each Non-Affiliated Trustee generally
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 the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
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 the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
----------------------------------------------------------
AGGREGATE AGGREGATE TOTAL
YEAR FIRST PENSION OR ESTIMATED MAXIMUM COMPENSATION
APPOINTED OR AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
ELECTED TO THE BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) BOARD FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- -------------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
J. Miles Branagan 1991 $3,000 $30,328 $60,000 $111,197
Linda Hutton Heagy 1995 3,000 3,141 60,000 111,197
R. Craig Kennedy 1995 3,000 2,229 60,000 111,197
Jack E. Nelson 1995 3,000 15,820 60,000 104,322
Jerome L. Robinson* 1995 3,000 32,020 15,750 107,947
Phillip B. Rooney** 1997 2,250 0 60,000 74,697
Dr. Fernando Sisto 1973 3,000 60,208 60,000 111,197
Wayne W. Whalen 1995 3,000 10,788 60,000 111,197
</TABLE>
- ---------------
* Mr. Robinson retired from the Board of Trustees on December 31, 1997.
** Mr. Phillip B. Rooney became a member of the Board of Trustees effective
April 14, 1997 and thus does not have a full fiscal year of information to
report.
(1) Messrs. DeMartini, McDonnell and Powell, trustees of the Fund during all or
a portion of the Fund's last fiscal year, are not included in the
compensation table because they are not eligible for compensation or
retirement benefits from the Fund. Mr. McDonnell resigned as a Trustee of
the Fund, effective May 31, 1997.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Fund's fiscal year ended December 31, 1997. The
detail of aggregate compensation before deferral for each series, including
the Fund, are shown in Table A below. The details of amounts deferred for
each series, including the Fund, are shown in Table B below. Amounts
deferred are retained by the Fund and earn a rate of return determined by
reference to either the return on the common shares of the Fund or other
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted
by the 1940 Act, each Fund may invest in securities of those funds selected
by the Non-Affiliated Trustees in order to match the deferred compensation
obligation. The details of cumulative
B-27
<PAGE> 620
deferred compensation (including interest) owed to current Trustees for each
series, including the Fund, are shown in Table C below. The deferred
compensation plan is described above the Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for their respective fiscal years ended in 1997. The retirement
plan is described above the Compensation Table.
(4) For Mr. Robinson, this is the sum of the actual annual benefits payable by
the operating investment companies in the Fund Complex as of the date of
their retirement for each year of the 10-year period since such trustee's
retirement. For the remaining trustees, this is the sum of the estimated
maximum annual benefits payable by the operating investment companies in the
Fund Complex for each year of the 10-year period commencing in the year of
such trustee's anticipated retirement. The Retirement Plan is described
above the Compensation Table. Each Non-Affiliated Trustee of the Board of
Trustees has served as a member of the Board of Trustees since he or she was
first appointed or elected in the year set forth in Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1997 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1997. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
trustees were not trustees of such investment companies. Combining the Fund
Complex with other investment companies advised by the Advisers and their
affiliates, Mr. Whalen received Total Compensation of $268,447 during the
calendar year ended December 31, 1997.
As of April 2, 1998, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.
B-28
<PAGE> 621
TABLE A
1997 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL ----------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............ 12/31 $ 3,000 $3,000 $3,000 $ 3,000 $3,000 $2,250 $3,000 $ 3,000
Tax Free High Income Fund............... 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
California Insured Tax Free Income
Fund.................................. 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
Municipal Income Fund*.................. 12/31 4,125 4,125 4,125 4,125 4,125 3,250 4,125 4,125
Intermediate Term Municipal Income
Fund.................................. 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
Florida Insured Tax Free Income Fund.... 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
New York Tax Free Income Fund........... 12/31 1,125 1,125 1,125 1,125 1,125 1,000 1,125 1,125
Trust Total........................... 20,250 20,250 20,250 20,250 20,250 15,500 20,250 20,250
</TABLE>
*Includes the deferred compensation balances from New Jersey Tax Free Income
Fund, which was merged into the Municipal Income Fund in November 1997.
TABLE B
1997 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund........ 12/31 $ 3,000 $ 3,000 $ 1,500 $ 3,000 $ 3,000 $ 1,500 $ 1,500 $ 3,000
Tax Free High Income Fund........... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
California Insured Tax Free Fund.... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Municipal Income Fund............... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Intermediate Term Municipal Income
Fund.............................. 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Florida Insured Tax Free Income
Fund.............................. 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
New York Tax Free Income Fund....... 12/31 1,125 1,125 563 1,125 1,125 875 563 1,125
New Jersey Tax Free Income Fund..... 12/31 1,125 1,125 563 1,125 1,125 875 563 1,125
Trust Total....................... 20,250 20,250 10,126 20,250 20,250 10,750 10,126 20,250
</TABLE>
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......... 12/31 $ 4,324 $ 6,482 $11,233 $15,086 $14,485 $ 1,513 $ 3,180 $12,966
Tax Free High Income Fund............ 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
California Insured Tax Free Fund..... 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
Municipal Income Fund*............... 12/31 5,170 7,878 14,033 19,758 18,928 1,765 8,110 17,020
Intermediate Term Municipal Income
Fund............................... 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
Florida Insured Tax Free Income
Fund............................... 12/31 4,324 6,482 6,853 10,650 10,391 1,513 1,622 9,946
New York Tax Free Income Fund........ 12/31 1,487 1,181 3,118 4,223 4,049 891 591 3,586
Trust Total........................ 28,277 41,469 68,936 94,975 91,308 10,221 18,369 82,416
</TABLE>
*Includes the deferred compensation balances from New Jersey Tax Free Income
Fund, which was merged into the Municipal Income Fund in November 1997.
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-----------------------------------------------------------------------------------
FUND NAME BRANAGAN DEMARTINI HEAGY KENNEDY NELSON POWELL ROONEY SISTO WHALEN
- --------- -------- --------- ----- ------- ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............... 1995 1997 1995 1993 1984 1997 1997 1995 1984
Tax Free High Income Fund.................. 1995 1997 1995 1993 1985 1997 1997 1995 1985
California Insured Tax Free Income Fund.... 1995 1997 1995 1993 1985 1997 1997 1995 1985
Municipal Income Fund...................... 1995 1997 1995 1993 1990 1997 1997 1995 1990
Intermediate Term Municipal Income Fund.... 1995 1997 1995 1993 1993 1997 1997 1995 1993
Florida Insured Tax Free Income Fund....... 1995 1997 1995 1994 1994 1997 1997 1995 1994
New Jersey Tax Free Income Fund............ 1995 1997 1995 1994 1994 1997 1997 1995 1994
New York Tax Free Income Fund.............. 1995 1997 1995 1994 1994 1997 1997 1995 1994
</TABLE>
B-29
<PAGE> 622
As of April 2 1998, 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 2, 1998 SHARES OWNERSHIP
-------------------------- ------------- -------- ----------
<S> <C> <C> <C>
Paul Richard Wolkenberg................................... 128,756 A 7.23%
1618 Kings Castle Drive
Katy, TX 77450-4300
Donaldson Lufkin Jenrette................................. 119,507 A 6.70%
Securities Corporation Inc.
P O Box 2052
Jersey City, NJ 07303-2052
Smith Barney Inc.......................................... 94,787 A 5.32%
00150429315
388 Greenwich Street
New York, NY 10013-2339
Dean Witter for the Benefit of............................ 20,703 C 6.97%
Charles Michael Gardner and
Kelly Jo Gardner JTTEN
5 World Trade Center 6th Floor
New York, NY 10048-0205
Sea Gardens Beach and Tennis.............................. 19,407 C 6.53%
Resort Condo Assoc. Inc. Ocean
View C/O Manzie/Elliot
2601 Palm-Aire Dr. N.
Pompano Beach, FL 33069-3466
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
The Adviser is the Fund's investment adviser. The Adviser was incorporated as
a Delaware corporation in 1982 (and through December 31, 1987 transacted
business under the name of American Portfolio Advisory Service Inc.).
The Adviser, Van Kampen American Capital Distributors, Inc. (the
"Distributor") and ACCESS Investor Services ("ACCESS") are wholly-owned
subsidiary of Van Kampen American Capital, Inc. ("VKAC"), which is an indirect
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The principal office
of the Fund, the Adviser, the Distributor and VKAC is located at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management, Inc., and
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending.
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,
B-30
<PAGE> 623
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 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, 1997, 1996 and 1995, the Fund paid $164,970,
$176,896 and $0, respectively.
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT. The Fund has also entered into an accounting
services agreement pursuant to which the Adviser provides accounting services
supplementary to those provided by the Custodian. Such services are expected to
enable the Fund to more closely monitor and maintain its accounts and records.
The Fund shares equally with the other Van Kampen American Capital mutual funds
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, 1997, 1996 and 1995, the Fund paid expenses
of approximately $36,000, $8,900 and $7,300, 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. 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, 1997, 1996 and 1995, the Fund paid expenses
of approximately $7,200, $7,800 and $8,200, respectively, representing Van
Kampen American Capital's cost of providing legal services.
B-31
<PAGE> 624
CUSTODIAN AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, 225 West 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 accountants for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent accountants 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.
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.
B-32
<PAGE> 625
For the years ended December 31, 1997, 1996 and 1995 the Fund paid no
brokerage commissions.
TAX STATUS OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal 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. VKAC
manages or supervises more than $60 billion in mutual funds, closed-end funds
and unit investment trusts -- assets which have been entrusted to VKAC in more
than 2 million investor accounts. VKAC has one of the largest research teams
(outside of the rating agencies) in the country. Each of our high yield
analysts, based either in San Francisco, Chicago, Houston or Boston, has the
responsibility to cover a specific region of the country. This regional focus
enables each high yield analyst to provide more specialized coverage of the
market and alert the portfolio manager to issues of local importance.
Shares of the Fund are offered through the Distributor. The Distributor is a
wholly owned subsidiary of Van Kampen American Capital, Inc. ("VKAC"), which is
an indirect wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The
principal office of the Fund, the Adviser, the Distributor and VKAC is located
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management, Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending.
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.
Total underwriting commissions on the sale of shares of the Fund for the last
three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
AMOUNTS
TOTAL UNDERWRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------------ --------------
<S> <C> <C>
Fiscal Year Ended December 31, 1995......................... $23,378 $2,081
Fiscal Year Ended December 31, 1996......................... $15,585 $1,844
Fiscal Year Ended December 31, 1997......................... $10,982 $ 636
</TABLE>
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 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
B-33
<PAGE> 626
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 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."
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 fiscal year ending December 31, 1997, the Fund's aggregate expenses
under the Class A Plan were $30,353, or 0.25% of the Class A shares' average net
assets. For the fiscal year ended December 31, 1997, the Fund's aggregate
expenses under the Class B Plan were $161,035, or 1.00%, of the Class B shares'
average net assets. Such expenses were paid to reimburse the Distributor for the
following payments: $120,525 for commissions and transaction fees paid to
financial intermediaries in respect of sales of Class B shares of the Fund and
$40,510 for fees paid to financial intermediaries for servicing Class B
shareholders and administering the Class B Plan. For the fiscal year ended
December 31, 1997, the Fund's aggregate expenses under the Class C Plan were
$58,716 or 1.00% of the Class C shares' average net assets. Such expenses were
paid to reimburse the Distributor for the following payments: $31,868 for the
commissions and transactions fees paid to financial intermediaries in respect of
sales of Class C shares of the Fund and $26,848 for fees paid to financial
intermediaries for servicing Class C shareholders and administering the Class C
Plan.
TRANSFER AGENT
During the fiscal years ended December 31, 1995, 1996 and 1997, ACCESS,
shareholder service agent and dividend disbursing agent for the Fund, received
fees approximately aggregating $16,900, $35,600 and $28,200, respectively, for
these services. The transfer agency prices are determined through negotiations
with the Fund's Board of Trustees and are based on competitive market
benchmarks.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (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
B-34
<PAGE> 627
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 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, 1997 was 4.60%
and (ii) the approximately four year seven month period from May 28, 1993 (the
commencement of investment operations of the Fund) through December 31, 1997 was
6.04%.
B-35
<PAGE> 628
The Fund's yield with respect to the Class A Shares for the 30 day period
ending December 30, 1997 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.15%. The tax-equivalent yield with
respect to the Class A Shares for the 30 day period ending December 30, 1997
(calculated in the manner described in the Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 6.48%. The Fund's current
distribution rate with respect to the Class A Shares for the month ending
December 31, 1997 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 4.35%. The taxable equivalent distribution
rate with respect to Class A Shares for the month ending December 31, 1997 was
6.80%.
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, 1997 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 30.94%.
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, 1997 was 35.39%.
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, 1997 was 4.23% and (ii)
the approximately four year seven month period of May 28, 1993 (commencement of
distribution) through December 31, 1997 was 6.04%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending December 30, 1997 (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, 1997
(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, 1997 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 3.82%. The taxable equivalent distribution
rate with respect to Class B Shares for the month ending December 31, 1997 was
5.97%.
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, 1997
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 30.95%.
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, 1997
was 30.95%.
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, 1997 was 6.23% and
(ii) the approximately four year three month period of October 19, 1993
(commencement of distribution) through December 31, 1997 was 4.87%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending December 30, 1997 (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, 1997
(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 C Shares for the month ending
December 31, 1997 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 3.82%. The taxable equivalent distribution
rate with respect to Class C Shares for the month ending December 31, 1997 was
5.97%.
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, 1997
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 22.12%.
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, 1997
was 22.12%.
B-36
<PAGE> 629
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen American Capital Intermediate Term Municipal Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Intermediate Term Municipal Income Fund (the "Fund"),
including the portfolio of investments, as of December 31, 1997, 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, 1997, 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 Intermediate Term Municipal Income Fund as of December
31, 1997, 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 4, 1998
B-37
<PAGE> 630
PORTFOLIO OF INVESTMENTS
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 98.1%
ALABAMA 1.6%
$ 500 West Jefferson Cnty, AL Amusement & Pub Pk
Auth............................................ 7.500% 12/01/08 $ 530,700
-----------
ALASKA 0.8%
250 Seward, AK Rev AK Sealife Cent Proj............. 7.100 10/01/05 264,735
-----------
ARIZONA 5.6%
500 Maricopa Cnty, AZ Indl Dev Auth Senior Living
Fac Rev......................................... 7.250 04/01/05 524,275
1,160 Pima Cnty, AZ Indl Dev Auth Indl Rev Lease Oblig
Irvington Proj Tucson Ser A Rfdg (FSA Insd)..... 7.250 07/15/10 1,299,687
-----------
1,823,962
-----------
CALIFORNIA 5.6%
360 California Edl Fac Auth Rev Pacific Grad
School.......................................... 6.950 11/01/07 372,409
1,000 California St (AMBAC Insd)...................... 6.400 09/01/08 1,173,580
240 Del Mar, CA Race Track Auth Rev Rfdg............ 6.000 08/15/06 259,368
-----------
1,805,357
-----------
COLORADO 5.5%
237 Colorado Hsg Fin Auth Access Pgm Single Family
Pgm Ser E....................................... 8.125 12/01/24 263,535
330 Colorado Hlth Fac Auth Rev Sr Living Fac Eaton
Terrace A....................................... 6.800 07/01/09 343,358
1,000 Denver, CO City & Cnty Arpt Rev Ser A........... 7.400 11/15/04 1,159,090
-----------
1,765,983
-----------
CONNECTICUT 2.6%
145 Mashantucket Wester Pequot Tribe Conn Spl Rev
Ser A (Escrowed to Maturity), 144A-Private
Placement (c)................................... 6.500 09/01/06 165,925
155 Mashantucket Western Pequot Tribe Conn Spl Rev
Ser A, 144A- Private Placement (c).............. 6.500 09/01/06 173,840
500 New Haven, CT Indl Fac Rev Adj Govt Cent Thermal
Energies........................................ 7.250 07/01/09 501,025
-----------
840,790
-----------
FLORIDA 8.1%
1,150 Florida Hsg Fin Agy Hsg Maitland Club Apts Ser
B1 (AMBAC Insd)................................. 6.750 08/01/14 1,254,661
190 Lee Cnty, FL Indl Dev Auth Econ Rev Encore
Nursing Cent Partner Rfdg....................... 8.125 12/01/07 211,590
250 Orange Cnty, FL Hlth Fac Auth Rev First Mtg
Orlando Lutheran Twr Rfdg....................... 8.125 07/01/06 278,110
300 Volusia Cnty, FL Indl Dev Auth Bishops Glen Proj
Rfdg............................................ 7.125 11/01/06 316,536
535 Westchase East Cmnty Dev Dist FL Cap Impt Rev... 7.250 05/01/03 555,282
-----------
2,616,179
-----------
GEORGIA 5.0%
1,470 De Kalb Cnty, GA Hsg Auth Multi-Family Hsg Rev
North Hill Apts Proj Rfdg (FNMA Collateralized)
(b)............................................. 6.625 01/01/25 1,616,000
-----------
ILLINOIS 13.0%
450 Bedford Park, IL Tax Increment 71st & Cicero
Proj Rfdg....................................... 7.000 01/01/06 479,646
</TABLE>
See Notes to Financial Statements
B-38
<PAGE> 631
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 500 Carol Stream, IL First Mtg Rev Windsor Pk Mnr
Proj............................................ 6.500% 12/01/07 $ 516,900
500 Chicago, IL Tax Increment Allocation San
Drainage & Ship Canal A......................... 7.375 01/01/05 530,715
165 Danville, IL Single Family Mtg Rev Rfdg......... 7.300 11/01/10 176,491
1,335 Illinois Dev Fin Auth Elderly Hsg Rev
Libertyville Towers Ser A....................... 6.500 09/01/09 1,408,932
750 Illinois Hlth Fac Auth Rev Holy Cross Hosp Proj
Ser 94-A........................................ 6.250 03/01/04 791,632
300 Peoria, IL Spl Tax Weaverridge Spl Svc Area..... 7.625 02/01/08 321,216
-----------
4,225,532
-----------
KENTUCKY 1.7%
500 Kenton Cnty, KY Arpt Brd Rev (MBIA Insd) (a).... 5.900 03/01/05 545,240
-----------
LOUISIANA 0.8%
250 Iberia Parish, LA Hosp Svc Dist No 1 Hosp Rev... 7.500 05/26/06 268,478
-----------
MASSACHUSETTS 4.0%
500 Massachusetts St Hlth & Edl Fac Auth Rev Cent
New England Hlth Sys Ser A...................... 6.125 08/01/13 504,855
500 Massachusetts St Hlth & Edl North Adams Regl
Hosp Ser C...................................... 6.250 07/01/04 536,900
230 Massachusetts St Indl Fin Agy East Boston
Neighborhood Proj............................... 7.250 07/01/06 240,444
-----------
1,282,199
-----------
MICHIGAN 0.8%
250 Michigan St Hosp Fin Auth Rev Detroit-Macomb
Hosp Corp Ser A Rfdg............................ 7.300 06/01/01 251,588
-----------
MINNESOTA 2.6%
500 Crow Fin Auth MN Tribal Purp Rev 144A-Private
Placement (a) (c)............................... 5.400 10/01/07 501,080
330 Minneapolis, MN Multi-Family Rev Hsg Belmont
Apts Proj....................................... 7.000 11/01/06 342,712
-----------
843,792
-----------
MISSOURI 5.2%
1,500 Kansas City, MO Arpt Rev Genl Impt Ser A (FSA
Insd)........................................... 7.000 09/01/12 1,686,225
-----------
NEW JERSEY 7.3%
500 Camden Cnty, NJ Impt Auth Lease Rev Kaighn Pt
Marine Terminal A............................... 7.375 06/01/07 519,430
250 New Jersey Econ Dev Auth Rev Sr Mtg Arbor Glen
Proj Ser A...................................... 8.000 05/15/04 272,680
1,000 New Jersey Hlthcare Fac Fin Auth Rev Christ Hosp
Group Issue (Connie Lee Insd)................... 7.000 07/01/06 1,175,740
375 New Jersey Hlthcare Fac Fin Auth Rev Palisades
Med Cent........................................ 7.500 07/01/06 403,414
-----------
2,371,264
-----------
NEW YORK 8.8%
500 New York City Ser A............................. 7.000 08/01/07 580,455
1,000 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg
Ser A (AMBAC Insd).............................. 6.200 08/15/05 1,123,000
1,000 Niagara Falls, NY Pub Impt (MBIA Insd).......... 6.900 03/01/20 1,141,360
-----------
2,844,815
-----------
</TABLE>
See Notes to Financial Statements
B-39
<PAGE> 632
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OHIO 5.8%
$ 500 Cuyahoga Cnty, OH Hlthcare Fac Rev Judson
Retirement Cmnty Ser A Rfdg..................... 7.000% 11/15/10 $ 538,220
250 Marion Cnty, OH Hosp Impt Rev Cmnty Hosp Rfdg... 6.375 05/15/11 268,735
1,000 Ohio St Air Quality Dev Auth Rev Owens Corning
Fiberglass Proj Rfdg............................ 6.250 06/01/04 1,064,350
-----------
1,871,305
-----------
OKLAHOMA 1.7%
520 Shawnee, OK Hosp Auth Hosp Rev Midamerica
Hlthcare Inc Rfdg............................... 5.750 10/01/03 535,834
-----------
PENNSYLVANIA 0.7%
225 Erie, PA Higher Edl Bldg Auth College Rev
Mercyhurst College Proj A Rfdg.................. 5.300 03/15/03 234,261
-----------
TEXAS 4.0%
500 Austin, TX Util Sys Rev Rfdg (AMBAC Insd) (a)... 6.500 11/15/05 560,975
405 Mesquite, TX Hlth Fac Dev Retirement Fac
Christian Ser A................................. 6.100 02/15/08 425,388
300 San Antonio, TX Hsg Fin Corp Multi-Family Hsg
Rev Beverly Oaks Arpt Proj Ser A................ 7.500 02/01/10 314,067
-----------
1,300,430
-----------
UTAH 5.2%
1,570 Utah St Hsg Fin Agy Single Family Mtg Mezz Ser
A-1 (FHA Gtd)................................... 7.150 07/01/12 1,692,727
-----------
VIRGINIA 1.7%
500 Pittsylvania Cnty, VA Indl Dev Auth Rev Exempt
Fac Ser A....................................... 7.450 01/01/09 553,679
-----------
TOTAL LONG-TERM INVESTMENTS 98.1%
(Cost $29,337,342)......................................................... 31,771,075
SHORT-TERM INVESTMENTS 4.3%
(Cost $1,400,056).......................................................... 1,400,056
-----------
TOTAL INVESTMENTS 102.4%
(Cost $30,737,398)......................................................... 33,171,131
LIABILITIES IN EXCESS OF OTHER ASSETS (2.4%)................................ (776,663)
-----------
NET ASSETS 100.0%........................................................... $32,394,468
===========
*Zero coupon bond
</TABLE>
(a) Securities purchased on a when issued or delayed delivery basis.
(b) Assets segregated as collateral for when issued or delayed delivery purchase
commitments.
(c) 144a securities are those which are exempt from registration under Rule 144a
of the Securities Act of 1933. These securities may be resold only in
transactions exempt from registration which are normally those transactions
with qualified institutional buyers.
See Notes to Financial Statements
B-40
<PAGE> 633
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $30,737,398)........................ $33,171,131
Cash........................................................ 44,461
Receivables:
Interest.................................................. 675,343
Investments Sold.......................................... 340,068
Fund Shares Sold.......................................... 17,505
Unamortized Organizational Cost............................. 4,828
-----------
Total Assets.......................................... 34,253,336
-----------
LIABILITIES:
Payables:
Investments Purchased..................................... 1,531,286
Distributor and Affiliates................................ 61,211
Income Distributions...................................... 38,817
Investment Advisory Fee................................... 13,618
Accrued Expenses............................................ 123,322
Trustees' Deferred Compensation and Retirement Plans........ 90,614
-----------
Total Liabilities..................................... 1,858,868
-----------
NET ASSETS.................................................. $32,394,468
===========
NET ASSETS CONSIST OF:
Capital..................................................... $30,265,817
Net Unrealized Appreciation................................. 2,433,733
Accumulated Undistributed Net Investment Income............. 33,324
Accumulated Net Realized Loss............................... (338,406)
-----------
NET ASSETS.................................................. $32,394,468
===========
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $12,922,442 and 1,226,471 shares of
beneficial interest issued and outstanding)............. $ 10.54
Maximum sales charge (3.25%* of offering price)......... .35
-----------
Maximum offering price to public........................ $ 10.89
===========
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $16,418,482 and 1,559,757 shares of
beneficial interest issued and outstanding)............. $ 10.53
===========
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $3,053,544 and 290,114 shares of
beneficial interest issued and outstanding)............. $ 10.53
===========
</TABLE>
*On sales of $25,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
B-41
<PAGE> 634
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $2,041,580
----------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $30,399, $160,699 and $47,630,
respectively)............................................. 238,728
Investment Advisory Fee..................................... 164,970
Registration................................................ 51,830
Shareholder Reports......................................... 44,275
Shareholder Services........................................ 41,433
Accounting.................................................. 36,037
Trustees' Fees and Expenses................................. 33,533
Custody..................................................... 24,290
Amortization of Organizational Costs........................ 11,994
Legal....................................................... 9,334
Other....................................................... 51,451
----------
Total Expenses.......................................... 707,875
Less Expenses Reimbursed................................ 47,231
----------
Net Expenses............................................ 660,644
----------
NET INVESTMENT INCOME....................................... $1,380,936
==========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................. $ 356,859
Futures................................................. (9,378)
----------
Net Realized Gain........................................... 347,481
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................. 1,782,271
End of the Period....................................... 2,433,733
----------
Net Unrealized Appreciation During the Period............... 651,462
----------
NET REALIZED AND UNREALIZED GAIN............................ $ 998,943
==========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $2,379,879
==========
</TABLE>
See Notes to Financial Statements
B-42
<PAGE> 635
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................ $ 1,380,936 $ 1,413,175
Net Realized Gain.................................... 347,481 347,243
Net Unrealized Appreciation/Depreciation During the
Period............................................. 651,462 (454,405)
----------- -----------
Change in Net Assets from Operations................. 2,379,879 1,306,013
----------- -----------
Distributions from Net Investment Income:
Class A Shares..................................... (560,309) (656,307)
Class B Shares..................................... (628,468) (666,673)
Class C Shares..................................... (186,777) (184,281)
----------- -----------
Total Distributions.............................. (1,375,554) (1,507,261)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES......................................... 1,004,325 (201,248)
----------- -----------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold............................ 5,579,082 4,946,191
Net Asset Value of Shares Issued Through Dividend
Reinvestment....................................... 883,487 972,957
Cost of Shares Repurchased........................... (9,753,115) (9,123,506)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS... (3,290,546) (3,204,358)
----------- -----------
TOTAL DECREASE IN NET ASSETS......................... (2,286,221) (3,405,606)
NET ASSETS:
Beginning of the Period.............................. 34,680,689 38,086,295
----------- -----------
End of the Period (Including accumulated
undistributed net investment income of $33,324 and
$27,942, respectively)............................. $32,394,468 $34,680,689
=========== ===========
</TABLE>
See Notes to Financial Statements
B-43
<PAGE> 636
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
May 28, 1993
(Commencement
Year Ended December 31, of Investment
------------------------------------- Operations) to
Class A Shares 1997 1996 1995 1994 December 31, 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................... $10.213 $10.264 $ 9.330 $10.145 $ 9.700
------- ------- ------- ------- -------
Net Investment Income................ .480 .455 .508 .489 .278
Net Realized and Unrealized
Gain/Loss.......................... .317 (.032) .900 (.815) .462
------- ------- ------- ------- -------
Total from Investment Operations....... .797 .423 1.408 (.326) .740
------- ------- ------- ------- -------
Less:
Distributions from Net Investment
Income............................. .474 .474 .474 .489 .273
Distributions from Net Realized
Gain............................... -0- -0- -0- -0- .022
------- ------- ------- ------- -------
Total Distributions.................... .474 .474 .474 .489 .295
------- ------- ------- ------- -------
Net Asset Value, End of the Period..... $10.536 $10.213 $10.264 $ 9.330 $10.145
======= ======= ======= ======= =======
Total Return* (a)...................... 8.08% 4.27% 15.31% (3.32%) 7.75%**
Net Assets at End of the Period (In
millions)............................ $ 12.9 $ 12.5 $ 15.6 $ 15.7 $ 14.0
Ratio of Expenses to Average Net
Assets*.............................. 1.52% 1.56% 1.00% .67% .14%
Ratio of Net Investment Income to
Average Net Assets*.................. 4.67% 4.45% 5.10% 5.07% 4.78%
Portfolio Turnover..................... 37% 45% 75% 274% 86%**
* If certain expenses had not been reimbursed by VKAC, Total Return would have been lower and the
ratios would have been as follow:
Ratio of Expenses to Average Net
Assets............................... 1.67% 1.74% 1.61% 1.75% 2.21%
Ratio of Net Investment Income to
Average Net Assets................... 4.52% 4.27% 4.49% 3.99% 2.70%
</TABLE>
** Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
See Notes to Financial Statements
B-44
<PAGE> 637
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
May 28, 1993
(Commencement
Year Ended December 31, of Investment
--------------------------- Operations) to
Class B Shares 1997 1996 1995 1994 December 31, 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.............................. $ 10.209 $10.263 $ 9.319 $10.137 $ 9.700
-------- ------- ------- ------- -------
Net Investment Income................. .402 .375 .430 .417 .233
Net Realized and Unrealized
Gain/Loss........................... .317 (.027) .916 (.818) .460
-------- ------- ------- ------- -------
Total from Investment Operations...... .719 .348 1.346 (.401) .693
-------- ------- ------- ------- -------
Less:
Distributions from Net Investment
Income............................ .402 .402 .402 .417 .234
Distributions from Net Realized
Gain.............................. -0- -0- -0- -0- .022
-------- ------- ------- ------- -------
Total Distributions................... .402 .402 .402 .417 .256
-------- ------- ------- ------- -------
Net Asset Value, End of the Period.... $ 10.526 $10.209 $10.263 $ 9.319 $10.137
======== ======= ======= ======= =======
Total Return* (a)..................... 7.23% 3.54% 14.62% (4.04%) 7.23%**
Net Assets at End of the Period (In
millions)........................... $ 16.4 $ 16.4 $ 17.5 $ 17.7 $ 13.9
Ratio of Expenses to Average Net
Assets*............................. 2.28% 2.32% 1.75% 1.43% .92%
Ratio of Net Investment Income to
Average Net Assets*................. 3.91% 3.69% 4.33% 4.30% 3.95%
Portfolio Turnover.................... 37% 45% 75% 274% 86%**
*If certain expenses had not been reimbursed by VKAC, Total Return would have been lower and the
ratios would have been as follows:
Ratio of Expenses to Average Net
Assets.............................. 2.42% 2.50% 2.36% 2.50% 2.98%
Ratio of Net Investment Income to
Average Net Assets.................. 3.77% 3.51% 3.72% 3.24% 1.89%
</TABLE>
** Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
See Notes to Financial Statements
B-45
<PAGE> 638
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 19, 1993
Year Ended December 31, (Commencement of
---------------------------------------- Distribution) to
Class C Shares 1997 1996 1995 1994 December 31, 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................. $10.206 $10.260 $ 9.314 $10.134 $10.250
------- ------- ------- ------- -------
Net Investment Income................ .402 .374 .430 .419 .091
Net Realized and Unrealized
Gain/Loss.......................... .319 (.026) .918 (.822) (.098)
------- ------- ------- ------- -------
Total from Investment Operations..... .721 .348 1.348 (.403) (.007)
------- ------- ------- ------- -------
Less:
Distributions from Net Investment
Income........................... .402 .402 .402 .417 .087
Distributions from Net Realized
Gain............................. -0- -0- -0- -0- .022
------- ------- ------- ------- -------
Total Distributions.................. .402 .402 .402 .417 .109
------- ------- ------- ------- -------
Net Asset Value, End of the Period... $10.525 $10.206 $10.260 $ 9.314 $10.134
======= ======= ======= ======= =======
Total Return* (a).................... 7.23% 3.54% 14.74% (4.04%) (.10%)**
Net Assets at End of the Period (In
millions).......................... $ 3.1 $ 5.8 $ 4.9 $ 4.7 $ .3
Ratio of Expenses to Average Net
Assets*............................ 2.29% 2.32% 1.74% 1.43% .97%
Ratio of Net Investment Income to
Average Net Assets*................ 3.88% 3.70% 4.36% 4.34% 4.05%
Portfolio Turnover................... 37% 45% 75% 274% 86%**
*If certain expenses had not been reimbursed by VKAC, Total Return would have been lower and the
ratios would have been as follows:
Ratio of Expenses to Average Net
Assets............................. 2.43% 2.50% 2.34% 2.46% 2.97%
Ratio of Net Investment Income to
Average Net Assets................. 3.74% 3.52% 3.75% 3.31% 2.06%
</TABLE>
** Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
See Notes to Financial Statements
B-46
<PAGE> 639
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Intermediate 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. 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.
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 60 days or less 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. 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. Expenses of the Fund are allocated on a pro rata basis to
each class of shares, except for distribution and service fees and transfer
agency costs which are unique to each class of shares.
B-47
<PAGE> 640
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
D. ORGANIZATIONAL 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 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 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, 1997, the Fund had an accumulated capital loss carryforward for
tax purposes of $337,570 which will expire between December 31, 2002 and
December 31, 2003. Net realized gains or losses may differ for financial
purposes primarily as a result of post October losses which may not be
recognized for tax purposes until the first day of the following fiscal year.
At December 31, 1997, for federal income tax purposes, cost of long- and
short term investments is $30,737,398; the aggregate gross unrealized
appreciation is $2,433,733 and the aggregate gross unrealized depreciation is
$0, resulting in net unrealized appreciation of $2,433,733.
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.
For Federal income tax purposes, the following information is furnished with
respect to the distributions paid by the Fund during its taxable year ended
December 31, 1997. The Fund designated 99.98% of the income distributions as a
tax-exempt income distribution.
B-48
<PAGE> 641
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
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>
For the year ended December 31, 1997, VKAC has agreed to assume a portion of
the Fund's registration and filing fees. This waiver is voluntary and may be
discontinued at any time.
For the year ended December 31, 1997, the Fund recognized expenses of
approximately $1,200 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended December 31, 1997, the Fund recognized expenses of
approximately $43,200 representing VKAC's cost of providing accounting, cash
management and legal services to the Fund.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the year ended
December 31, 1997, the Fund recognized expenses of approximately $28,200,
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 provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Fund. The maximum annual
benefit per trustee under the plan is equal to $2,500.
At December 31, 1997, 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 shares of beneficial interest, 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-49
<PAGE> 642
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
At December 31, 1997, capital aggregated $12,105,732, $15,529,684 and
$2,630,401 for Classes A, B and C, respectively. For the year ended December 31,
1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................................... 224,786 $ 2,319,832
Class B....................................... 176,313 1,821,383
Class C....................................... 141,162 1,437,867
-------- -----------
Total Sales..................................... 542,261 $ 5,579,082
======== ===========
Dividend Reinvestment:
Class A....................................... 36,275 $ 374,192
Class B....................................... 34,418 354,505
Class C....................................... 15,094 154,790
-------- -----------
Total Dividend Reinvestment..................... 85,787 $ 883,487
======== ===========
Repurchases:
Class A....................................... (255,254) $(2,615,305)
Class B....................................... (255,930) (2,632,842)
Class C....................................... (437,360) (4,504,968)
-------- -----------
Total Repurchases............................... (948,544) $(9,753,115)
======== ===========
</TABLE>
B-50
<PAGE> 643
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
At December 31, 1996, capital aggregated $12,027,013, $15,986,638 and
$5,542,712 for Classes A, B and C, respectively. For the year ended December 31,
1996, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................................... 103,746 $ 1,052,973
Class B....................................... 139,700 1,404,638
Class C....................................... 245,967 2,488,580
-------- -----------
Total Sales..................................... 489,413 $ 4,946,191
======== ===========
Dividend Reinvestment:
Class A....................................... 40,990 $ 414,943
Class B....................................... 38,800 392,637
Class C....................................... 16,324 165,377
-------- -----------
Total Dividend Reinvestment..................... 96,114 $ 972,957
======== ===========
Repurchases:
Class A....................................... (445,139) $(4,514,663)
Class B....................................... (281,671) (2,845,685)
Class C....................................... (172,868) (1,763,158)
-------- -----------
Total Repurchases............................... (899,678) $(9,123,506)
======== ===========
</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.
<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-51
<PAGE> 644
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
For the year ended December 31, 1997, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately $636
and CDSC on redeemed shares of approximately $19,600. Sales charges do not
represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $12,443,850 and $17,294,867,
respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general items 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 unrealized
appreciation/depreciation. Upon disposition, a realized gain or loss is
recognized accordingly, except when taking delivery of a security underlying a
futures contract. In this instance, the recognition of gain or loss is postponed
until the disposal of the security underlying the futures contract.
During the year ended December 31, 1997, the Fund invested in futures
contracts, a type of derivative. 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 Fund's effective maturity
and duration.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin).
B-52
<PAGE> 645
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
Transactions in futures contracts for the year ended December 31, 1997, were
as follows:
<TABLE>
<CAPTION>
CONTRACTS
- -------------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1996....................... 0
Futures Opened......................................... 6
Futures Closed......................................... (6)
--
Outstanding at December 31, 1997....................... 0
==
</TABLE>
6. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a 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 net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the year ended December 31, 1997, are payments retained by VKAC of
approximately $152,700.
B-53
<PAGE> 646
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 and 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 30, 1998 (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
writing or calling Van Kampen American Capital Distributors, Inc. at One
Parkview Plaza, Oakbrook Terrace, IL 60181 at (800) 421-5666 (or (800) 421-2833
for the hearing impaired). 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-17
Description of Insurance Company Claims Paying Ability
Ratings................................................... B-23
Trustees and Officers....................................... B-24
Investment Advisory and Other Services...................... B-35
Custodian and Independent Accountants....................... B-37
Portfolio Transactions and Brokerage Allocation............. B-37
Tax Status of the Fund...................................... B-38
The Distributor............................................. B-39
Distribution and Service Plans.............................. B-40
Transfer Agent.............................................. B-40
Legal Counsel............................................... B-40
Performance Information..................................... B-41
Report of Independent Accountants........................... B-44
Financial Statements........................................ B-45
Notes to Financial Statements............................... B-54
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1998.
B-1
<PAGE> 647
THE FUND AND THE TRUST
Van Kampen American Capital Florida Insured Tax Free Income Fund (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 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> 648
bond market; however, the Fund will not invest more than 25% of its assets
in industrial development bonds in a single industry, except that the Fund
may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
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, except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
8. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and extent permitted by
(i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
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
B-3
<PAGE> 649
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 normally will be less than 200%.
ADDITIONAL INVESTMENT CONSIDERATIONS
MUNICIPAL SECURITIES
Municipal securities include long-term obligations, which often are 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.
B-4
<PAGE> 650
"Non-Substitution" clauses in municipal lease transactions have recently been
held unenforceable in Florida as violative of public policy. 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 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 also may 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
B-5
<PAGE> 651
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.
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
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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 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
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upon seven days written notice to an insurer if it determines that the cost of
such policy is not reasonable in relation to the value of the insurance to the
Fund.
Each Portfolio Insurance policy shall terminate as to any municipal security
that has been redeemed from or sold by the Fund on the date of such redemption
or the settlement date of such sale, and an insurer shall not have any liability
thereafter under a policy as to any such municipal security, except that if the
date of such redemption or the settlement date of such sale occurs after a
record date and before the related payment date with respect to any such
municipal security, the policy will terminate as to such municipal security on
the business day immediately following such payment date. Each policy will
terminate as to all municipal securities covered thereby on the date on which
the last of the covered municipal securities mature, are redeemed or are sold by
the Fund.
One or more policies of Portfolio Insurance may provide the Fund, pursuant to
an irrevocable commitment of the insurer, with the option to exercise the right
to obtain permanent insurance ("Permanent Insurance") with respect to a
municipal security that is to be sold by the Fund. The Fund would exercise the
right to obtain Permanent Insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such municipal
security. It is expected that the Fund will exercise the right to obtain
Permanent Insurance for a municipal security only if, in the opinion of the
Adviser, upon such exercise the net proceeds from the sale by the Fund of such
obligation, as insured, would exceed the proceeds from the sale of such
obligation without insurance. The Permanent Insurance premium with respect to
each such obligation is determined based upon the insurability of each such
obligation as of the date of purchase by the Fund and will not be increased or
decreased for any change in the creditworthiness of such obligation unless such
obligation is in default as to payment of principal or interest, or both. In
such event, the Permanent Insurance premium shall be subject to an increase
predetermined at the date of purchase by the Fund.
Because each Portfolio Insurance policy will terminate as to municipal
securities sold by the Fund on the date of sale, in which event the insurer will
be liable only for those payments of principal and interest that are then due
and owing (unless Permanent Insurance is obtained by the Fund), the provision
for this insurance will not enhance the marketability of securities held by the
Fund, whether or not the securities are in default or in significant risk of
default. On the other hand, since Original Issue Insurance and Secondary Market
Insurance will remain in effect as long as municipal securities covered thereby
are outstanding, such insurance may enhance the marketability of such securities
even when such securities are in default or in significant risk of default, but
the exact effect, if any, on the marketability cannot be estimated. Accordingly,
the Fund may determine to retain or, alternatively, to sell municipal securities
covered by Original Issue Insurance or Secondary Market Insurance that are in
default or in significant risk of default.
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
Standard and Poor's Ratings Group ("S&P"), Aaa by Moody's Investor Services,
Inc. ("Moody's") or an equivalent rating by another nationally recognized
statistical ratings organization
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("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 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 or guarantor of the relevant
municipal securities for payments of principal and interest and such issuer 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
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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 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, and is expected to experience steady if
unspectacular growth over the next couple of years. 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 may 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, 1995, Florida ranks fourth with an estimated population
of 14.7 million. Since the beginning of the eighties, Florida has surpassed
Ohio, Illinois and Pennsylvania in total population. Because of the national
recession, Florida's net in-migration declined to 138,000 in 1992, but migration
has since recovered and reached 255,000 in 1996. 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.
Real personal income in Florida is estimated to increase at 5.2% and 3.7% for
1997-98 and 1998-99 respectively while real personal income per capita is
projected to grow 3.2% in 1997-98 and 1.8% in 1998-99.
Florida's economic dependence on the cyclical construction and construction
related manufacturing sectors has declined over time. The service and trade
sectors are Florida's largest employers. Presently, the State's service and
trade sectors employment constitutes approximately 60% 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.
Historically, Florida's unemployment rate has generally tracked below that of
the nation; however, beginning with the recession in the early 1990's, the trend
reversed. Since 1995, the State's unemployment rate has again been below or
about the same as the nations. The unemployment rate for Florida in 1997 was
4.8% while the rate in 1997 was 4.9%. Florida's unemployment rate is forecasted
at 4.6% for fiscal year 1997-98 and 4.8% in 1998-99.
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TOURISM INDUSTRY. Tourism is one of Florida's most important industries.
Approximately 47 million people visited the State in 1997. By the end of fiscal
year 1998-99, 49.7 million domestic and international tourists are expected to
have visited the State. In 1999-00 tourist arrivals should approximate 50.6
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 1996-97, the State derived an estimated 67%
of its total direct revenues to these funds from state taxes and fees. Federal
funds and other special revenues accounted for 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, beverage tax and estate
tax, which amounted to 68%, 8%, 4%, 3% and 3% 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 1996-97, appropriations from the General
Revenue Fund for education, health and welfare, and public safety amounted to
approximately 53%, 26%, and 14%, 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, 1997, receipts from the sales
and use tax were $12,089 million, an increase of 5.5% from fiscal year 1995-96.
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, 1997 were
$2,012 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 $447.2
million in the State fiscal year ended June 30, 1997. The receipts of corporate
income tax for the State fiscal year ended June 30, 1997 were $1,362.3 million,
an increase of 17.2% 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
1996-97 produced gross revenues of $2.09 billion of which education received
approximately $792.3 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.
For fiscal year 1997-98, the estimated General Revenue plus Working Capital
and Budget Stabilization funds available total $18,469.8 million, 10.3% increase
over 1996-97.
For fiscal year 1998-99, the estimated General Revenue plus Working Capital
and Budget Stabilization funds available total $19,185.4 million, a 3.9%
increase over 1997-98. The $7,627.0 million in Estimated Revenues represent a
4.4% increase over the analogous figure in 1997-98.
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.
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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 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 was effective in the fiscal year
1995-1996. 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;
B-13
<PAGE> 659
(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> 660
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.
B-15
<PAGE> 661
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 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
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<PAGE> 662
liquid 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 securities 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 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 S&P 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.
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<PAGE> 663
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, B, Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as
CCC, CC, C having significant speculative characteristics with respect
to capacity to pay interest and repay principal. 'BB'
indicates the lowest degree of speculation and 'C' the
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 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' is more vulnerable to default than debt rated
"BB" 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' is currently vulnerable 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 Debt rating 'CC' is currently highly vulnerable to
nonpayment. The rating 'CC' is also used for debt
subordinated to senior debt that is assigned an actual or
implied 'CCC' rating.
C The 'C' rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has
been taken, but debt service payments are continued. The
rating 'C' typically is applied to debt subordinated to
senior debt which is assigned an actual or implied 'CCC-'
debt rating.
CI The rating 'CI' is reserved for income bonds on which no
interest is being paid.
</TABLE>
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<PAGE> 664
<TABLE>
<S> <C>
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 or the taking of a similar action 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.
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.
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<PAGE> 665
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.
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+').
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<PAGE> 666
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.
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.
(P) (..) When applied to forward delivery bonds, indicates that the
rating is provisional pending the delivery of the bonds. The
rating may be revised prior to delivery if changes occur in
the legal documents or the underlying credit quality of the
bonds.
</TABLE>
B-21
<PAGE> 667
<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>
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.
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 promissory obligations not having an original maturity
in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933,
not does it represent that any specific note is a valid obligation of a
rated issuer or issued in conformity with any applicable law.
B-22
<PAGE> 668
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 (for related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
-- Broad margins in earning coverage of fixed financial charges and
high internal cash generation.
-- Well established access to a range of financial markets and
assured sources of alternative liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supported institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
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.
B-23
<PAGE> 669
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.
TRUSTEES AND OFFICERS
The tables below list the trustees and officers of the Fund and other
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with VK/AC
Holding, Inc. ("VKAC Holding"), Van Kampen American Capital, Inc. ("Van Kampen
American Capital" or "VKAC"), Van Kampen American Capital Investment Advisory
Corp. ("Advisory Corp."), Van Kampen American Capital Asset Management, Inc.
("Asset Management"), Van Kampen American Capital Distributors, Inc., the
distributor of the Fund's shares (the "Distributor"), Van Kampen American
Capital Advisors Corp., Van Kampen Merritt Equity Advisors Corp., Van Kampen
American Capital Insurance Agency of Illinois, Inc., VK/AC System, Inc., Van
Kampen American Capital Record Keeping Services, Inc., American Capital
Contractual Services, Inc., Van Kampen American Capital Trust Company, Van
Kampen American Capital Exchange Corporation, and ACCESS Investors Services
Inc., the Fund's transfer agent ("ACCESS"). Advisory Corp. and Asset Management
sometimes are referred to herein collectively as the "Advisers". For purposes
hereof, the term "Fund Complex" includes each of the open-end investment
companies advised by the Advisers (excluding the Van Kampen American Capital
Exchange Fund).
B-24
<PAGE> 670
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee/Director of each of the
funds in the Fund Complex.
Richard M. DeMartini*..................... President and Chief Operating Officer, Individual Asset
Two World Trade Center Management Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Mr. DeMartini is a Director of InterCapital
New York, NY 10048 Funds, Dean Witter Distributors, Inc. and Dean Witter
Date of Birth: 10/12/52 Trust Company. Trustee of the TCW/DW Funds. Director of
the National Healthcare Resources, Inc. Formerly Vice
Chairman of the Board of the National Association of
Securities Dealers, Inc. and Chairman of the Board of the
Nasdaq Stock Market, Inc. Trustee/Director of each of the
funds in the Fund Complex.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board, The
International House Board and the Women's Board of the
University of Chicago. Trustee/Director of each of the
funds in the Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont 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.
Trustee/Director of each of the funds in the Fund
Complex.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee/Director of each of
the funds in the Fund Complex.
Don G. Powell*............................ Chairman and a Director of VKAC. Chairman and a Director
2800 Post Oak Blvd. of the Advisers and the Distributor. Chairman and a
Houston, TX 77056 Director of ACCESS. Director or officer of certain other
Date of Birth: 10/19/39 subsidiaries of VKAC. Chairman of the Board of Governors
and the Executive Committee of the Investment Company
Institute. Prior to November 1996, President, Chief
Executive Officer and a Director of VKAC Holding.
Trustee/Director of funds in the Fund Complex advised by
Advisory Corp. and prior to July 1996, President, Chief
Executive Officer and a Trustee of the funds in the Fund
Complex.
</TABLE>
B-25
<PAGE> 671
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer services company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company; the
Date of Birth: 07/08/44 Urban Shopping Centers Inc., a retail mall management
company; and Stone Container Corp., a paper manufacturing
company. Trustee, University of Notre Dame. Formerly,
President and Chief Executive Officer, Waste Management,
Inc., an environmental services company, and prior to
that President and Chief Operating Officer, Waste
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen American Capital
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex, and other open-end and closed-end funds
advised by the Advisers or Van Kampen American Capital
Management, Inc.
</TABLE>
- ---------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
position with Morgan Stanley Dean Witter & Co. and its affiliates.
B-26
<PAGE> 672
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Wood, Sullivan, Dalmaso, Martin,
Wetherell and Hill are located at One Parkview Plaza, Oakbrook Terrace, IL
60181. The Fund's other officers are located at 2800 Post Oak Blvd., Houston, TX
77056.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Dennis J. McDonnell......... President Executive Vice President and a Director of
Date of Birth: 05/20/42 VKAC and VK/AC Holding, Inc. President,
Chief Operating Officer and a Director of
the Advisers, Van Kampen American Capital
Advisors, Inc., and Van Kampen American
Capital Management, Inc. President and a
Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he
was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996,
Mr. McDonnell was Chief Executive Officer
and Director of MCM Group, Inc., McCarthy,
Crisanti & Maffei, Inc. and Chairman and
Director of MCM Asia Pacific Company,
Limited and MCM (Europe) Limited. Prior to
November 1996, Executive Vice President and
a Director of VKAC Holding. Prior to July
of 1996, Mr. McDonnell was President, Chief
Operating Officer and Trustee of VSM Inc.
and VCJ Inc. President of each of the funds
in the Fund Complex. President, Chairman of
the Board and Trustee of other investment
companies advised by the Advisers or their
affiliates.
Peter W. Hegel.............. Vice President Executive Vice President of the Advisers,
Date of Birth: 06/25/56 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Prior to July of 1996, Mr.
Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of
McCarthy, Crisanti & Maffei, Inc. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Curtis W. Morell............ Vice President and Chief Senior Vice President of the Advisers, Vice
Date of Birth: 08/04/46 Accounting Officer President and Chief Accounting Officer of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
</TABLE>
B-27
<PAGE> 673
<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 Secretary Executive Vice President, General Counsel,
Date of Birth: 07/29/53 Secretary and Director of VKAC and VK/AC
Holding, Inc. Mr. Nyberg is also Executive
Vice President, General Counsel and a
Director of Van Kampen Merritt Equity
Holdings Corp. Executive Vice President,
General Counsel, Assistant Secretary and a
Director of the Advisers and the
Distributor, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Management, Inc., Van Kampen American
Capital Exchange Corporation, American
Capital Contractual Services, Inc. and Van
Kampen American Capital Trust Company.
Executive Vice President, General Counsel
and Assistant Secretary of ACCESS. Director
or officer of certain other subsidiaries of
VKAC. Prior to June of 1997, Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to April of 1997,
he was Executive Vice President, General
Counsel and Director of Van Kampen Merritt
Equity Advisors Corp. Prior to July of
1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc.
and Executive Vice President and General
Counsel of VCJ Inc. Prior to September of
1996, he was General Counsel of McCarthy,
Crisanti & Maffei, Inc. Vice President and
Secretary of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Alan T. Sachtleben.......... Vice President Executive Vice President of the Advisers,
Date of Birth: 04/20/42 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Vice President of each of
the funds in the Fund Complex and certain
other investment companies advised by the
Advisers or their affiliates.
Paul R. Wolkenberg.......... Vice President Executive Vice President and Director of
Date of Birth: 11/10/44 VKAC, and VK/AC Holding Inc. Executive Vice
President of the AC Adviser and the
Distributor. President and a Director of
ACCESS. President and Chief Operating
Officer of Van Kampen American Capital
Record Keeping Services, Inc. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
B-28
<PAGE> 674
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Edward C. Wood III.......... Vice President and Chief Senior Vice President of the Advisers and
Date of Birth: 01/11/56 Financial Officer Van Kampen American Capital Management,
Inc. Vice President and Chief Financial
Officer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
John L. Sullivan............ Treasurer First Vice President of the Advisers.
Date of Birth: 08/20/55 Treasurer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Tanya M. Loden.............. Controller Vice President of the Advisers. Controller
Date of Birth: 11/19/59 of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Nicholas Dalmaso............ Assistant Secretary Associate General Counsel and Assistant
Date of Birth: 03/01/65 Secretary of VKAC. Vice President,
Associate General Counsel and Assistant
Secretary of the Advisers, the Distributor,
Van Kampen American Capital Advisors, Inc.
and Van Kampen American Capital Management,
Inc. Assistant Secretary of each of the
funds in the Fund Complex and other
investment companies advised by the
Advisers or their affiliates.
Huey P. Falgout, Jr......... Assistant Secretary Vice President and a Senior Attorney of
Date of Birth: 11/15/63 VKAC. Vice President and Assistant
Secretary of the Advisers, the Distributor,
ACCESS, Van Kampen American Capital
Management, Inc., American Capital
Contractual Services, Inc., Van Kampen
American Capital Exchange Corporation and
Van Kampen American Capital Advisors, Inc.
Assistant Secretary of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
B-29
<PAGE> 675
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Scott E. Martin............. Assistant Secretary Senior Vice President, Deputy General
Date of Birth: 08/20/56 Counsel and Assistant Secretary of VKAC and
VKAC Holding, Inc. Senior Vice President,
Deputy General Counsel and Secretary of the
Advisers, the Distributor, ACCESS American
Capital Contractual Services, Inc., Van
Kampen American Capital Management, Inc.,
Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Insurance Agency of Illinois, Inc., VKAC
System, Inc., Van Kampen American Capital
Record Keeping Services, Inc. and Van
Kampen Merritt Equity Advisors Corp. Prior
to April of 1997, Senior Vice President,
Deputy General Counsel and Secretary of Van
Kampen American Capital Services, Inc. and
Van Kampen Merritt Holdings Corp. Prior to
September of 1996, Mr. Martin was Deputy
General Counsel and Secretary of McCarthy,
Crisanti & Maffei, Inc., and prior to July
of 1996, he was Senior Vice President,
Deputy General Counsel and Secretary of VSM
Inc. and VCJ Inc. Assistant Secretary of
each of the funds in the Fund Complex and
other investment companies advised by the
Advisers or their affiliates.
Weston B. Wetherell......... Assistant Secretary Vice President, Associate General Counsel
Date of Birth: 06/15/56 and Assistant Secretary of VKAC, the
Advisers, the Distributor, Van Kampen
American Capital Management, Inc. and Van
Kampen American Capital Advisors, Inc.
Prior to September of 1996, Mr. Wetherell
was Assistant Secretary of McCarthy,
Crisanti & Maffei, Inc. Assistant Secretary
of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Steven M. Hill.............. Assistant Treasurer Vice President of the Advisers. Assistant
Date of Birth: 10/16/64 Treasurer of each of the funds in the Fund
Complex and other investment companies
advised by the Advisers or their
affiliates.
Michael Robert Sullivan..... Assistant Controller Assistant Vice President of the Advisers.
Date of Birth: 03/30/33 Assistant Controller of each of the funds
in the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 64 operating funds in the Fund Complex. For purposes of the following
compensation and benefits discussion, the Fund Complex is divided into the
following three groups: the funds advised by Asset Management (the "AC Funds"),
the funds advised by Advisory Corp. excluding funds organized as series of the
Morgan Stanley Fund, Inc. (the "VK Funds") and the funds advised by Advisory
Corp. organized as series of the Morgan Stanley Fund, Inc. (the "MS Funds").
Each trustee/director who is not an affiliated person of VKAC, the Advisers, the
Distributor, ACCESS or Morgan
B-30
<PAGE> 676
Stanley Dean Witter & Co. (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 (except the money market series of the MS Funds)
provides a deferred compensation plan to its Non-Affiliated Trustees that allows
trustees/directors to defer receipt of their compensation and earn a return on
such deferred amounts. Deferring compensation has the economic effect as if the
Non-Affiliated Trustee reinvested his or her compensation into the funds. Each
fund in the Fund Complex (except the money market series of the MS Funds)
provides a retirement plan to its Non-Affiliated Trustees that provides
Non-Affiliated Trustees with compensation after retirement, provided that
certain eligibility requirements are met as more fully described below.
The trustees recently reviewed and adopted a standardized compensation and
benefits program for each fund in the Fund Complex. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes an annual retainer in
an amount equal to $50,000 per calendar year, due in four quarterly installments
on the first business day of each quarter. Payment of the annual retainer is
allocated among the funds in the Fund Complex (except the money market series of
the MS Funds) on the basis of the relative net assets of each fund as of the
last business day of the preceding calendar quarter. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes a per meeting fee from
each fund in the Fund Complex (except the money market series of the MS Funds)
in the amount of $200 per quarterly or special meeting attended by the
Non-Affiliated Trustee, due on the date of the 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.
For each AC Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from the AC
Funds includes an annual retainer in an amount equal to $35,000 per calendar
year, due in four quarterly installments on the first business day of each
calendar quarter. The AC Funds pay each Non-Affiliated Trustee a per meeting fee
in the amount of $2,000 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. Payment of the annual retainer and the regular meeting
fee is allocated among the AC Funds (i) 50% on the basis of the relative net
assets of each AC Fund to the aggregate net assets of all the AC Funds and (ii)
50% equally to each AC Fund, in each case as of the last business day of the
preceding calendar quarter. Each AC Fund which is the subject of a special
meeting of the trustees generally pays each Non-Affiliated Trustee a per meeting
fee 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.
For each VK Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from each VK
Fund includes an annual retainer 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 each VK
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 each VK 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.
For the period from July 2, 1997 up to and including December 31, 1997, the
compensation of each Non-Affiliated Trustee from the MS Funds was based
generally on the compensation amounts and methodology used by such funds prior
to their joining the current Fund Complex on July 2, 1997. Each trustee/director
was elected as a director of the MS Funds on July 2, 1997. Prior to July 2,
1997, the MS Funds were part of another fund complex (the "Prior Complex") and
the former directors of the MS Funds were paid an aggregate fee allocated among
the funds in the Prior Complex that resulted in individual directors receiving
total compensation between approximately $8,000 to $10,000 from the MS Funds
during such funds' last fiscal year.
B-31
<PAGE> 677
Under the deferred compensation plan, each Non-Affiliated Trustee generally
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 the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
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 the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
----------------------------------------------------------
AGGREGATE AGGREGATE TOTAL
YEAR FIRST PENSION OR ESTIMATED MAXIMUM COMPENSATION
APPOINTED OR AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
ELECTED TO THE BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) BOARD FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- -------------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
J. Miles Branagan 1991 $3,000 $30,328 $60,000 $111,197
Linda Hutton Heagy 1995 3,000 3,141 60,000 111,197
R. Craig Kennedy 1995 3,000 2,229 60,000 111,197
Jack E. Nelson 1995 3,000 15,820 60,000 104,322
Jerome L. Robinson* 1995 3,000 32,020 15,750 107,947
Phillip B. Rooney** 1997 2,250 0 60,000 74,697
Dr. Fernando Sisto 1973 3,000 60,208 60,000 111,197
Wayne W. Whalen 1995 3,000 10,788 60,000 111,197
</TABLE>
- ---------------
* Mr. Robinson retired from the Board of Trustees on December 31, 1997.
** Mr. Phillip B. Rooney became a member of the Board of Trustees effective
April 14, 1997 and thus does not have a full fiscal year of information to
report.
(1) Messrs. DeMartini, McDonnell and Powell, also trustees of the Fund during
all or a portion of the Fund's last fiscal year, are not included in the
compensation table because they are not eligible for compensation or
retirement benefits from the Fund. Mr. McDonnell resigned as a Trustee of
the Fund, effective May 31, 1997.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Fund's fiscal year ended December 31, 1997. The
detail of aggregate compensation before deferral for each series, including
the Fund, are shown in Table A below. The details of amounts deferred for
each series, including the Fund, are shown in Table B below. Amounts
deferred are retained by the Fund and earn a rate of return determined by
reference to either the return on the common shares of the Fund or other
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted
by the 1940 Act, each Fund may invest in securities of those funds selected
by the Non-Affiliated Trustees in order to match the deferred compensation
obligation. The details of cumulative
B-32
<PAGE> 678
deferred compensation (including interest) owed to current Trustees by each
series, including the Fund, are shown in Table C below. The deferred
compensation plan is described above the Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for their respective fiscal years ended in 1997. The retirement
plan is described above the Compensation Table.
(4) For Mr. Robinson, this is the sum of the actual annual benefits payable by
the operating investment companies in the Fund Complex as of the date of
their retirement for each year of the 10-year period since such trustee's
retirement. For the remaining trustees, this is the sum of the estimated
maximum annual benefits payable by the operating investment companies in the
Fund Complex for each year of the 10-year period commencing in the year of
such trustee's anticipated retirement. The Retirement Plan is described
above the Compensation Table. Each Non-Affiliated Trustee of the Board of
Trustees has served as a member of the Board of Trustees since he or she was
first appointed or elected in the year set forth in Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1997 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1997. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
trustees were not trustees of such investment companies. Combining the Fund
Complex with other investment companies advised by the Advisers and their
affiliates, Mr. Whalen received Total Compensation of $268,447 during the
calendar year ended December 31, 1997.
As of April 2, 1998, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.
B-33
<PAGE> 679
TABLE A
1997 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......... 12/31 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 2,250 $ 3,000 $ 3,000
Tax Free High Income Fund............ 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
California Insured Tax Free Income
Fund............................... 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
Municipal Income Fund*............... 12/31 4,125 4,125 4,125 4,125 4,125 3,250 4,125 4,125
Intermediate Term Municipal Income
Fund............................... 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
Florida Insured Tax Free Income
Fund............................... 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
New York Tax Free Income Fund........ 12/31 1,125 1,125 1,125 1,125 1,125 1,000 1,125 1,125
Trust Total........................ 20,250 20,250 20,250 20,250 20,250 15,500 20,250 20,250
</TABLE>
*Includes the deferred compensation balances from New Jersey Tax Free Income
Fund, which merged with and into Municipal Income Fund in November 1997.
TABLE B
1997 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund........ 12/31 $ 3,000 $ 3,000 $ 1,500 $ 3,000 $ 3,000 $ 1,500 $ 1,500 $ 3,000
Tax Free High Income Fund........... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
California Insured Tax Free Fund.... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Municipal Income Fund............... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Intermediate Term Municipal Income
Fund.............................. 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Florida Insured Tax Free Income
Fund.............................. 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
New York Tax Free Income Fund....... 12/31 1,125 1,125 563 1,125 1,125 875 563 1,125
New Jersey Tax Free Income Fund..... 12/31 1,125 1,125 563 1,125 1,125 875 563 1,125
Trust Total....................... 20,250 20,250 10,126 20,250 20,250 10,750 10,126 20,250
</TABLE>
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......... 12/31 $ 4,324 $ 6,482 $11,233 $15,086 $14,485 $ 1,513 $ 3,180 $12,966
Tax Free High Income Fund............ 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
California Insured Tax Free Fund..... 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
Municipal Income Fund*............... 12/31 5,170 7,878 14,033 19,758 18,928 1,765 8,110 17,020
Intermediate Term Municipal Income
Fund............................... 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
Florida Insured Tax Free Income
Fund............................... 12/31 4,324 6,482 6,853 10,650 10,391 1,513 1,622 9,946
New York Tax Free Income Fund........ 12/31 1,487 1,181 3,118 4,223 4,049 891 591 3,586
Trust Total........................ 28,277 41,469 68,936 94,975 91,308 10,221 18,369 82,416
</TABLE>
*Includes the deferred compensation balances from New Jersey Tax Free Income
Fund, which merged with and into Municipal Income Fund in November 1997.
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------
FUND NAME BRANAGAN HEAGY KENNEDY NELSON ROONEY ROBINSON SISTO WHALEN
- --------- -------- ----- ------- ------ ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......................... 1995 1995 1993 1984 1997 1992 1995 1984
Tax Free High Income Fund............................ 1995 1995 1993 1985 1997 1992 1995 1985
California Insured Tax Free Income Fund.............. 1995 1995 1993 1985 1997 1992 1995 1985
Municipal Income Fund................................ 1995 1995 1993 1990 1997 1992 1995 1990
Intermediate Term Municipal Income Fund.............. 1995 1995 1993 1993 1997 1993 1995 1993
Florida Insured Tax Free Income Fund................. 1995 1995 1994 1994 1997 1994 1995 1994
New Jersey Tax Free Income Fund...................... 1995 1995 1994 1994 1997 1994 1995 1994
New York Tax Free Income Fund........................ 1995 1995 1994 1994 1997 1994 1995 1994
</TABLE>
B-34
<PAGE> 680
As of April 1, 1998, 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 1, 1998 SHARES OWNERSHIP
-------------------------- -------------- -------- ----------
<S> <C> <C> <C>
First Union Brokerage Services 12,906 C 18.70%
William J Grant and
A/C 3823-5816
11111 Country River Road
Parrish, FL 34219-9055
Prudential Securities Inc. FBO 7,898 C 11.44%
Mr. John A Guthlein
221 NE Plantation Road Apt 414
Stuart, FL 34996-4469
First Union Brokerage Services 6,483 C 9.39%
Leland D Johansen Jr
A/C 4566-2681
8501 US Highway 19 North
Pinellas Park, FL 33781-1714
John R Reiss 6,436 C 9.33%
4700 S Barna Avenue #703
Titusville, FL 32780
D Jerry Sall 6,374 C 9.24%
7900 Tatum Waterway Dr #301
Miami Beach, FL 33141-1939
Ilene B Haym 4,142 C 6.00%
7021 Galleon Cove Cir
Palm Beach Gardens, FL 33418
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") The
Adviser is the Fund's investment adviser. The Adviser was incorporated as a
Delaware corporation in 1982 (and through December 31, 1987 transacted business
under the name of American Portfolio Service Inc.).
The Adviser, Van Kampen American Capital Distributors, Inc. (the
"Distributor") and ACCESS Investors Services, Inc. ("ACCESS") are wholly-owned
subsidiaries of Van Kampen American Capital, Inc. ("VKAC"), which is an indirect
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The principal office
of the Fund, the Adviser, the Distributor and VKAC is located at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending.
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.
B-35
<PAGE> 681
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, 1997, 1996 and 1995, the Fund paid no
advisory expenses.
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT. The Fund has also entered into an accounting
services agreement pursuant to which Asset Management provides accounting
services to the Fund. The Fund shares together with the other Van Kampen
American Capital mutual funds 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, 1997, 1996 and 1995 the Fund paid expenses of
approximately $0, $0 and $0, respectively, representing the Asset Management's
and its affiliates' cost of providing accounting services.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital funds advised by the 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, 1997, 1996 and 1995 the Fund paid no legal
services expenses.
B-36
<PAGE> 682
CUSTODIAN AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, 225 West Franklin Street, 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 accountants for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent accountants 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 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
B-37
<PAGE> 683
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.
During the year ended December 31, 1997, the Fund did not pay brokerage
commissions on transactions to brokers selected primarily on the basis of
research services provided to the Adviser.
Effective October 31, 1996, Morgan Stanley Group Inc. ("Morgan Stanley")
became an affiliate of the Adviser. Effective May 31, 1997, Dean Witter Discover
& Co. ("Dean Witter") became an affiliate of the Adviser. The negotiated
commission paid to an affiliated broker on any transaction would be comparable
to that payable to a non-affiliated broker in a similar transaction.
The Fund paid the following commissions to these brokers during the periods
shown:
<TABLE>
<CAPTION>
AFFILIATED BROKERS
-------------------
MORGAN DEAN
BROKERS STANLEY WITTER
------- ---------- ------
<S> <C> <C> <C>
Fiscal year 1995............................................ $ 0 N/A N/A
Fiscal year 1996............................................ 0 N/A N/A
Fiscal year 1997............................................ 2,232 0 0
Fiscal year 1997 Percentages:
Commissions with affiliate to total commissions........... -- N/A N/A
Value of brokerage transactions with affiliate to total
transactions........................................... -- N/A N/A
</TABLE>
TAX STATUS OF THE FUND
The Trust and any of its series, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund intends to
qualify each year and to elect to be treated as a regulated investment company
under the Code. 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 gain, but not net capital
gains, which are the excess of 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.
The table below illustrates approximate equivalent taxable and tax-free yields
at the 1997 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-38
<PAGE> 684
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.
1998 FEDERAL TAXABLE VS. TAX-FREE YIELDS
<TABLE>
<CAPTION>
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
SINGLE JOINT TAX -------------------------------------------------------------------------------
RETURN RETURN BRACKET 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5%
- ---------------- --------------- ------- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-
25,350 0-42,350 15.00% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82% 9.41% 10.00%
25,350-61,400 42,350-102,300 28.00% 4.86 5.56 6.25 6.94 7.64 8.33 9.03 9.72 10.42 11.11 11.81
61,400-128,100 102,300-155,950 31.00% 5.07 5.80 6.52 7.25 7.97 8.70 9.42 10.14 10.87 11.59 12.32
128,100-278,450 155,950-278,450 36.00% 5.47 6.25 7.03 7.81 8.59 9.38 10.16 10.94 11.72 12.50 13.28
Over 278,450 Over 278,450 39.60% 5.79 6.62 7.45 8.28 9.11 9.93 10.76 11.59 12.42 13.25 14.07
</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. VKAC
manages or supervises more than $57 billion in mutual funds, closed-end funds
and unit investment trusts -- assets which have been entrusted to VKAC in more
than 2 million investor accounts. VKAC has one of the largest research teams
(outside of the rating agencies) in the country. Each of our high yield
analysts, based either in San Francisco, Chicago, Houston or Boston, has the
responsibility to cover a specific region of the country. This regional focus
enables each high yield analyst to provide more specialized coverage of the
market and alert the portfolio manager to issues of local importance.
Shares of the Fund are offered continuously through Van Kampen American
Capital Distributors, Inc. The Distributor is a wholly-owned subsidiary of Van
Kampen American Capital, Inc. ("VKAC") which is an indirect wholly-owned
subsidiary of Morgan Stanley Dean Witter & Co. The principal office of the Fund,
the Adviser, the Distributor and VKAC is located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management, Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending.
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.
Total underwriting commissions on the sale of shares of the Fund for the last
three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
AMOUNTS
TOTAL UNDERWRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------------ --------------
<S> <C> <C>
Fiscal Year Ended December 31, 1995......................... $32,048 $243,290
Fiscal Year Ended December 31, 1996......................... $18,660 $143,174
Fiscal Year Ended December 31, 1997......................... $15,284 $128,317
</TABLE>
B-39
<PAGE> 685
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 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."
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 fiscal year ending December 31, 1997, the Fund's aggregate expenses
under the Class A Plan were $56,042, or 0.25% of the Class A shares' average net
assets. For the fiscal year ended December 31, 1997, the Fund's aggregate
expenses under the Class B Plan were $200,352, or 1.00%, of the Class B shares'
average net assets. Such expenses were paid to reimburse the Distributor for the
following payments: $151,132 for commissions and transaction fees paid to
financial intermediaries in respect of sales of Class B shares of the Fund and
$49,220 for fees paid to financial intermediaries for servicing Class B
shareholders and administering the Class B Plan. For the fiscal year ended
December 31, 1997, the Fund's aggregate expenses under the Class C Plan were
$4,470 or 1,00% of the Class C shares' average net assets. Such expenses were
paid to reimburse the Distributor for the following payments: $1,331 for the
commissions and transactions fees paid to financial intermediaries in respect of
sales of Class C shares of the Fund and $3,139 for fees paid to financial
intermediaries for servicing Class C shareholders and administering the Class C
Plan.
TRANSFER AGENT
During the fiscal years ended December 31, 1995, 1996 and 1997, ACCESS,
shareholder service agent and dividend disbursing agent for the Fund, received
no fees for these services. The transfer agency prices are determined through
negotiations with the Fund's Board of Trustees and are based on competitive
market benchmarks.
LEGAL COUNSEL
Counsel to the Fund are Skadden, Arps, Slate, Meagher & Flom (Illinois) and
Squire, Sanders & Dempsey L.L.P. of Jacksonville, Florida.
B-40
<PAGE> 686
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 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.
B-41
<PAGE> 687
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, 1997 was 3.57% and (ii) the approximately three year, five month period from
July 29, 1994 (the commencement of investment operations of the Fund) through
December 31, 1997 was 6.44%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending December 30, 1997 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.78%. The tax-equivalent yield with
respect to the Class A Shares for the 30 day period ending December 30, 1997
(calculated in the manner described in the Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 5.91%. The Fund's current
distribution rate with respect to the Class A Shares for the month ending
December 31, 1997 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 4.74%. The Fund's taxable equivalent
distribution rate with respect to the Class A Shares for the month ending
December 31, 1997 was 7.41%.
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, 1997 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 23.87%.
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, 1997 was 30.02%.
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,
1997 was 3.91% and (ii) the approximately three year, five month period of July
29, 1994 (commencement of investment operations of the Fund) through December
31, 1997 was 6.55%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending December 30, 1997 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.19%. The tax-equivalent yield with
respect to the Class B Shares for the 30 day period ending December 30, 1997
(calculated in the manner described in the Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 4.98%. The Fund's current
distribution rate with respect to the Class B Shares for the month ending
December 31, 1997 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 4.24%. The Fund's taxable equivalent
distribution rate with respect to the Class B Shares for the month ending
December 31, 1997 was 6.63%.
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, 1997
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 24.30%.
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, 1997
was 26.80%.
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,
1997 was 6.97% and (ii) the approximately three year, five month period from
July 29, 1994 (the commencement of investment operations of the Fund) through
December 31, 1997 was 7.23%.
B-42
<PAGE> 688
The Fund's yield with respect to the Class C Shares for the 30 day period
ending December 30, 1997 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.21%. The tax-equivalent yield with
respect to the Class C shares for the 30 day period ending December 30, 1997
(calculated in the manner described in the Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 5.02%. The Fund's current
distribution rate with respect to the Class C Shares for the month ending
December 31, 1997 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 4.24%. The Fund's taxable equivalent
distribution rate with respect to the Class C Shares for the month ending
December 31, 1997 was 6.63%.
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, 1997
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 27.04%.
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, 1997
was 27.04%.
B-43
<PAGE> 689
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1997, 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, 1997, 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,
1997, 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 4, 1998
B-44
<PAGE> 690
PORTFOLIO OF INVESTMENTS
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 103.5%
FLORIDA 100.8%
$2,750 Alachua Cnty, FL Sch Brd Ctfs Partn (AMBAC Insd)
(a).............................................. 5.000% 07/01/18 $ 2,729,100
465 Brevard Cnty, FL Hsg Fin Auth Single Family Mtg
Rev (GNMA Collateralized)........................ 6.650 09/01/21 497,527
650 Brevard Cnty, FL Sales Tax Rev (MBIA Insd)....... 5.750 12/01/13 696,222
1,000 Brevard Cnty, FL Sch Brd Ctfs Partn Ser A (AMBAC
Insd) (b)........................................ 5.400 07/01/12 1,071,910
500 Broward Cnty, FL Hsg Fin Auth Single Family Mtg
Rev Rfdg Ser A (GNMA Collateralized)............. 6.100 10/01/19 528,740
750 Broward Cnty, FL Hsg Fin Auth Single Family Mtg
Rev Rfdg Ser A (GNMA Collateralized)............. 6.200 04/01/30 792,885
500 Citrus Cnty, FL Hosp Brd Rev Citrus Mem Hosp Ser
A Rfdg (FSA Insd)................................ 6.500 08/15/12 548,760
1,000 Dade Cnty, FL Aviation Rev Ser B (MBIA Insd)..... 5.600 10/01/26 1,043,420
1,000 Dade Cnty, FL Edl Fac Auth Rev Univ of Miami Ser
B (MBIA Insd).................................... 5.750 04/01/20 1,057,030
980 Dade Cnty, FL Sch Brd Ctfs Partn Ser A (MBIA
Insd)............................................ 5.750 05/01/08 1,055,872
500 Dade Cnty, FL Sch Brd Ctfs Partn Ser A (MBIA
Insd)............................................ 6.000 05/01/14 538,285
2,000 Dade Cnty, FL Seaport Rfdg (MBIA Insd)........... 5.125 10/01/21 1,982,200
750 Dade Cnty, FL Wtr & Swr Sys Rev (FGIC Insd)...... 5.375 10/01/16 770,137
900 Daytona Beach, FL Wtr & Swr Rev Rfdg (AMBAC
Insd)............................................ 5.750 11/15/10 961,983
400 Florida Hsg Fin Agy Hsg Reserves at Kanapaha Ser
G (AMBAC Insd)................................... 5.600 07/01/27 407,816
2,500 Florida St Brd Edl Cap Outlay Pub Edl Ser C (MBIA
Insd)............................................ 5.600 06/01/20 2,589,750
1,750 Florida St Brd Regt Univ Sys Impt Rev (MBIA
Insd)............................................ 5.625 07/01/19 1,834,140
1,750 Florida St Division Bond Fin Dept Genl Svcs Rev
(AMBAC Insd) .................................... 5.000 07/01/12 1,774,990
250 Greater Orlando Aviation Auth Orlando FL Arpt
Facs Rev (FGIC Insd)............................. 5.250 10/01/23 250,088
500 Hillsborough Cnty, FL Hosp Auth Hosp Rev Tampa
Genl Hosp Proj Rfdg (FSA Insd)................... 6.375 10/01/13 545,945
750 Hillsborough Cnty, FL Indl Dev Auth Pollutn Ctl
Rev Tampa Elec Co Proj Rfdg (MBIA Insd).......... 6.250 12/01/34 833,520
1,300 Indian River Cnty, FL Hosp Rev Rfdg (FSA Insd)... 5.700 10/01/15 1,395,446
1,000 Indian River Cnty, FL Hosp Rev Rfdg (FSA Insd)... 6.100 10/01/18 1,102,090
1,000 Jacksonville, FL Elec Auth Rev Saint John's Pwr-2
Ser 7 Rfdg (MBIA Insd) (b)....................... 5.500 10/01/14 1,032,350
700 Jacksonville, FL Hlth Fac Auth Hosp Rev Baptist
Med Cent Proj Ser A Rfdg (Prerefunded @ 06/01/99)
(MBIA Insd)...................................... 7.300 06/01/19 746,130
750 Jacksonville, FL Hlth Fac Auth Hosp Rev Charity
Oblig Group Ser A (MBIA Insd).................... 5.250 08/15/17 759,990
1,000 Jacksonville, FL Wtr & Swr Rev United Wtr FL Proj
(AMBAC Insd) (b)................................. 6.350 08/01/25 1,104,730
</TABLE>
See Notes to Financial Statements
B-45
<PAGE> 691
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FLORIDA (CONTINUED)
$ 250 Lakeland, FL Hosp Sys Rev Lakeland Regl Med Cent
Ser A Rfdg (MBIA Insd)........................... 5.000% 11/15/17 $ 246,915
965 Lee Cnty, FL Hsg Fin Auth Single Family Mtg Rev
Multi-Cnty Pgm Ser A (GNMA Collateralized) (b)... 7.450 09/01/27 1,092,660
980 Manatee Cnty, FL Hsg Fin Auth Mtg Rev
(GNMA Collateralized) (b)........................ 6.875 11/01/26 1,088,006
890 Martin Cnty, FL Cons Util Sys Rev Rfdg & Impt
(FGIC Insd)...................................... 5.750 10/01/08 971,070
750 Martin Cnty, FL Indl Dev Auth Indl Dev Rev
Indiantown Cogeneration Proj A Rfdg.............. 7.875 12/15/25 877,852
545 Melbourne, FL Arpt Rev Rfdg (MBIA Insd).......... 6.250 10/01/18 614,874
500 Miramar, FL Wastewater Impt Assmt Rev (FGIC
Insd)............................................ 6.750 10/01/25 565,405
2,000 Naples, FL Hosp Rev Naples Cmnty Hosp Inc (MBIA
Insd)............................................ 5.500 10/01/26 2,060,400
1,250 North Broward, FL Hosp Dist Rev Rfdg & Impt (MBIA
Insd)............................................ 5.375 01/15/24 1,266,075
775 Orange Cnty, FL Hsg Fin Auth Single Family Mtg
Rev (GNMA Collateralized)........................ 6.550 10/01/21 826,933
1,680 Orange Cnty, FL Sch Brd Ctfs Partn Ser A (MBIA
Insd)............................................ 5.375 08/01/17 1,720,656
900 Orange Cnty, FL Tourist Dev Tax Rev Ser B
(Prerefunded @ 10/01/02) (AMBAC Insd)............ 6.500 10/01/19 1,005,480
750 Palm Beach Cnty, FL Hlth Fac Auth Rev Abbey
Delray South Proj Rfdg........................... 5.500 10/01/11 757,080
1,550 Palm Beach Cnty, FL Hlth Fac Auth Rev Retirement
Cmnty............................................ 5.625 11/15/20 1,592,408
450 Palm Beach Cnty, FL Hlth Fac Auth Rev Waterford
Proj Rfdg........................................ 5.500 10/01/15 454,248
500 Palm Beach Cnty, FL Rev N Cnty Courthouse
Expansion (FSA Insd)............................. 5.000 12/01/17 497,545
750 Palm Beach Cnty, FL Sch Brd Ctfs Partn Ser A
(Prerefunded @ 08/01/04) (AMBAC Insd)............ 6.375 08/01/15 846,757
250 Pinellas Cnty, FL Edl Fac Auth Rev College Harbor
Proj Ser B....................................... 6.500 12/01/14 268,775
1,000 Polk Cnty, FL Indl Dev Auth Tampa Elec Co Proj... 5.850 12/01/30 1,047,720
1,000 Santa Rosa Bay Brdg Auth FL Rev.................. 6.250 07/01/28 1,068,280
750 Sarasota Cnty, FL Util Sys Rev (Prerefunded @
10/01/04) (FGIC Insd)............................ 6.500 10/01/14 859,687
2,450 Seminole Cnty, FL Sch Brd Ctfs Partn Ser A (AMBAC
Insd)............................................ 5.000 07/01/17 2,439,416
1,000 Volusia Cnty, FL Edl Fac Auth Rev Stetson Univ
Proj Ser A (MBIA Insd)........................... 5.500 06/01/26 1,031,970
500 Volusia Cnty, FL Hlth Fac Auth Rev Hosp Fac Mem
Hlth Rfdg & Impt (AMBAC Insd).................... 5.750 11/15/13 539,020
1,000 Volusia Cnty, FL Hlth Fac Auth Rev John Knox Hlth
Care Rfdg (Asset Gty Insd)....................... 6.000 06/01/17 1,066,570
-----------
53,456,858
-----------
</TABLE>
See Notes to Financial Statements
B-46
<PAGE> 692
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PUERTO RICO 2.7%
$ 670 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev Ser V
Rfdg............................................. 6.625% 07/01/12 $ 737,945
650 Puerto Rico Pub Bldgs Auth Gtd Pub Edl & Hlth Fac
Ser M Rfdg (FSA Insd)............................ 5.750 07/01/15 687,537
-----------
1,425,482
-----------
TOTAL LONG-TERM INVESTMENTS 103.5%
(Cost $51,234,398)......................................................... 54,882,340
LIABILITIES IN EXCESS OF OTHER ASSETS (3.5%)................................ (1,838,297)
-----------
NET ASSETS 100.0%........................................................... $53,044,043
===========
</TABLE>
(a) Securities purchased on a when issued or delayed delivery basis.
(b) Assets segregated as collateral for when issued or delayed delivery purchase
commitments and open futures transactions.
AMBAC--AMBAC Indemnity Corporation
BIGI--Bond Investor Guaranty Inc.
Connie Lee--Connie Lee Insurance Company
FGIC--Financial Guaranty Insurance Company
FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements
B-47
<PAGE> 693
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $51,234,398)........................ $54,882,340
Cash........................................................ 999,140
Receivables:
Investments Sold.......................................... 988,745
Interest.................................................. 768,988
Fund Shares Sold.......................................... 170,584
Unamortized Organizational Costs............................ 21,998
Other....................................................... 3,221
-----------
Total Assets.......................................... 57,835,016
-----------
LIABILITIES:
Payables:
Investments Purchased..................................... 4,430,808
Income Distributions...................................... 108,097
Distributor and Affiliates................................ 97,848
Variation Margin on Futures............................... 2,813
Accrued Expenses............................................ 88,114
Trustees' Deferred Compensation and Retirement Plans........ 63,293
-----------
Total Liabilities..................................... 4,790,973
-----------
NET ASSETS.................................................. $53,044,043
===========
NET ASSETS CONSIST OF:
Capital..................................................... $50,004,228
Net Unrealized Appreciation................................. 3,637,769
Accumulated Undistributed Net Investment Income............. (4,556)
Accumulated Net Realized Loss............................... (593,398)
-----------
NET ASSETS.................................................. $53,044,043
===========
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $29,347,021 and 1,887,297 shares of
beneficial interest issued and outstanding)........... $ 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 $22,501,937 and 1,446,624 shares of
beneficial interest issued and outstanding)........... $ 15.55
===========
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $1,195,085 and 76,703 shares of
beneficial interest issued and outstanding)........... $ 15.58
===========
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
B-48
<PAGE> 694
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $2,523,156
----------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $59,871, $201,488 and $6,432,
respectively)............................................. 267,791
Investment Advisory Fee..................................... 223,516
Custody..................................................... 71,138
Shareholder Reports......................................... 40,584
Registration and Filing Fees................................ 35,205
Shareholder Services........................................ 19,910
Legal....................................................... 9,125
Trustees' Fees and Expenses................................. 5,729
Other....................................................... 58,605
----------
Total Expenses............................................ 731,603
Less Fees Waived and Expenses Reimbursed ($223,516 and
$88,936, respectively).................................. 312,452
----------
Net Expenses............................................ 419,151
----------
NET INVESTMENT INCOME....................................... $2,104,005
==========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ (229,913)
Futures................................................... (363,485)
----------
Net Realized Loss........................................... (593,398)
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 1,459,008
----------
End of the Period:
Investments............................................... 3,647,94
Futures................................................... (10,173)
----------
3,637,769
----------
Net Unrealized Appreciation During the Period............... 2,178,761
----------
NET REALIZED AND UNREALIZED GAIN............................ $1,585,363
==========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $3,689,368
==========
</TABLE>
See Notes to Financial Statements
B-49
<PAGE> 695
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................. $ 2,104,005 $ 1,687,363
Net Realized Gain/Loss................................ (593,398) 287,514
Net Unrealized Appreciation/Depreciation During the
Period.............................................. 2,178,761 (547,665)
----------- -----------
Change in Net Assets from Operations.................. 3,689,368 1,427,212
----------- -----------
Distributions from Net Investment Income.............. (2,104,005) (1,654,415)
Distributions in Excess of Net Investment Income...... (24,977) -0-
----------- -----------
Distributions from and in Excess of Net Investment
Income*............................................. (2,128,982) (1,654,415)
----------- -----------
Distributions from Net Realized Gain:
Class A Shares...................................... (14,898) -0-
Class B Shares...................................... (12,813) -0-
Class C Shares...................................... (397) -0-
----------- -----------
(28,108) -0-
----------- -----------
Total Distributions................................... (2,157,090) (1,654,415)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES... 1,532,278 (227,203)
----------- -----------
FROM CAPITAL TRANSACTIONS
Proceeds from Shares Sold............................. 15,913,603 16,047,069
Net Asset Value of Shares Issued Through Dividend
Reinvestment........................................ 999,451 701,942
Cost of Shares Repurchased............................ (7,278,428) (8,255,409)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.... 9,634,626 8,493,602
----------- -----------
TOTAL INCREASE IN NET ASSETS.......................... 11,166,904 8,266,399
NET ASSETS:
Beginning of the Period............................... 41,877,139 33,610,740
----------- -----------
End of the Period (Including accumulated undistributed
net investment income of $(4,556) and $20,971,
respectively)....................................... $53,044,043 $41,877,139
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class December 31, 1997 December 31, 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of Net Investment
Income:
Class A Shares...................................... $(1,223,114) $ (868,212)
Class B Shares...................................... (878,013) (768,924)
Class C Shares...................................... (27,855) (17,279)
----------- -----------
$(2,128,982) $(1,654,415)
=========== ===========
</TABLE>
See Notes to Financial Statements
B-50
<PAGE> 696
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 29, 1994
(Commencement
of Investment
Year Ended December 31, Operations) to
----------------------------- December 31,
Class A Shares 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period................................ $15.060 $15.203 $13.796 $14.300
------- ------- ------- -------
Net Investment Income................. .766 .784 .789 .291
Net Realized and Unrealized
Gain/Loss........................... .508 (.153) 1.416 (.507)
------- ------- ------- -------
Total from Investment Operations........ 1.274 .631 2.205 (.216)
------- ------- ------- -------
Less:
Distributions from and in Excess of
Net Investment
Income.............................. .774 .774 .798 .288
Distributions from Net Realized
Gain................................ .010 -0- -0- -0-
------- ------- ------- -------
Total Distributions..................... .784 .774 .798 .288
------- ------- ------- -------
Net Asset Value, End of the Period...... $15.550 $15.060 $15.203 $13.796
======= ======= ======= =======
Total Return* (a)....................... 8.72% 4.37% 16.29% (1.47%)**
Net Assets at End of the Period (In
millions)............................. $29.3 $22.2 $16.2 $9.0
Ratio of Expenses to Average Net
Assets*............................... .59% .28% .44% .49%
Ratio of Net Investment Income to
Average Net Assets*................... 5.05% 5.31% 5.33% 5.13%
Portfolio Turnover...................... 48% 73% 41% 19%**
* 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................................ 1.29% 1.47% 1.70% 1.99%
Ratio of Net Investment Income to
Average Net Assets.................... 4.35% 4.13% 4.07% 3.64%
</TABLE>
**Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
See Notes to Financial Statements
B-51
<PAGE> 697
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 29, 1994
(Commencement
of Investment
Year Ended December 31, Operations) to
----------------------------- December 31,
Class B Shares 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period... $15.064 $15.201 $13.792 $14.300
------- ------- ------- -------
Net Investment Income.................... .650 .677 .685 .251
Net Realized and Unrealized Gain/Loss.... .510 (.154) 1.415 (.509)
------- ------- ------- -------
Total from Investment Operations........... 1.160 .523 2.100 (.258)
------- ------- ------- -------
Less:
Distributions from and in Excess of Net
Investment Income...................... .660 .660 .691 .250
Distributions from Net Realized Gain..... .010 -0- -0- -0-
------- ------- ------- -------
Total Distributions........................ .670 .660 .691 .250
------- ------- ------- -------
Net Asset Value, End of the Period......... $15.554 $15.064 $15.201 $13.792
======= ======= ======= =======
Total Return* (a).......................... 7.91% 3.58% 15.53% (1.81%)**
Net Assets at End of the Period
(In millions)............................ $22.5 $18.9 $16.9 $10.9
Ratio of Expenses to Average Net Assets*... 1.33% 1.03% 1.12% 1.26%
Ratio of Net Investment Income to Average
Net Assets*.............................. 4.30% 4.56% 4.66% 4.31%
Portfolio Turnover......................... 48% 73% 41% 19%**
* 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.... 2.03% 2.22% 2.38% 2.75%
Ratio of Net Investment Income to Average
Net Assets............................... 3.60% 3.38% 3.40% 2.81%
</TABLE>
**Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
See Notes to Financial Statements
B-52
<PAGE> 698
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 29, 1994
(Commencement
of Investment
Year Ended December 31, Operations) to
----------------------------- December 31,
Class C Shares 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period... $15.081 $15.213 $13.786 $14.300
------- ------- ------- -------
Net Investment Income.................... .666 .668 .690 .249
Net Realized and Unrealized Gain/Loss.... .504 (.140) 1.428 (.513)
------- ------- ------- -------
Total from Investment Operations........... 1.170 .528 2.118 (.264)
------- ------- ------- -------
Less:
Distributions from and in Excess of Net
Investment Income...................... .660 .660 .691 .250
Distribution from Net Realized Gain...... .010 -0- -0- -0-
------- ------- ------- -------
Total Distributions........................ .670 .660 .691 .250
------- ------- ------- -------
Net Asset Value, End of the Period......... $15.581 $15.081 $15.213 $13.786
======= ======= ======= =======
Total Return* (a).......................... 7.97% 3.65% 15.61% (1.81%)**
Net Assets at End of the Period (In
thousands)............................... $1,195.1 $849.2 $461.8 $11.4
Ratio of Expenses to Average Net Assets*... 1.37% 1.03% 1.13% 1.26%
Ratio of Net Investment Income to Average
Net Assets*.............................. 4.38% 4.56% 4.51% 4.28%
Portfolio Turnover......................... 48% 73% 41% 19%**
* 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.... 2.06% 2.22% 2.39% 2.74%
Ratio of Net Investment Income to Average
Net Assets............................... 3.68% 3.38% 3.25% 2.87%
</TABLE>
**Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
See Notes to Financial Statements
B-53
<PAGE> 699
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
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. 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.
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 60 days or less 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. INCOME AND EXPENSES--Interest income is recorded on an accrual basis. Bond
premium and original issue discount on securities purchased are amortized over
the expected life of each applicable security. Expenses of the Fund are
allocated on a pro rata basis to each class of shares, except for distribution
and service fees and transfer agency costs which are unique to each class of
shares.
B-54
<PAGE> 700
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
D. ORGANIZATIONAL 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. During the period, the original
estimate of organizational costs of $120,000 was reduced to $70,000, reflecting
the actual costs incurred. The amortization of these costs has been revised and
adjusted accordingly. 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 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, 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 loss and offset such losses against any future realized capital gains.
At December 31, 1997, the Fund had an accumulated capital loss carryforward for
tax purposes of $588,149 which will expire in 2005. Net realized gains or losses
differ for financial reporting and tax purposes as a result of post October 31
losses which are not realized for tax purposes until the first day of the
following fiscal year and losses recognized for tax purposes on open futures
positions at December 31, 1997.
At December 31, 1997, for federal income tax purposes, cost of long-term
investments is $51,234,398; the aggregate gross unrealized appreciation is
$3,647,942 and the aggregate gross unrealized depreciation is $0, resulting in
net unrealized appreciation of $3,647,942.
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 income, expenses and
realized gains/losses under generally accepted accounting principles and federal
income tax purposes, permanent differences between book and tax basis reporting
for the 1997 fiscal year have been identified and appropriately reclassified.
Permanent book and tax
B-55
<PAGE> 701
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
differences relating to distributions totaling $550 were reclassified from
accumulated net realized loss to accumulated undistributed net investment
income.
For Federal income tax purposes, the following information is furnished with
respect to the distributions paid by the Fund during its taxable year ended
December 31, 1997. The Fund designated $27,558 as a 28% rate capital gain
distribution. Shareholders were sent a 1997 Form 1099-DIV in January 1998
representing their proportionate share of the capital gain distribution to be
reported on their income tax returns. The Fund designated 99.99% of the income
distributions as a tax-exempt Income distribution.
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>
For the year ended December 31, 1997, the Fund recognized expenses of
approximately $1,800 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended December 31, 1997, the Fund incurred expenses of
approximately $27,100 representing VKAC's cost of providing accounting, cash
management and legal services to the Fund. All of these expenses were assumed by
VKAC.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the year ended
December 31, 1997, the Fund incurred expenses of approximately $11,400,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit. All of this expense 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 provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Fund. The maximum annual
benefit per trustee under the plan is equal to $2,500.
At December 31, 1997, VKAC owned 100 shares each of Classes A, B and C.
B-56
<PAGE> 702
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of shares of beneficial interest, 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, 1997, capital aggregated $27,794,429, $21,042,117 and
$1,167,682 for Classes A, B and C, respectively. For the year ended December 31,
1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A............................... 609,339 $ 9,274,646
Class B............................... 384,943 5,831,452
Class C............................... 52,399 807,505
--------- -----------
Total Sales............................. 1,046,681 $15,913,603
========= ===========
Dividend Reinvestment:
Class A............................... 39,223 $ 594,339
Class B............................... 25,536 387,076
Class C............................... 1,188 18,036
--------- -----------
Total Dividend Reinvestment............. 65,947 $ 999,451
========= ===========
Repurchases:
Class A............................... (232,349) $(3,502,983)
Class B............................... (216,650) (3,274,422)
Class C............................... (33,195) (501,023)
--------- -----------
Total Repurchases....................... (482,194) $(7,278,428)
========= ===========
</TABLE>
B-57
<PAGE> 703
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
At December 31, 1996, capital aggregated $21,428,427, $18,098,011 and
$843,164 for Classes A, B and C, respectively. For the year ended December 31,
1996, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A..................................... 662,550 $ 9,888,850
Class B..................................... 371,733 5,505,878
Class C..................................... 43,663 652,341
--------- -----------
Total Sales................................... 1,077,946 $16,047,069
========= ===========
Dividend Reinvestment:
Class A..................................... 24,754 $ 367,510
Class B..................................... 21,677 321,647
Class C..................................... 858 12,785
--------- -----------
Total Dividend Reinvestment................... 47,289 $ 701,942
========= ===========
Repurchases:
Class A..................................... (282,145) $(4,206,188)
Class B..................................... (255,198) (3,772,557)
Class C..................................... (18,569) (276,664)
--------- -----------
Total Repurchases............................. (555,912) $(8,255,409)
========= ===========
</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.
<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-58
<PAGE> 704
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
For the year ended December 31, 1997, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$15,100 and CDSC on redeemed shares of approximately $68,700. Sales charges do
not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $35,250,549 and $21,272,934,
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 unrealized
appreciation/depreciation. Upon disposition, a realized gain or loss is
recognized accordingly, except when taking delivery of a security underlying a
futures contract. In these instances, the recognition of gain or loss is
postponed until the disposal of the security underlying the futures contract.
During the period, the Fund invested in futures contracts, a type of
derivative. 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.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin).
B-59
<PAGE> 705
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
Transactions in futures contracts for the year ended December 31, 1997, were
as follows:
<TABLE>
<CAPTION>
CONTRACTS
- ------------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1996........................... -0-
Futures Opened............................................. 285
Futures Closed............................................. (279)
----
Outstanding at December 31, 1997........................... 6
====
</TABLE>
The futures contracts outstanding at December 31, 1997, and the description
and unrealized depreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS DEPRECIATION
- ---------------------------------------------------------------------------
<S> <C> <C>
Short Contracts -- Municipal Bond Index Futures
March 1998
(Current notional value $123,125 per
contract).................................... 6 $10,173
== ========
</TABLE>
6. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a 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 net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the year ended December 31, 1997, are payments retained by VKAC of
approximately $156,100.
B-60
<PAGE> 706
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 and 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 30, 1998 (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
writing or calling Van Kampen American Capital Distributors, Inc. at One
Parkview Plaza, Oakbrook Terrace, IL 60181 at (800) 421-5666 (or (800) 421-2833
for the hearing impaired). 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-37
Trustees and Officers....................................... B-44
Investment Advisory and Other Services...................... B-54
Custodian and Independent Accountants....................... B-56
Portfolio Transactions and Brokerage Allocation............. B-56
Tax Status of the Fund...................................... B-57
The Distributor............................................. B-58
Distribution and Service Plans.............................. B-59
Transfer Agent.............................................. B-60
Legal Counsel............................................... B-60
Performance Information..................................... B-60
Report of Independent Accountants........................... B-63
Financial Statements........................................ B-64
Notes to Financial Statements............................... B-73
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1998.
B-1
<PAGE> 707
THE FUND AND THE TRUST
Van Kampen American Capital New York Tax Free Income Fund (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 and Van Kampen American Capital Florida Insured 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 originally was 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.
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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, except that the Fund
may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
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, except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
8. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and extent permitted by
(i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief form the provisions of
the 1940 Act.
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.
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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 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 normally will be less than 200%.
ADDITIONAL INVESTMENT CONSIDERATIONS
MUNICIPAL SECURITIES
Municipal securities include long-term obligations, which often are 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
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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 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 also may 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 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
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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.
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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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 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 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.
THE STATE. The State is the third most populous state in the nation (after
California and Texas) 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. Like the rest of
the nation, the State has had a declining proportion of its workforce engaged in
manufacturing and an increasing proportion engaged in service industries. 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; in 1995, tourists spent $24.3
billion in the State.
Historically, State per capita personal income has been significantly higher
that the national average, although the ratio has varied substantially. Because
the City is a regional employment center for a multi-state region, however,
personal income measured on a residence basis may understate the relative
importance of the State to the national economy and the size of the base to
which State taxation applies. In 1994, the State had a per capita personal
income of $25,726, compared to $21,699 for the nation as a whole. According to
data published by the US Bureau of Economic Analysis, during the past ten years,
total personal income in the State rose slightly faster than the national
average only from 1986 through 1988. Personal income was expected to record
moderate gains in 1996 and bonus payments in the securities industry were
expected to increase further from 1995's record level.
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While the State historically has been one of the wealthiest in the nation,
demographic changes have been 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. Nevertheless, the State's population has grown since 1930,
except for a period of decline during the 1970s and a virtual standstill the
past two years. The City has also faced greater competition as other major
cities have developed financial and business capabilities which make businesses
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. In fiscal year 1994, the State assessed per capita
taxes of $1,806 (9th in the nation), compared to a national average of $1,439.
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 help businesses 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 "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.
During the 1982-83 recession, overall economic activity in the State declined
less than that in the nation as a whole. However, from 1987 to 1995, the State's
rate of economic growth was somewhat slower than the rest of the nation. In
particular, during the 1990-91 recession and post-recession period, the economy
of the State, and that of the rest of the Northeast, was more heavily damaged
than that of the nation as a whole and has been slower to recover. The total
employment growth rate in the State has been below the national average since
1987. The unemployment rate in the State dipped below the national rate in the
second half of 1981 and remained lower until 1991; since then, it has been
higher. The national economy has resumed a more robust rate of growth after a
"soft landing" in 1995, with over 11 million jobs added national since early
1992. The State economy has continued to expand, but growth remains somewhat
slower than in the nation. Although the State has added approximately 240,000
jobs since late 1992, employment growth in the State has been hindered during
recent years by significant cutbacks in the computer and instrument
manufacturing, utility, defense and banking industries. Government downsizing
has also moderated these job gains.
At the State level, moderate growth is projected to continue in 1998 and 1999
for employment, wages, and personal income, although the growth rates will
lessen gradually during the course of the two years. Personal income is
estimated to grow by 5.4 percent in 1997, fueled in part by a continued large
increase in financial sector bonus payments, and is projected to grow 4.7
percent in 1998 and 4.4 percent in 1999. Increases in bonus payments at year-end
1998 are projected to be modest, a substantial change from the rate of increase
of the last few years. Overall employment growth is expected to continue at a
modest rate, reflecting the slowing growth in the national economy, continued
spending restraint in government, and restructuring in the health care, social
service, and banking sectors.
The forecast for continued slow growth, and any resultant impact on the
State's Financial Plans, contains some uncertainties. Stronger-than-expected
gains in employment could lead to a significant improvement in consumption
spending. Investments could also remain robust. Conversely, the prospect of a
continuing deadlock on federal budget deficit reduction or fears of excessively
rapid economic growth could create upward pressures on interest rates. In
addition, the State economic forecast could over- or underestimate the level of
future bonus payments or inflation growth, resulting in forecasted average wage
growth that could differ significantly from actual growth. Similarly, the State
forecast could fail to correctly account for expected declines in government and
banking employment and the direction of employment change that is likely to
accompany telecommunications deregulation.
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THE STATE'S 1997-98 FISCAL YEAR. The State's 1997-98 fiscal year commenced on
April 1, 1997 and ended on March 31, 1998, and is referred to herein as the
1997-98 fiscal year.
The State's budget for the 1997-98 fiscal year was enacted by the State
Legislature on August 4, 1997, more than four 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 necessary appropriations for all State-supported
debt service. The State Financial Plan for the 1997-98 fiscal year was
formulated on August 11, 1997 and is based on the State's budget as enacted by
the Legislature and signed into law by the Governor, as well as actual results
for the first quarter of the current fiscal year. The State Financial Plan is
updated quarterly pursuant to law in July, October and January.
1997-98 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.
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 1997-98 fiscal year, the General Fund is expected to account for
approximately 48 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 State's 1997-98 fiscal year. Total receipts and transfers
from other funds are projected to be $35.09 billion, an increase of $2.05
billion from the prior fiscal year. Total General Fund disbursements and
transfers to other funds are projected to be $34.60 billion, an increase of
$1.70 billion from the total amount disbursed in the prior fiscal year.
Projected General Fund Receipts. The discussion below summarizes the State's
original projections of General Fund tax revenues and other receipts for the
1997-98 fiscal year. Total General Fund receipts and transfers from other funds
in the 1997-98 fiscal year were projected to be $35.09 billion, an increase of
over $2 billion or roughly 6 percent from the $33.04 billion recorded in the
1996-97 fiscal year. This total includes $31.68 billion in tax receipts, $1.48
billion in miscellaneous receipts, and $1.94 billion in transfers from other
funds.
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-reduction program is estimated to reduce receipts by approximately $4
billion, compared to what tax receipts would have been under the pre-1995 rate
structure. On a current law basis, 1997 income tax liability is expected to fall
slightly, reflecting the tax cut. On a constant law basis, liability growth
during taxable year 1997 would be between 6 and 7 percent. 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 6.85
percent in 1997 and thereafter. Net personal income tax collections are
projected to reach $18.87 billion, over half of all General Fund receipts and
$2.5 billion above the reported 1996-97 fiscal year total. Virtually all of the
projected annual growth in this category, however, is provided by tax refund and
refund reserve transactions which affect reported receipts levels in the 1995-96
through 1997-98 fiscal years. Without these transactions between years, income
tax receipts in 1997-98 would be virtually flat.
USER TAXES AND FEES are comprised of three-quarters of the State's four
percent sales and use tax (the balance, one percent, flows to support Local
Government Assistance Corporation ("LGAC") debt service requirements), the
cigarette, alcoholic beverage container and auto rental taxes and a portion of
the motor fuel excise levies. Also included in this category are receipts from
the motor vehicle registration fees and alcoholic beverage license fees. Since
1993-94, a portion of the motor fuel tax and motor vehicle registration fees and
all of the highway use tax have been earmarked for dedicated transportation
funds. Receipts in this category in the 1997-98 fiscal year were expected to
total $7 billion, an increase of $204 million from reported 1996-97 results. The
sales tax component of this category accounts for all of the projected 1997-98
growth in this category, as receipts from all other categories are projected to
decline by $3 million. The yield of most of the excise taxes in this category
show a long-term declining trend, particularly cigarette and alcoholic beverage
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taxes. These declines in the 1997-98 fiscal year are projected to be offset by
an increase in anticipated motor vehicle fees arising, in large part, from
legislative actions that raise additional receipts from this source.
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. Beginning in 1994, a 15 percent surcharge on these
levies began to be phased out and, for most taxpayers, there will be no
surcharge liability for taxable periods ending in 1997 and thereafter. Total
business tax receipts in the State's 1997-98 fiscal year were projected at $4.83
billion, a decline of $253 million from reported 1996-97 results. The
year-over-year decline in projected receipts in this category is a function of
both statutory changes between the two years -- 1997 is the first "surcharge
free" taxable period in this decade -- and a number of essentially one-time
transactions that increased receipts in the base year, including unusually large
audit receipts under the bank tax.
OTHER TAXES include estate, gift and real estate transfer taxes, a tax on
gains from the sale or transfer of certain real estate (this tax was repealed in
1996), a pari-mutuel tax and other minor levies. This is the first fiscal year
that real estate transfer tax receipts have been diverted from the General Fund
to the Clean Water/Clean Air Fund to provide debt service coverage for general
obligation bonds. Total receipts from this category in the State's 1997-98
fiscal year were projected at $982 million, nearly $100 million less than in the
preceding year. This figure masks the significant increase in estate tax
collections during the first four months of the fiscal year, and results largely
from the dedication of the proceeds of the real estate transfer tax to meet debt
service obligations on the new Clean Water/Clean Air bond act and from the
full-year impact of the repeal of the real property gains tax.
MISCELLANEOUS RECEIPTS include investment income, abandoned property receipts,
medical provider assessments, minor federal grants, receipts from public
authorities and certain other license and fee revenues. Receipts in this
category in the 1997-98 fiscal year were expected to total $1.48 billion, a
decrease of almost $600 million from the amount received in the prior fiscal
year. The reduction reflects a significant diminution in the amount of
non-recurring resources used in the 1997-98 Financial Plan as compared to
1996-97.
TRANSFERS FROM OTHER FUNDS to the General Fund consist primarily of tax
revenues in excess of debt service requirements, particularly the one percent
sales tax used to support payments to LGAC. In the State's 1997-98 fiscal year,
tax revenues transferred in support of debt service were projected to be $1.48
billion, $58 million more than the amount received in the 1996-97 fiscal year.
All other transfers were projected to increase by $237 million, primarily
reflecting the non-recurring transfer of $200 million for retroactive
reimbursement to the State of certain social services claims from the federal
government.
Projected General Fund Disbursements
GRANTS TO LOCAL GOVERNMENTS is the largest category of General Fund
disbursements, and generally accounts for approximately 68 percent of overall
General Fund spending. Disbursements from this category were projected to total
$23.63 billion in the 1997-98 State Financial Plan, an increase of $750 million
(3.3 percent) from 1996-97 levels. This category of the State Financial Plan
included $11.57 billion in aid for elementary, secondary and higher education,
accounting for 49 cents of every dollar spent in this category. On a school year
basis, school aid increases by $750 million including formula-based elementary
and secondary education aid increases of $650 million levels. This category of
the Financial Plan is affected by reclassification of costs formerly budgeted as
City University local assistance that are now included in the transfers for debt
service category. This has the effect of decreasing disbursements in this
category by a projected $262 million, and raising projected transfers by the
same amount. General Fund payments for Medicaid were projected to be $5.42
billion, virtually unchanged from the level of $5.38 billion in 1997-98. This
expected slow growth was due primarily to continuation of cost containment
measures enacted in 1995-96, new reforms included in the adopted 1997-98 budget
and forecasts for slower underlying growth. Other social service spending was
forecast to increase by only $115 million to $3.15 billion in 1997-98. Remaining
disbursements primarily supported community-based mental hygiene programs,
community and public health programs, local transportation programs and revenue
sharing.
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STATE OPERATIONS spending reflects the administrative costs of operating the
State's agencies, including the prison system, mental hygiene institutions, the
State University of New York ("SUNY") system, the Legislature and the court
system. Personal service costs were to account for approximately 71 percent of
the anticipated disbursements in this category in 1997-98. Since January 1995,
the State's workforce had been reduced by about 10%, and is projected to reach a
level of approximately 191,000 persons by the end of the 1997-98 fiscal year.
Collective bargaining agreements have been ratified by employee bargaining units
representing most State employees subject to such agreements and the 1997-98
projections reflect salary increases under the agreements. Disbursements for
State operations were projected at $6.22 billion, an increase of $441 million or
7.6 percent. Approximately $200 million of this increase resulted from approved
collective bargaining agreements and the impact of binding arbitration
settlements. Other major increases include growth in SUNY operations, increased
mental hygiene costs resulting from increased assessments on State operated
programs, public protection agency spending, which is increasing to reflect the
impact of sentencing reforms and prison expansion, and higher spending by the
Judiciary and Legislature.
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 were projected at $2.18
billion in the 1997-98 State Financial Plan, virtually unchanged from 1996-97
levels. Pension costs are projected to grow moderately, while most of the
projected growth in fixed costs is related to increased payments to localities
for State owned lands. These increases are fully offset by continued savings
from health care and worker's compensation reforms, which account for most of
the cost containment savings in this area.
DEBT SERVICE to be paid from the General Fund for 1997-98 reflected only the
$11 million interest cost of the State's commercial paper program.
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 were
projected to total $2.07 billion in 1997-98, an increase of $496 million. This
reflects the increased debt service impact of prior year bond sales, the
reclassification of City University debt service costs that had been previously
included in grants to local governments, and the inclusion of costs associated
with the 1996-1997 bonding of previous pension liabilities at lower interest
rates. Transfers for capital projects provide General Fund support for projects
not otherwise financed through bond proceeds, dedicated taxes and other revenues
and federal grants. These transfers are projected at $184 million for 1997-98,
an increase of $46 million. The 1997-98 State Financial Plan also includes $299
million for subsidies or transfers to other State funds, a decrease of $30
million from last year's level.
Non-recurring Resources. The 1997-98 State Financial Plan included actions
affecting the budget outlook for fiscal year 1997-98 and beyond. The DOB
estimated that the 1997-98 State Financial Plan contained actions that provided
non-recurring resources or savings totaling approximately $270 million. These
included the use of $200 million in federal reimbursement funds available from
retroactive social service claims approved by the federal government in April
1997. The balance was composed of various other actions, primarily the transfer
of unused special revenue fund balances to the General Fund.
Out-year Projections of Receipts and Disbursements. The State closed projected
budget gaps of $5.0 billion, $3.9 billion and $2.3 billion for its 1995-96
through 1997-98 fiscal years, respectively. The 1998-99 gap was projected at
$1.68 billion, (before the application of any assumed efficiencies) in the
outyear projections submitted to the Legislature in February 1997. As a result
of changes made in the adopted budget, the 1998-99 gap is now expected to be
about the same or smaller than the amount previously projected, after
application of the $530 million reserve for future needs. The expected gap is
smaller than the three previous budget gaps closed by the State.
The revised expectations for the 1998-99 fiscal year reflect the loss of $1.4
billion in surplus resources from 1996-97 operations that are being utilized to
finance current year spending and an incremental effect of approximately $300
million in legislated State and local tax reductions in the outyear. Other
factors include
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the annualized costs of certain program increases in the 1997-98 adopted budget,
most of which are subject to annual appropriation.
Certain actions taken in the State's 1997-98 fiscal year, such as Medicaid and
welfare reforms, are expected to provide recurring savings in future fiscal
years. Continued controls on State agency spending will also provide recurring
savings. The availability of $530 million in reserves created as part of the
1997-98 adopted budget and included in the Financial Plan was expected to
benefit the 1998-99 fiscal year. Sustained growth in the State's economy and
continued declines in welfare caseload and health care costs would also produce
additional savings in the 1998-99 Financial Plan. Finally, various federal
actions, including the potential beneficial effect on State tax receipts from
changes to the federal tax treatment of capital gains, could potentially provide
significant benefits to the State over the next several years. The Governor
indicated that he would close any potential imbalance primarily through General
Fund expenditure reductions without increases in taxes or deferrals of scheduled
tax reductions.
Fund Balances. The 1997-98 opening fund balance of $433 million included $317
million reserved in the Tax Stabilization Reserve Fund ("TSRF"), $41 million on
deposit in the Contingency Reserve Fund ("CRF") and $75 million in the Community
Projects Fund. The projected closing fund balance in the General Fund of $927
million reflected a balance of $332 million in the TSRF, following an additional
payment of $15 million at the end of the year, $65 million in the CRF, following
a deposit of $24 million in 1997-98, and a reserve for future needs of $530
million.
Other Governmental Funds. In addition to the General Fund, the 1997-98 State
Financial Plan included Special Revenue Funds, Capital Projects Funds and Debt
Service Funds which are discussed below. Amounts below do not include other
sources and uses of funds transferred to or from other fund types.
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. Activity
in this fund type was expected to comprise approximately 42 percent of total
government funds receipts in the 1997-98 fiscal year, about three-quarters of
which related to federally-funded programs. Projected receipts in this fund type
totaled $28.22 billion, an increase of $2.51 billion (9.7 percent) over the
prior year. Projected disbursements in this fund type totaled $28.45 billion, an
increase of $2.43 billion (9.3 percent) over 1996-97 levels. Disbursements from
federal funds, primarily the federal share of Medicaid and other social services
programs, were projected to total $21.19 billion in the 1997-98 fiscal year.
Remaining projected spending of $7.26 billion primarily reflected aid to SUNY
supported by tuition and dormitory fees, education aid funded from lottery
receipts, operating aid payments to the Metropolitan Transportation Authority
("MTA") funded from the proceeds of dedicated transportation taxes and costs of
a variety of self-supporting programs which deliver services financed by user
fees.
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 receipts transferred from the General Fund, and various
other capital funds established to distinguish specific capital construction
purposes supported by other revenues. In the 1997-98 fiscal year, activity in
these funds was expected to comprise 5 percent of total governmental receipts.
Total receipts in this fund type were projected at $3.30 billion. Disbursements
from this fund type were projected to be $3.70 billion, an increase of $154
million (4.3 percent) over prior-year levels. The Dedicated Highway and Bridge
Trust Fund (the "Highway Trust Fund") was the single largest dedicated fund,
comprising an estimated $982 million (27 percent) of the activity in this fund
type. Total spending for capital projects was financed through a combination of
sources: federal grants (29 percent), public authority bond proceeds (31
percent), general obligation bond proceeds (15 percent) and pay-as-you-go
revenues (25 percent).
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 type was expected to comprise 4 percent of total governmental fund receipts
and 47 percent of total governmental disbursements in the 1997-98 fiscal year.
Receipts in these funds in excess of debt service requirements may be
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
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tax receipts transferred from the General Fund, and other funds established to
accumulate moneys for the payment of debt service. In the 1997-98 fiscal year,
total disbursements in this fund type were projected at $3.17 billion, an
increase of $641 million or 25.3 percent from the prior year. The transfer from
the General Fund of $2.07 billion was expected to finance 65 percent of these
payments. The remaining payments were expected to be financed by pledged
revenues, including $2.03 billion in taxes and $601 million in dedicated fees
and other miscellaneous receipts. After required impoundment for debt service,
$3.77 billion was expected to be transferred to the General Fund and other funds
in support of State operations. The largest transfer--$1.86 billion--was made to
the Special Revenue Fund type in support of operations of the mental hygiene
agencies. Another $1.47 billion in excess sales taxes was expected to be
transferred to the General Fund, following payment of projected debt service on
LGAC bonds.
1997-98 Financial Plan Revisions. The 1997-98 State Financial Plan was updated
on October 30, 1997 (the "Mid-Year Update") and on January 20, 1998 (the "Third
Quarter Update"). Revisions were made to estimates of both receipts and
disbursements based on (1) updated economic forecasts for both the nation and
the State, (2) an analysis of actual receipts and disbursements during the
elapsed portion of the fiscal year and (3) an assessment of changing program
requirements.
The 1997-98 General Fund Financial Plan continues to be balanced, with a
projected cash surplus of $1.83 billion, an increase of $1.3 billion over the
surplus estimate of $530 million in the prior update. The increase in the
surplus results primarily from higher-than-expected tax receipts, which are
forecast to exceed the October estimates by $1.28 billion. In order to make the
surplus available to help finance 1998-99 requirements, the State plans to
accelerate $1.18 billion in income tax refund payments into 1997-98, or provide
reserves for such payments. The balance in the refund reserve on March 31, 1998
is projected to be $1.647 billion, including $521 million as a result of LGAC.
This acceleration decreases reported personal income receipts by $1.18 billion
in 1997-98, while increasing available personal income receipts in 1998-99, as
these refunds will no longer be a charge against current revenues in 1998-99. As
a result, projections of available receipts in 1997-98 have been increased by
only $103 million from the Mid-Year Update.
Compared to the prior update, personal income tax collections for 1997-98 are
now projected at $18.50 billion, or $363 million less than projected in October
after accounting for the refund reserve transaction discussed above. Business
tax receipts are projected at $4.98 billion, an increase of $158 million. User
tax collections are estimated at $7.06 billion, or $52 million higher than the
prior update and reflect a projected loss of $20 million in sales tax receipts
from an additional week of sales tax exemption for clothing and footwear costing
less than $500, which was authorized and implemented in January 1998. Other tax
receipts are projected to increase by $103 million over the prior update and
total $1.09 billion for the fiscal year. Miscellaneous receipts and transfers
from other funds are projected to reach $3.57 billion, or $153 million higher
than the Mid-Year Update.
The State projects that disbursements will increase by $565 million over the
Mid-Year Update, with nearly the entire increase attributable to one-time
disbursements of $561 million that pre-pay expenditures previously scheduled for
1998-99. In the absence of these accelerated payments, projected General Fund
spending in the current year would have remained essentially unchanged from the
Mid-Year Update. The Governor is proposing legislation to use a portion of the
current year surplus to transfer $425 million to pay for capital projects
authorized under the Community Enhancement Facilities Assistance Program (CEFAP)
that were previously planned to be financed with bond proceeds in 1998-99 and
thereafter, and $136 million in costs for an additional Medicaid payment
originally scheduled for 1998-99. Aside from these actions, a number of other
changes produced a net increase of $4 million in projected disbursements over
the Mid-Year Update. These included higher spending in General State charges
($80 million), largely as a result of litigation settlements and collective
bargaining costs, an increase in General Fund transfers for education ($70
million) to offset declines in Lottery receipts, and additional costs associated
with a delay of Housing Finance Agency (HFA) receipts into 1998-99 that were
originally planned to offset capital projects spending ($25 million). These
increases were offset in part by projected savings in Medicaid ($85 million),
social services ($75 million), and debt service ($37 million).
The General Fund closing balance is projected to be $465 million at the end of
1997-98, a decline of $462 million from the Mid-Year Update. The decline
reflects the application of the $530 million undesignated
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reserve plus additional surplus monies projected in the January Update to pay
for certain one-time costs in the State's Financial Plan. The effect of this
action is to help lower the State's projected disbursements in 1998-99. The
remaining General Fund closing balance will be held in two funds, the TSRF and
CRF. The TSRF is projected to have $400 million on deposit at the close of the
fiscal year, following a required deposit of $15 million and an extraordinary
deposit of $68 million made from the 1997-98 surplus. The CRF is projected to
have a closing balance of $65 million, following an earlier planned deposit of
$24 million in 1997-98.
1997-98 Borrowing Plan. The proposed 1997-98 through 2002-03 Capital Program
and Financing Plan was released with the 1998-99 Executive Budget on January 20,
1998. As a part of that Plan, changes were proposed to the State's 1997-98
borrowing plan, including: the delay in the issuance of COPs to finance welfare
information systems until 1998-99 to permit a thorough assessment of needs; and
the elimination of issuances for the CEFAP to reflect the proposed conversion of
that bond-financed program to pay-as-you-go financing.
As a result of these changes, the State's 1997-98 borrowing plan now reflects:
$501 million in general obligation bonds (including $140 million for purposes of
redeeming outstanding BANs) and $140 million in general obligation commercial
paper; the issuance of $83 million in COPs for equipment purchases; and
approximately $1.8 billion in borrowings by public authorities pursuant to
lease-purchase and contractual-obligation financings for capital programs of the
State, including costs of issuance, reserve funds, and other costs, net of
anticipated refundings and other adjustments for 1997-98 capital projects. The
projection of State borrowings for the 1997-98 fiscal year is subject to change
as market conditions, interest rates and other factors vary through the end of
the fiscal year.
THE STATE'S 1997-98 FISCAL YEAR. The State's most recent fiscal year commenced
on April 1, 1998 and ends on March 31, 1999, and is referred to herein as the
1998-99 fiscal year. The Governor presented his 1998-99 Executive Budget to the
Legislature on January 20, 1998. The Executive Budget also contains financial
projections for the State's 1997-98 through 2000-01 fiscal years, detailed
estimates of receipts and a proposed Capital Program and Financing Plan for the
1997-98 through 2002-03 fiscal years. It was expected that the Governor would
prepare amendments to his Executive Budget as permitted under law and that these
amendments would be reflected in a revised Financial Plan to be released on or
before February 19, 1998. There can be no assurance that the Legislature will
enact the Executive Budget as proposed by the Governor into law, or that the
State's adopted budget projections will not differ materially and adversely from
the projections set forth herein.
1998-99 State Financial Plan. The 1998-99 Financial Plan projects balance on a
cash basis in the General Fund. Total General Fund receipts and transfers from
other funds are projected to be $36.22 billion, an increase of $1.02 billion
over total receipts projected in the 1997-98 fiscal year. Total General Fund
disbursements and transfers to other funds are projected to be $36.18 billion,
an increase of $1.02 billion over spending totals projected for the 1997-98
fiscal year. As compared to the 1997-98 State Financial Plan, the Executive
Budget proposes a year-to-year growth in General Fund spending of 2.89 percent.
State funds spending (i.e., General Fund plus other dedicated funds, with the
exception of federal aid) is projected to grow by 8.5 percent. Spending from All
Governmental Funds (excluding transfers) is proposed to increase by 7.6 percent
from the prior fiscal year.
Current law and programmatic requirements are primarily responsible for the
year-to-year growth in General Fund spending. These include a current law
increase in school aid ($607 million), cost and enrollment growth in handicapped
education ($91 million) and Medicaid ($212 million), and employee contract
increases and inflation adjustments for State agency operations. The Executive
Budget also included increases of $84 million for corrections programs to cover
new capacity demands and $152 million for mental health programs to finance
current law increases and the expansion of community beds. Other spending growth
reflects a requested increase of $108 million for the Judiciary and $117 million
for long-term debt service. New spending is partially offset by reductions of
$453 million in capital projects transfers due to the financing of CEFAP from
resources available in 1997-98, $37 million in welfare assistance savings, $36
million from lower spending in General State charges, and $68 million in lower
transfers primarily due to the elimination of the Lottery transfer made in
1997-98.
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The 1998-99 Financial Plan projects that the State will end 1998-99 with a
closing balance in the General Fund of $500 million, which reflects $400 million
in the TSRF and $100 million in the CRF, following an anticipated deposit of $35
million in the latter fund during the year.
Projected General Fund Receipts. The 1998-99 Financial Plan projects General
Fund receipts (including transfers from other funds) of $36.22 billion, an
increase of $1.02 billion from the projected 1997-98 level. Recurring growth in
the State General Fund tax base is projected to be approximately 6 percent
during 1998-99, after adjusting for tax law and administrative changes. This
growth rate is lower than the rates for 1996-97 or currently estimated for
1997-98, but roughly equivalent to the rate for 1995-96.
The Executive Budget contains several new tax initiatives which are projected
to reduce total receipts by $700 million in 1998-99. The Executive Budget
proposed accelerating school tax relief for senior citizens under the School Tax
Relief Initiative ("STAR"), which is projected to reduce General Funds receipts
by $537 million in 1998-99. The proposed reduction supplements STAR tax
reductions already scheduled in law, which were projected at $187 million for
1998-99. The Budget also proposed several new tax-cut initiatives and other
funding changes that were projected to further reduce receipts available to the
General Fund by over $200 million. The Executive Budget also proposed
establishing a reserve of $100 million to permit the acceleration into 1998-99
of other tax reductions that are otherwise scheduled in law for the
implementation in future fiscal years.
General Fund receipts in 1998-99 will also be affected by the loss of certain
one-time receipts recorded in 1997-98, the largest of which include
approximately $200 million in retroactive federal reimbursements for prior-year
social service spending recorded as a transfer from other funds and about $55
million in retroactive assessments on Office of Mental Retardation and
Developmental Disabilities facilities that were received in 1997-98 as
miscellaneous receipts. Estimates for 1998-99 also reflect the loss of one-time
receipts from a tax amnesty program.
Personal income tax collections for 1998-99 are projected to be $19.02
billion, an increase of $1.32 billion from the projected 1997-98 level. This
estimate reflects growth in "constant law" liability (i.e., taxpayer liability
before scheduled or proposed tax reductions) of over 6 percent in 1998.
User tax and fee receipts are projected at $7.2 billion in 1998-99, up $144
million from projected 1997-98 levels. Total collections in this category are
dominated by the State sales and use tax, which accounts for nearly 80 percent
of total receipts in the category. The strong growth in income experienced this
year produced continuing growth in the base of the sales and use tax of 5.2
percent in 1997-98. The sales tax growth rate projected for the coming year is
expected to be marginally higher.
Total business taxes are now projected at $4.96 billion for 1998-99, a
decrease in $200 million from 1997-98 levels. The decline in this category is
largely attributable to scheduled tax reductions.
Other tax receipts are now projected at $1.01 billion, down $78 million from
the estimated 1997-98 level. The main reason for the decline is an expected fall
in the number and value of large estate tax payments from the extraordinary
level achieved in 1997-98. The decline also reflects the first full-year impact
of the repeal of the gains tax.
Miscellaneous receipts, which include license revenues, fee and fine income,
investment income and abandoned property proceeds, as well as the proceeds of
the largest share of the State's medical provider assessment and various
one-time transactions, are estimated to total $1.4 billion in 1998-99, a decline
of $170 million from the prior year. This decline is largely attributable to the
loss of $90 million in several one-time transactions and $56 million in
statutory reductions in Medicaid provider assessments.
Transfers from other funds consist primarily of sales tax revenues in excess
of debt service requirements used to support debt service payments to LGAC.
Projected amounts in this category for 1998-99 total $1.55 billion, an increase
of $72 million from 1997-98.
Projected General Fund Disbursements. The 1997-98 Financial Plan projects
General Fund disbursements of $36.18 billion, an increase of $1.02 billion from
projected spending levels for 1997-98.
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Grants to Local Governments constitute approximately 67.9 percent of all
General Fund spending, and include payments to local governments, non-profit
providers and individuals. Disbursements in this category are projected to
increase by $931 million, primarily reflecting increases for school aid and
Medicaid. School aid is projected at $9.47 billion in 1998-99, an increase of
$607 million on a State fiscal year basis. This increase funds both the balance
of aid payable for the 1997-98 school year and a proposed 1998-99 school year
increase of $518 million. Medicaid costs are estimated to increase $212 million
to $5.68 billion, about the same spending level as in 1994-95. After adjusting
1997-98 spending for the one-time acceleration of a 53(rd) weekly Medicaid
payment scheduled for 1998-99, Medicaid spending is projected to increase by
$348 million or 6.5 percent. The adjustment eliminates this extraordinary
payment in 1997-98 for purposes of comparison with 1998-99. Spending in local
assistance programs for higher education, handicapped education, mental hygiene,
local public health and revenue sharing are also proposed to increase.
Support for State operations is projected to increase by $524 million to $6.73
billion in 1998-99. This projected increase is primarily due to costs associated
with an additional 27(th) payroll and current collective bargaining agreements,
the loss of Federal disproportionate share receipts that offset General Fund
spending in mental hygiene programs, and a $108 million requested increase in
the Judiciary's budget. Adjusting for the extra payroll, State operations
spending increases by a projected 6.1 percent. The State workforce is roughly
191,000 at present and is projected to remain stable over the year.
General State Charges are projected to decline slightly from 1997-98 to $2.23
billion in 1998-99. This annual decline reflects projected decreases in one-time
costs for pension and Court of Claims payments, offset by projected increases
for health insurance contributions, social security costs, and the loss of
reimbursements due to a reduction in the fringe benefit rate charged to
positions financed by non-General funds.
Transfers in support of debt service are projected to grow at 5.8 percent in
1998-99, from $2.03 billion to $2.15 billion. Transfers in support of capital
projects for 1998-99 are estimated to total $190 million, a decrease of $453
million from 1997-98, reflecting the absence of one-time transfers for the
Hudson River Park and CEFAP in 1997-98. All other transfers reflect remaining
transfers from the General Fund to other funds. These transfers decline by $68
million to $323 million in 1998-99, reflecting non-recurring transfers in
1997-98 to the State University Tuition Stabilization Fund ($29 million) and to
the Lottery fund to support school aid as a result of lower-than-projected
1997-98 Lottery receipts ($70 million), offset by a $34 million increase in the
State subsidy to the Roswell Park Cancer Institute.
General Fund Closing Balance. The 1998-99 closing fund balance in the General
Fund is projected to be $500 million. The expected balance of the TSRF will be
$400 million at the close of 1998-99. The remaining General Fund balance
reflects a reserve of $100 million in the CRF (after an additional deposit of
$35 million in 1998-99.
Non-recurring Resources. The DOB estimates that the 1998-99 Financial Plan
includes approximately $62 million in non-recurring resources, comprising less
than two-tenths of one percent of the General Fund disbursements. The
non-recurring resources projected for use in 1998-99 consist of $27 million in
retroactive federal welfare reimbursements for family assistance recipients with
HIV/AIDS, $25 million in receipts from the Housing Finance Agency that were
originally anticipated in 1997-98, and $10 million in other measures, including
$5 million in assets sales.
Special Revenue Funds. For 1998-99, the Financial Plan projects disbursements
of $30.16 billion from Special Revenue Funds, an increase of $2.32 billion. This
includes $8.29 billion from Special Revenue Funds containing State revenues and
$21.87 billion from funds containing federal grants.
The implementation of the first phase of the STAR program accounts for $724
million of the $1.09 billion increase in proposed State SRF spending in 1998-99.
Other projected State SRF spending increases include; $149 million in additional
operating assistance for mass transit systems; $82 million to expand the Child
Health Plus program, which provides health insurance for uninsured children
under 19 years of age; and $138 million for various State agency activities.
Spending from the State Lottery Fund is projected to increase slightly over
1997-98, while disbursements from the Indigent Care Fund are projected to remain
flat. The $1.22 billion year-to-year growth in federal SRF spending is primarily
due to increases in Medicaid ($433
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million), Children and Family Assistance Programs ($297 million), education
programs ($172 million), the expanded Child Health Plus program ($144 million),
and the welfare program ($50 million).
Capital Projects Funds. Disbursements from the Capital Projects funds in
1998-99 are estimated at $4.82 billion, or $1.07 billion higher than 1997-98.
The proposed spending plan includes: $2.51 billion in disbursements for
transportation purposes, including the State and local highway and bridge
program; $815 million for environmental activities; $379 million for
correctional services; $228 million for SUNY and CUNY; $290 million for mental
hygiene projects; and $375 million for CEFAP.
Approximately 28 percent of capital projects are proposed to be financed by
"pay-as-you-go" resources. State-supported bond issuances finance 46 percent of
capital projects, with federal grants financing the remaining 26 percent.
Debt Service Funds. Disbursements from Debt Service Funds are estimated at
$3.39 billion in 1998-99, an increase of $281 million from 1997-98. The increase
in debt service is primarily attributable to bonds previously issued in support
of the following: $107 million for transportation purposes in the State and
local highway and bridge programs financed by the Dedicated Highway and Bridge
Trust Fund; $26 million for the mental hygiene programs financed through the
Mental Health Services Fund; $34 million for the environment; $37 million for
public protection purposes; and $43 million for CUNY senior and community
college debt service formerly classified as local assistance in the General
Fund. Debt services for LGAC bonds is projected at $345 million, an increase of
$15 million from 1997-98.
Cash Flow. The projected 1998-99 General Fund cash flow will not depend on
either short-term spring borrowing or the issuance of LGAC bonds. The new-money
bond issuance portion of the LGAC program was completed in 1995-96, and
provisions prohibiting the State from returning to a reliance upon cash flow
manipulation to balance its budget will remain in bond covenants until the LGAC
bonds are retired.
The 1998-99 cash flow projects substantial closing balances in each quarter of
the fiscal year, with excesses in receipts over disbursements in every quarter
of the fiscal year, and no monthly balance (prior to March) lower than $1.5
billion. The closing fund balance is projected at $500 million.
Outyear Projections Of Receipts And Disbursements. General Fund receipts are
projected at $36.14 billion and $35.75 billion for 1999-00 and 2000-01,
respectively. These projections were prepared on the basis of an economic
forecast of a steadily growing national economy, in an environment of low
inflation and slow employment growth. The forecast for the State's economic
performance likewise is for slow but steady economic growth. The receipt
projections reflect constant law income tax liability growth of approximately
5.3 percent annually and sales tax growth averaging slightly less than 5 percent
over the period. Constant law business tax liability is projected to rise slowly
over the two years.
Disbursements from the General Fund are projected at $37.84 billion in 1999-00
and $39.45 billion in 2000-01, after assuming implementation of spending
proposals contained in the Executive Budget, the value of which is annualized
and assumed to continue. The projections include additional school aid increases
of roughly 7 percent annually to finance present law and implement proposals
enacted under the STAR/School Aid program. Additional funding to implement
welfare reform is also included, as well as funding for mental health community
reinvestment, prison expansion, and other previous multi-year spending
commitments. Growth in General Fund Medicaid spending is projected at just over
6 percent annually. Other spending growth is projected to follow recent trends.
Consistent with past practice, funding is not included for any costs associated
with new collective bargaining agreements after the expiration of the current
round of contracts at the end of the 1998-99 fiscal year. Savings actions
totaling $600 million in 1990-00 and growing to $800 million in 2000-01 are
assumed in these spending projections. It is expected that the 1999-00 Financial
Plan will include continued actions by State agencies to deliver services more
efficiently, continued savings from workforce management efforts, aggressive
efforts to maximize federal and other non-General Fund spending offsets, and
other efforts to control State spending.
The Governor is required by law to propose a balanced budget each year. In
order to address any potential remaining budget gap, the Governor is expected to
make additional proposals to bring receipts in line with disbursements. The
State has closed projected budget gaps of $5.0 billion, 3.9 billion and $2.3
billion in its 1995-96, 1996-97 and 1997-98 fiscal years, respectively.
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GAAP-Basis Financial Plan. The Executive Budget also contains General Fund and
All Governmental Funds Financial Plans prepared in accordance with Generally
Accepted Accounting Principles ("GAAP"). The Financial Plan is projected to show
a GAAP-basis surplus of $131 million for 1997-98 and a GAAP-basis deficit of 1.3
billion for 1998-99 in the General Fund, primarily as a result of the use of the
1997-98 cash surplus. In 1998-99, the General Fund GAAP Financial Plan shows
total revenues of $34.68 billion, total expenditures of $35.94 billion, and net
other financing sources and uses of $42 million.
Special Considerations. DOB believes that the economic assumptions and
projections of receipts and disbursements accompanying the 1998-99 Executive
Budget are reasonable. However, the economic and financial condition of the
State may be affected by various financial, social, economic and political
factors. Those factors can be very complex, can vary from fiscal year to fiscal
year and are frequently the result of actions taken not only by the State but
also by entities, such as the federal government, that are outside the State's
control. Because of the uncertainty and unpredictability of changes in these
factors, their impact cannot be fully included in the assumptions underlying the
State's projections. There can be no assurance that the State economy will not
experience results that are worse than predicted, with corresponding material
and adverse effects on the State's financial projections. However, there can be
no assurance that the Legislature will enact the Governor's proposals or that
the State's actions will be sufficient to preserve budgetary balance or to align
recurring receipts and disbursements in either 1998-99 or future fiscal years.
Uncertainties with regard to the economy present the largest potential risk to
future budget balance in New York State. This risk includes either a financial
market or broader economic "correction" during the period, a risk heightened by
the relatively lengthy expansions currently underway. The securities industry is
more important to the New York economy than the national economy, and a
significant deterioration in stock market performance could ultimately produce
adverse changes in wage and employment levels. In addition, a normal "forecast
error" of one percentage point in the expected growth rate could cumulatively
raise or lower receipts by over $1 billion by the last year of the 1998 through
2001 projection period. On the other hand, the national or State economy may
continue to perform better than projected, which could produce beneficial
short-term results in State receipts.
An additional risk to the State Financial Plan arises from the potential
impact of certain litigation and federal disallowances now pending against the
State, which could produce adverse effects on the State's projections of
receipts and disbursements. The Financial Plan assumes no significant federal
disallowances or other federal actions that could affect State finances, but has
reserves of $500 million in the event of such an action.
On August 11, 1997 President Clinton exercised his line-item veto powers to
cancel a provision in the Federal Balanced Budget Act of 1997 that would have
deemed New York State's health care provider taxes to be approved by the federal
government. New York and several other states have used hospital rate
assessments and other provider tax mechanisms to finance various Medicaid and
health insurance programs since the early 1980s. The State's process of taxation
and redistribution of health care dollars was sanctioned by federal legislation
in 1987 and 1991. However, the federal Health Care Financing Administration
(HCFA) regulations governing the use of provider taxes require the State to seek
waivers from HCFA that grant explicit approval of the provider taxing system now
in place. The State filed the majority of these waivers with HCFA in 1995 but
has yet to receive final approval.
The Balanced Budget Act of 1997 provision passed by Congress was intended to
rectify the uncertainty created by continued inaction on the State's waiver
requests. A federal disallowance of the State's provider tax system could
jeopardize up to $2.6 billion in Medicaid reimbursement received through
December 31, 1998. The President's veto message valued any potential
disallowance at $200 million. The Financial Plan projections do not anticipate
any provider tax disallowance.
On October 9, 1997 the President offered a corrective amendment to the HCFA
regulations governing such taxes. The Governor stated that this proposal did not
appear to address all of the State's concerns, and negotiations are ongoing
between the State and HCFA. In addition, the City of New York and other affected
parties in the health care industry have filed a lawsuit challenging the
constitutionality of the President's line-item veto.
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THE STATE'S DEBT. 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, 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 BANs issued in the 1993-94 through
1995-96 fiscal years, excluding bonds issued to redeem BANs, was $388 million,
$250 million and $333 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,
municipal non-hazardous waste landfill closures and hazardous waste site cleanup
projects. As of March 31, 1996, the total amount of outstanding general
obligation debt was $5.05 billion, including $293.6 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.
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. 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 approximately 400,000 lane miles of
highways and approximately 7,500 State bridges. Despite more than $4.1 billion
of general obligation bond authorizations since 1983, of which more than $3.5
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 Highway Trust Fund to provide for
the dedication of a portion of the petroleum business tax and certain other
transportation-related taxes and fees for transportation improvements.
Legislation enacted in 1996 extends the capital program supported by the Highway
Trust Fund through fiscal year 1999-2000. The $11.35 billion plan is expected to
be financed by federal grants (45 percent), general obligation bonds (3 percent)
and the Highway Trust Fund (52 percent). It is expected that about 50 percent of
the Highway Trust Fund financing will be supported by the dedicated taxes on a
pay-as-you-go basis and 50 percent from bonds to be issued by the Thruway
Authority. The 1996 legislation also extended the authorization of the Thruway
Authority to 1999-2000 to finance the local transportation programs, including a
new $350 million program.
The State has supported the capital plans of the 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 capital program.
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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 DASNY,
paying all capital costs of the 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 approximately 68 percent are over 20
years of age. Together with the 30 SUNY community colleges, the SUNY system
serves approximately 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 the Office of Mental Retardation ("OMR"), the Office of
Substance Abuse Services and the Office of Mental Hygiene ("OMH"). Historically,
this care had been provided at large State institutions, but the State recently
adopted policies that provide institutional care to only the neediest and
provide additional care in community residences. OMR has closed 11 of its 20
developmental centers, with one additional facility planned for closure in
1996-97. OMH has reduced its adult institutional population from 22,000 in 1982
to approximately 8,250. OMH will continue to require substantial capital
investments to upgrade to federal standards and implement community facility
development as deinstitutionalization continues. Capital investments for both
programs are primarily supported by patient revenues through financing
arrangements with DASNY.
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. 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 of existing
facilities. While high priority renovation projects and replacement of
deteriorated structures remains a DOCS capital program priority, the 1996-97
enacted budget contained funding to increase bed capacity through the addition
of 1,500 new beds. This program is financed through lease-purchase financing
arrangements with the UDC.
Other Programs. The State also uses lease-purchase and contractual-obligation
financing arrangements for hospital capital programs of the Department of Health
(including 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.
Local Government Assistance Corporation (LGAC). 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).
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 throughout the fiscal year without
relying on short-term seasonal borrowings.
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THE STATE'S RATINGS. As of August 1997, the State's general obligation bonds
were rated A by Standard & Poor's ("S&P"), A2 by Moody's Investors Service
("Moody's") and A+ by Fitch Investors Service ("Fitch"). The State carries the
lowest general obligation bond rating of any state. There is no assurance that
any 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.
Standard & Poor's. On January 13, 1992, S&P lowered its rating on the State's
general obligation bonds to A- from A and continued its negative rating outlook
assessment on State general obligation debt. 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. On April 26, 1993,
S&P revised the rating outlook assessment to stable. On February 14, 1994, S&P
raised its rating outlook assessment to positive and, on December 12, 1994,
confirmed its A- rating. On August 28, 1997, S&P revised its ratings from A- to
A. 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.
Moody's Investors Service. 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. On February 11, 1997, Moody's confirmed its rating of the State's
general obligation bonds and, in connection with a policy change at Moody's to
introduce numerical modifiers to its municipal securities ratings, assigned a
rating of A2 to the State's general obligation bonds.
THE STATE'S 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 Medicaid 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.
Tax Law. In Matter of the Petition of Consolidated Rail Corporation v. Tax
Appeals Tribunal (Appellate Division, Third Department, commenced December 22,
1995), petitioner, a rail freight corporation that purchases diesel motor fuel
out of State and imports the fuel into the State for use, distribution, storage
or sale in the State, contended that the assessment of the petroleum business
tax imposed pursuant to Tax Law sec.301-a to such fuel purchases violated the
Commerce Clause of the United States Constitution. Petitioner contended that the
application of Section 301-a to the interstate transaction, but not to
purchasers who purchase fuel within the State for use, distribution, storage or
sale within the State, discriminates against interstate commerce. In a decision
dated July 17, 1997, the Appellate Division, Third Department, dismissed the
petition. Petitioner appealed to the Court of Appeals. On December 4, 1997, the
Court of Appeals dismissed the appeal, sua sponte, upon the ground that no
substantial Constitutional question was directly involved.
In New York Association of Convenience Stores, et al. v. Urbach, et al.,
petitioners, New York Association of Convenience Stores, National Association of
Convenience Stores, M.W.S. Enterprises, Inc. and Sugarcreek Stores, Inc. seek to
compel respondents, the Commissioner of Taxation and Finance and the Department
of Taxation and Finance, to enforce sales and excise taxes imposed pursuant to
Tax Law Articles 12-A, 20 and
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28 on tobacco products and motor fuel sold to non-Indian consumers on Indian
reservations. In orders dated August 13, 1996 and August 24, 1996, the Supreme
Court, Albany County, ordered, inter alia, that there be equal implementation
and enforcement of said taxes for sales to non-Indian consumers on and off
Indian reservations, and further ordered that, if respondents failed to comply
within 120 days, no tobacco products or motor fuel could be introduced onto
Indian reservations other than for Indian consumption or, alternately, the
collection and enforcement of such taxes would be suspended statewide.
Respondents appealed to the Appellate Division, Third Department, and invoked
CPLR 5519(a)(1), which provides that the taking of the appeal stayed all
proceedings to enforce the orders pending the appeal. Petitioner's motion to
vacate the stay was denied. In a decision entered May 8, 1997, the Third
Department modified the orders by deleting the portion thereof that provided for
the statewide suspension of the enforcement and collection of the sales and
excise taxes on motor fuel and tobacco products. The Third Department held,
inter alia, that petitioners had not sought such relief in their petition and
that it was an error for the Supreme Court to have awarded such undemanded
relief without adequate notice of its intent to do so. On May 22, 1997,
respondents appealed to the Court of Appeals on other grounds, and again invoked
the statutory stay. On October 23, 1997, the Court of Appeals granted
petitioners' motion for leave to cross-appeal from the portion of the Third
Department's decision that deleted the statewide suspension of the enforcement
and collection of the sales and excise taxes on motor fuel and tobacco.
Insurance Law. Proceedings have been brought by two groups of petitioners
challenging regulations promulgated by the Superintendent of Insurance that
established excess medical malpractice premium rates for the 1986-87 through
1995-96 and 1996-97 fiscal years, respectively (New York State Health
Maintenance Organization Conference, Inc., et al. v. Muhl, et al. ["HMO"], and
New York State Conference of Blue Cross and Blue Shield Plans, et al. v. Muhl,
et al. ["Blue Cross 'I' and 'II"'], Supreme Court, Albany County). By Order
filed January 22, 1997, the Court in Blue Cross I permitted the plaintiffs in
HMO to intervene and dismissed the challenges to the rates for the period prior
to 1995-96. By decision dated July 24, 1997, the Court in Blue Cross I held that
the determination made by the Superintendent in establishing the 1995-96 rate
was arbitrary and capricious and directed that premiums paid pursuant to that
determination be returned to the payors. The State has appealed this decision.
Offices 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. The cases have been settled by a stipulation
and order dated January 7, 1998.
Shelter Allowance. In an action commenced in March 1987 against State and New
York City officials (Jiggetts, et al. v. Bane, et al., Supreme Court, New York
County), plaintiffs allege that the shelter allowance granted to recipients of
public assistance is not adequate for proper housing. In a decision dated April
16, 1997, the Court held that the shelter allowance promulgated by the
Legislature and enforced through Department of Social Services regulations is
not reasonably related to the cost of rental housing in New York City and
results in homelessness to families in New York City. A judgement was entered on
July 25, 1997, directing, inter alia, that the State (i) submit a proposed
schedule of shelter allowances (for the Aid to Dependent Children program and
any successor program) that bears a reasonable relation to the cost of housing
in New York City; and (ii) compel the New York City Department of Social
Services to pay plaintiffs a monthly shelter allowance in the full amount of
their contract rents, provided they continue to meet the eligibility
requirements for public assistance, until such time as a lawful shelter
allowance is implemented, and provide interim relief to other eligible
recipients of Aid to Dependent Children under the interim relief system
established in this case. The State has sought relief from each and every
provision of this judgment except that portion directing the continued provision
of interim relief.
Civil Rights Claims. In an action commenced in 1980 (United States, et al. v
Yonkers Board of Education, et al.), the United States District Court for the
Southern District of New York found, in 1985, that Yonkers and its public
schools were intentionally segregated. In 1986, the District Court ordered
Yonkers to develop and comply with a remedial educational improvement plan ("EIP
I"). On January 19, 1989, the District Court granted motions by Yonkers and the
NAACP to add the State Education Department, the Yonkers
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Board of Education, and the State Urban Development Corporation as defendants,
based on allegations that they had participated in the perpetuation of the
segregated school system. On August 30, 1993, the District Court found that
vestiges of a dual school system continued to exist in Yonkers. On March 27,
1995, the District Court made factual findings regarding the role of the State
and the other State defendants (the "State") in connection with the creation and
maintenance of the dual school system, but found no legal basis for imposing
liability. On September 3, 1996, the Court of Appeals, based on the District
Court's factual findings, held the State defendants liable under 42 USC sec.1983
and the Equal Educational Opportunity Act, 20 USC sec.sec.1701, et seq., for the
unlawful dual school system, because the State, inter alia, had taken no action
to force the school district to desegregate despite its actual or constructive
knowledge of de jure segregation. By Order dated October 8, 1997, the District
Court held that vestiges of the prior segregated school system continued to
exist and that, based on the State's conduct in creating and maintaining that
system, the State is liable for eliminating segregation and its vestiges in
Yonkers and must fund a remedy to accomplish that goal. Yonkers presented a
proposed educational improvement plan ("EIP II") to eradicate these vestiges of
segregation. The October 8, 1997 Order of the District Court ordered that EIP II
be implemented and directed that, within 10 days of the entry of the Order, the
State make available to Yonkers $450,000 to support planning activities to
prepare the EIP II budget for 1997-98 and the accompanying capital facilities
plan. A final judgment to implement EIP II was entered on October 14, 1997. The
State intends to appeal that judgment. Additionally, the Court adopted a
requirement that the State pay to Yonkers $9 million as its pro rata share of
the funding of EIP I for the 1996-97 school year. The requirement for State
funding of EIP I has not yet been reduced to an order.
Medicaid. Several cases, including Port Jefferson Health Care Facility, et al.
v. Wing (Supreme Court, Suffolk County), challenge the constitutionality of
Public Health Law sec.2807-d, which imposes a tax on the gross receipts
hospitals and residential health care facilities receive from all patient care
services. Plaintiffs allege that the tax assessments were not uniformly applied,
in violation of federal regulations. In a decision dated June 30, 1997, the
Court held that the 1.2 percent and 3.8 percent assessments on gross receipts
imposed pursuant to Public Health Law sec.sec.2807-d(2)(b)(ii) and
2807-d(2)(b)(iii), respectively, are unconstitutional. An order entered August
27, 1997 enforced the terms of the decision. The State has appealed that order.
Contract and Tort Claims. In Inter-Power of New York, Inc. v. State of New
York, commenced November 16, 1994 in the Court of Claims, plaintiff alleged that
by reason of the failure of the State's Department of Environmental Conservation
to provide in a timely manner accurate and complete data, plaintiff was unable
to complete by the projected completion date a cogeneration facility, and
thereby suffered damages. The parties have agreed to settle this case for $29
million.
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,
with a population of approximately 7.4 million, is the most populous city in the
State and in the nation and is the center of the nation's largest metropolitan
area. Its non-manufacturing economy is broadly based, with the banking and
securities, life insurance, communications, publishing, fashion design,
retailing and construction industries accounting for a significant portion of
the City's total employment earnings. Additionally, the City is the nation's
leading tourist destination. Manufacturing activity in the City is conducted
primarily in apparel and printing.
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 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
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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 GAAP and audited by independent
certified public accountants. For each of the 1981 through 1997 fiscal years,
the City achieved balanced operating results as reported in accordance with
GAAP. The City's operating results for the 1997 fiscal year were balanced in
accordance with GAAP, after taking into account the use of $1.362 billion for
expenditures due in the 1998 fiscal year. The City's current financial plan for
the 1998 through 2002 fiscal years (the "Financial Plan") projects a surplus in
the 1998 fiscal year, before discretionary transfers, and substantial budget
gaps for each of the 2000, 2001 and 2002 fiscal years. This pattern of current
year balanced operating results and projected subsequent year budget gaps has
been consistent through virtually the entire period since 1982. The City was
required to close substantial budget gaps between forecast revenues and forecast
expenses in recent years in order to maintain balanced operating results. 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 City depends on State aid both to
enable the City to balance its budget and to meet its cash requirements. There
can be no assurance that there will not be reductions in State aid to the City
from amounts currently projected or that State budgets will be adopted by the
April 1 statutory deadline or that any such reductions or delays will not have
adverse effects on the City's cash flow or expenditures. In addition, the
federal budget negotiation process could result in a reduction in or a delay in
the receipt of federal grants which could have additional adverse effects on the
City's cash flow or revenues.
The Financial Plan. Pursuant to the New York State Financial Emergency Act for
The City of New York, 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 financial plan, including the Financial Plan. The City is
required to submit its financial plans to review bodies, including the Control
Board.
On January 29, 1998, the City published the Financial Plan, which relates to
the City, the Board of Education ("BOE") and CUNY. The Financial Plan is a
modification to the financial plan submitted to the Control Board on June 10,
1997 (the "June Financial Plan").
The June Financial Plan identified actions to close a previously projected gap
for the 1998 fiscal year. The proposed actions in the June Financial Plan for
the 1998 fiscal year included (i) agency actions totaling $621 million, (ii) the
proposed sale of various assets; and (iii) additional State aid of $294 million,
including a proposal that the State accelerate a $142 million revenue sharing
payment to the City from March 1999. The June Financial Plan also included a
proposed discretionary transfer in the 1998 fiscal year of $300 million of debt
service due in the 1999 fiscal year for budget stabilization purposes.
The Financial Plan reflects actual receipts and expenditures and changes in
forecast revenues and expenditures since the June Financial Plan. The Financial
Plan projects revenues and expenditures for the 1998 and 1999 fiscal years
balanced in accordance with GAAP, and project gaps of $1.8 billion, $2.0 billion
and $1.9 billion for the 2000, 2001 and 2002 fiscal years, respectively. Changes
since the June Financial Plan include: (i) an increase in projected tax revenues
of $841 million, $738 million, $808 million and $802 million in the 1998 through
2001 fiscal years, respectively, including an increase in sales tax revenues
resulting from the State adopting a smaller sales tax reduction than previously
assumed; (ii) a reduction in assumed State aid of $283 million in the 1998
fiscal year and of between $134 million and $142 million in each of the 1999
through 2001 fiscal years, reflecting the State adopted budget, including, in
the 1998 fiscal year, the failure of the State budget to implement the proposed
acceleration of $142 million of revenue sharing payments; (iii) a reduction in
projected debt service expenditures totaling $164 million, $291 million, $127
million and $145
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million in the 1998 through 2001 fiscal years, respectively; (iv) an increase in
BOE spending of $70 million, $182 million, $59 million and $61 million in the
1998 through 2001 fiscal years, respectively; and (v) an increase in
expenditures totaling $71 million in the 1998 fiscal year and between $214
million and $273 million in each of the 1999 and 2001 fiscal years, reflecting
additional spending for the City's proposed drug initiative and other agency
spending. The Financial Plan includes a proposed discretionary transfer in the
1998 fiscal year of an additional $920 million of debt service due in the 1999
fiscal year, and a proposed discretionary transfer in the 1999 fiscal year of
$210 million of debt service due in fiscal year 2000, for budget stabilization
purposes, raising the total for the 1999 fiscal year to $1.2 billion.
In addition, the Financial Plan sets forth gap-closing actions to eliminate a
previously projected gap for the 1999 fiscal year and to reduce projected gaps
for fiscal years 2000 through 2002. The gap-closing actions for the 1998 through
2002 fiscal years include: (i) additional agency actions totaling $122 million,
$429 million, $354 million, $303 million and $311 million in fiscal years 1998
through 2002; (ii) additional Federal aid of $250 million in each of the fiscal
years 1999 through 2002, which could include funds to be distributed from the
tobacco settlement, increased Medicaid assistance, unrestricted Federal revenue
sharing aid or increased funds for school construction; and (iii) additional
State aid of $200 million in each of fiscal years 1999 through 2002, including a
proposed increase in revenue sharing payments and reimbursement of inmate costs.
The gap-closing actions are partially offset by proposed new tax reduction
programs totaling $237 million, $537 million, $610 million and $774 million in
fiscal years 1999 through 2002, respectively, including the elimination of the
City sales tax on all clothing as of December 1, 1998, the extension of current
tax reductions for owners of cooperative and condominium apartments starting in
fiscal year 2000, a personal income tax credit for child care and for resident
shareholders of Subchapter S corporations and elimination of the commercial rent
tax over three years commencing in fiscal year 2000, all of which are subject to
State legislative approval.
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. The Financial Plan assumes (i) approval by the Governor
and the State Legislature of the extension of the 14% personal income tax
surcharge, which is scheduled to expire on December 31, 1999 and the extension
of which is projected to provide revenue of $168 million, $507 million and $530
million in the 2000 through 2002 fiscal years, respectively, and of the
extension of the 12.5% personal income tax surcharge, which is scheduled to
expire on December 31, 1998 and the extension of which is projected to provide
revenue of $187 million, $531 million, $554 million and $579 million in the 1999
through 2002 fiscal years, respectively, (ii) collection of the projected rent
payments for the City's airports, totalling $365 million, $175 million, $170
million and $70 million in 1999 through 2002 fiscal years, respectively, which
may depend on the successful completion of negotiations with the Port Authority
or the enforcement of the City's rights under the existing leases thereto
through pending legal actions, and (iii) State approval of the repeal of the
Wicks Law relating to contracting requirements for City construction projects
and the additional State funding assumed in the Financial Plan, and State and
Federal approval of the State and Federal gap-closing actions proposed by the
City in the Financial Plan. It can be expected that the Financial Plan will
engender public debate which will continue through the time the budget is
scheduled to be adopted in June 1998, and that there will be alternative
proposals to reduce taxes, including the 12.5% personal income tax surcharge,
and increase spending. Accordingly, the Financial Plan may be changed by the
time the budget for the 1999 fiscal year is adopted. The Financial Plan provides
no additional wage increases for City employees after their contracts expire in
fiscal years 2000 and 2001. In addition, the economic and financial condition of
the City may be affected by various financial, social, economic and political
factors which could have a material effect on the City.
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 1998 through 2001 contemplates the issuance of $7.0 billion of general
obligation bonds and $7.5 billion of bonds to be issued by the New York City
Transitional Finance Authority (the "Finance Authority") to finance City capital
projects. The Finance Authority was created as part of the City's effort to keep
the City's indebtedness within the forecast level of the constitutional
restrictions on the amount of debt the City is authorized to incur. The State
Constitution
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provides that, with certain exceptions, the City may not contract indebtedness,
including contracts for capital projects to be paid with the proceeds of City
bonds ("contracts for capital projects"), in an amount greater than 10% of the
average full value of taxable real estate in the City for the most recent five
years (the "general debt limit"). The City's projections of total debt subject
to the general debt limit that would be required to be issued to fund the
Updated Ten-Year Capital Strategy published in April 1995 indicated that
projected contracts for capital projects and debt issuance might exceed the
general debt limit by the end of fiscal year 1997 and would exceed the general
debt limit by a substantial amount thereafter, unless legislation was enacted
creating the Finance Authority or other legislative initiatives were identified
and implemented. This City's projection of its capital financing need pursuant
to the Mayor's Declaration of Need and Proposed Transitional Capital Plan of
June 30, 1997 indicates additional projected debt and contract liabilities of
approximately $3 billion for fiscal year 1998. To provide for the City's capital
program, State legislation was enacted which created the Finance Authority, the
debt of which is not subject to the general debt limit. Without the Finance
Authority or other legislative relief, new contractual commitments for the
City's general obligation financed capital program would have been virtually
brought to a halt during the Financial Plan period beginning early in the 1998
fiscal year. By utilizing projected Finance Authority borrowing and including
the Finance Authority's projected borrowing as part of the total debt-incurring
power, the City's total debt-incurring power has been increased. Even with the
increase, the City may reach the limit of its capacity to enter into new
contractual commitments in fiscal year 2000. 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, New
York City Municipal Water Finance Authority (the "Water Authority") bonds and
Finance Authority bonds will be subject to prevailing market conditions and no
assurance can be given that such sales will be completed. The City's planned
capital and operating expenditures are dependent upon the sale of its general
obligations bonds and notes, and the Water Authority and Finance Authority
bonds. 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.
The Governor presented his 1998-1999 Executive Budget to the Legislature on
January 20, 1998. The Governor's Executive Budget projected balance on a cash
basis in the General Fund. The Legislature and the State Comptroller will review
the Governor's Executive Budget and are expected to comment on it. There can be
no assurance that the Legislature will enact the Executive Budget into law, or
that the State's adopted budget projections will not differ materially and
adversely from the projections set forth in the Executive Budget. Depending upon
the amount of State aid provided to localities, the City might be required to
make substantial additional changes in the Financial Plan. If the State's budget
for the State's 1998-99 fiscal year is not adopted by the statutory deadline and
interim appropriations are not enacted, the projected receipt by the City of
State aid could be delayed.
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 December 18, 1997, the City Comptroller issued a report on the November
1997 update to the June Financial Plan (the "November Financial Plan"). With
respect to the 1998 fiscal year, the report identified a possible $19 million to
$372 million surplus above the level projected in the November Financial Plan,
which itself reflected a $214 million discretionary transfer in the 1998 fiscal
year of debt service due in the 1999 fiscal year for budget stabilization
purposes. The report stated that the range of possible surpluses depends
primarily on whether the State accelerates $142 million of State revenue sharing
payments from the 1999 fiscal year to the 1998 fiscal year and whether the sale
of the Coliseum for $200 million is completed. With respect to the 1999 fiscal
year, the report identified total net budget gaps of between $1.1 billion and
$1.3 billion, which
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include the gap set forth in the November Financial Plan. The potential risks
identified in the report for the 1999 fiscal year include (i) assumed payments
from the Port Authority relating to the City's claim for back rentals and an
increase in future rentals, part of which are the subject of arbitration,
totaling $350 million; and (ii) State approval of the extension of the 12.5%
personal income tax surcharge beyond December 31, 1998, which would generate
$188 million in the 1999 fiscal year. The potential risks are offset by
potential additional resources for the 1999 fiscal year, including the potential
for an additional $100 million of State education aid, $170 million of
additional debt service savings and $137 million of higher than projected tax
revenues. On January 22, 1998, the City Comptroller increased the possible
surplus for the 1998 fiscal year by approximately $520 million, to $900 million
more than projected in the November Financial Plan, due primarily to tax
collections which exceed prior projections.
The report notes that if the difficulties in Asia were to reduce the value of
assets traded on the U.S. stock market in future months, projected tax revenues
could be reduced in the 1999 fiscal year. The report noted that a general lag
occurs between the time of the initial stock market downturn and tax collections
and that the City did not feel the consequences of the October 1987 stock market
crash until the 1990 fiscal year, when revenues from the City's business and
real estate taxes fell by 20% over the prior fiscal year. The report also noted
that the gap-closing program for the 1999 fiscal year continues to rely heavily
on State actions to generate resources and savings, including $400 million in
unspecified State aid and $200 million in unspecified entitlement savings, which
appear optimistic. In addition, the report noted that the State remains
delinquent in the payment of approximately $633 million in prior year education
aid covering the 1989 through 1996 fiscal years, and that the current labor
reserve for the 1999 fiscal year does not include funding for contractual
increases due employees of certain Covered Organizations, including HHC, which
total $104 million, $225 million and $231 million in the 1999 through 2001
fiscal years, respectively, and which the Financial Plan assumes will be funded
by the Covered Organizations. The City Comptroller also noted, in a separate
report on the City's capital debt, that debt burden measures, such as annual
debt service as a percentage of tax revenues, debt per capita and debt to
assessed value of real property, are approaching historically high post-fiscal
crisis levels, which calls for restraint in the City's capital program, while
the City's infrastructure, which is in need of rehabilitation, requires
increased resources.
On December 18, 1997, the staff of the OSDC issued a report on the November
Financial Plan. The report projected a potential surplus for the 1998 fiscal
year of $199 million, due to the potential for greater than forecast tax
revenues, and budget gaps for the 1999 through 2001 fiscal years which are
slightly less than the gaps set forth in the November Financial Plan for such
years, due primarily to the potential for greater than forecast tax revenues and
lower pension costs for fiscal years 2000 and 2001. The report noted that the
budget for the 1998 fiscal year is balanced with $1.6 billion in non-recurring
resources, two-thirds of which represents the portion of the 1997 fiscal year
surplus targeted for use in the 1998 fiscal year. The report also identified net
risks of $192 million, $1.1 billion, $1.3 billion and $1.3 billion for the 1998
through 2001 fiscal years, respectively. The additional risks identified in the
report relate to: (i) the receipt of Port Authority lease payments totaling $350
million, $140 million and $135 million in the 1999 through 2001 fiscal years,
respectively; (ii) City proposals for the acceleration of $142 million of State
revenue sharing payments from the 1999 fiscal year to the 1998 fiscal year,
which are subject to approval by the Governor and/or the State Legislature;
(iii) the receipt of $200 million in the 1998 fiscal year in connection with the
proposed sale of the New York Coliseum; (iv) unfunded expenditures relating to
BOE totaling $375 million in the 1999 fiscal year and $397 million in each of
the 2000 and 2001 fiscal years; (v) State approval of a three-year extension of
the City's 12.5% personal income tax surcharge, which is scheduled to expire on
December 31, 1998 and which would generate revenues of $230 million, $525
million and $550 million in the 1999 through 2001 fiscal years, respectively;
(vi) the potential for additional funding needs for the City's labor reserve
totaling $104 million, $225 million and $231 million in the 1999 through 2001
fiscal years, respectively, to pay for collective bargaining increases for the
Covered Organizations, which the November Financial Plan assumes will be paid
for by the Covered Organizations, rather than the City; and (vii) the
reimbursement of the State by the City in the 1999 fiscal year for $75 million
of State funding of children's services. The report also noted that the November
Financial Plan assumes that the State will extend the 14% personal income tax
that is scheduled to expire in December 1999, which would generate revenues of
$200 million in fiscal year 2000 and $560 million annually in subsequent fiscal
years, and that the November Financial Plan makes no provision for wage
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increases after the expiration of current contracts in fiscal year 2000, which
would add $400 million to the 2001 fiscal year budget gap if employees receive
wage increases at the projected rate of inflation.
The report noted that despite positive developments over the last few years,
including a reduced municipal workforce, reduced welfare rolls, record profits
in the securities industries and pension fund investment earnings, the City
still faces substantial budget gaps during the financial plan period, and that
the projected budget gaps for fiscal years 2000 and 2001 are among the largest
gaps faced by the City since the City first achieved budget balance in
accordance with generally accepted accounting principles in the 1981 fiscal
year. The report noted that, while revenues are projected to grow at 1.3% each
year, spending is projected to grow at the average annual rate of 5.2% during
the financial plan period. Moreover, the report noted that the City's economy
and budget are even more dependent on the securities industry than a decade ago
and there have been large, rapid swings in the securities industry which affect
revenues significantly. The report noted that while the economy should remain
strong for the foreseeable future, economic slowdown is inevitable and that
there is already evidence that business tax revenues could be adversely affected
by the turmoil in the Asian economy. The report also noted that (i) the MTA has
not yet stated how it will fund the cost of recently adopted fare reductions or
the additional cost of services for the expected increase in ridership; (ii)
school enrollment is expected to continue to grow over the next eight years and,
accordingly, additional expenditures may be required for BOE; (iii) HHC will be
required to continue to reduce costs as a result of implementation of managed
care; and (iv) the City faces a potential liability of $633 million in State
education aid owed from prior years which has already been reflected in the
City's financial statements and which the City could be required to write off if
a plan is not reached to fund these claims.
In addition, the staff of the OSDC noted in the report, and in a separate
report on Child Care Services in New York City, that, if the State implements
the Federal requirement that TANF recipients who have received benefits for two
years or more undertake work assignments, as many as 33,500 additional children
may require child care, at a cost of between $135 million and $225 million
beginning in fiscal year 2000, depending upon the method for providing child
care services. The report noted that, while the State will receive Federal funds
as part of its welfare surpluses that could be used for this purpose, it remains
to be seen whether such funds will be shared with the City and other localities.
The report noted that the City does not believe that the demand for child care
services will exceed the levels assumed in the November Financial Plan, because
the City expects a large reduction in the percentage of the TANF recipients
receiving benefits for two or more years.
On December 17, 1997, the staff of the Control Board issued a report
commenting on the 1998 fiscal year. The report stated that the City should end
the 1998 fiscal year with its budget in balance, with sufficient reserves
available to offset $355 million in risks. The principal risks identified in the
report included uncertain State funding, the proposed sale of the Coliseum in
the 1998 fiscal year, and the assumed receipt of $76 million by BOE for prior
year claims of State aid. The report also noted that there are substantial gaps
for fiscal years 2000 and 2001 which remain near historical highs. In addition,
the report noted that the State is subject potentially to recoupment of as much
as $2.6 billion of Federal Medicaid reimbursement for provider taxes, and it is
not clear what the City's financial exposure might be in the event that the
Federal government disallows all or a portion of such Medicaid reimbursement.
The report also noted that currently projected City spending for the 1998 fiscal
year exceeds the ceiling set forth in an agreement between the City and MAC
entered into in 1996. Although, as entered into, the agreement could result in
MAC taking up to $125 million from the City in the 1999 fiscal year, the City
does not expect this outcome.
On January 13, 1998, the IBO released a report setting forth its forecast of
the City's revenues and expenditures for the 1998 through 2001 fiscal years,
assuming continuation of current spending policies and tax laws. In the report,
the IBO forecasts that the City will end the 1998 fiscal year with a surplus of
$120 million, in addition to $514 million in the budget stabilization account,
and that the City will face gaps of $1.4 billion, $2.6 billion and $2.8 billion
in the 1999 through 2001 fiscal years, respectively, resulting from 4.8% annual
growth in spending from 1998 through 2001, compared with 2.2% annual revenue
growth. The report noted that slow revenue growth is attributable to a variety
of factors, including a gradual deceleration in economic growth through the
first half of calendar year 1999, the impact of recently enacted tax cuts and
constraints on increases in the real property tax, as well as uncertain back
rent payments from the Port Authority, while future costs for existing programs
will increase to reflect inflation and scheduled pay increases
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for City employees during the term of existing labor agreements. The report
noted that debt service and education spending will increase rapidly, while
spending for social services will rise more slowly due to lower projected
caseloads.
On October 31, 1996, the IBO released a report assessing the costs that could
be incurred by the City in response to the 1996 Welfare Act, which, among other
things, replaces the AFDC entitlement program with TANF, imposes a five-year
time limit on TANF assistance, required 50% of states' TANF caseload to be
employed by 2002, and restricts assistance to legal aliens. The report noted
that if the requirement that all recipients work after two years of receiving
benefits is enforced, these additional costs could be substantial starting in
1999, reflecting costs for worker training and supervision of new workers and
increased child care costs. The report further noted that, if economic
performance weakened, resulting in an increased number of public assistance
cases, potential costs to the City could substantially increase. The report
noted that decisions to be made by the State which will have a significant
impact on the City budget include the allocation of block grant funds between
the State and New York local governments such as the City and the division
between the State and its local governments of welfare costs not funded by the
Federal government.
Finally, the report noted that the new welfare law's most significant fiscal
impact is likely to occur in the years 2002 and beyond, reflecting the full
impact of the lifetime limit on welfare participation which only begins to be
felt in 2002 when the first recipients reach the five-year limit and are assumed
to be covered by Home Relief, which has recently been replaced by the Safety Net
Assistance program. In addition, the report noted that, given the constitutional
requirement to care for the needy, the 1996 Welfare Act might well prompt a
migration of benefit-seekers into the City, thereby increasing City welfare
expenditures in the long run. The report concluded that the impact of the 1996
Welfare Act on the City will ultimately depend on the decisions of State and
City officials, the performance of the local economy and the behavior of
thousands of individuals in response to the new system.
On August 25, 1997, the IBO issued a report describing recent developments
regarding welfare reform. The report noted that Federal legislation adopted in
August 1997, modified certain aspects of the 1996 Welfare Act, by reducing SSI
eligibility restrictions for certain legal aliens residing in the country as of
August 22, 1996, resulting in the continuation of Federal benefits, by providing
significant funding to the states to move welfare recipients from public
assistance and into jobs and by providing continued Medicaid coverage for those
children who lose SSI due to stricter eligibility criteria. In addition, the
report noted that the State had enacted the Welfare Reform Act of 1997 which,
among other things, requires the City to achieve work quotas and other work
requirements and requires all able-bodied recipients to work after receiving
assistance for two years. The report noted that this provision could require the
City to spend substantial funds over the next several years for workfare and day
care in addition to the funding reflected in the Financial Plan. The report also
noted that the State Welfare Reform Act of 1997 established a Food Assistance
Program designed to replace Federal food stamp benefits for certain classes of
legal aliens denied eligibility for such benefits by the 1996 Welfare Act. The
report noted that if the City elects to participate in the Food Assistance
Program, it will be responsible for 50% of the costs for the elderly and
disabled.
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, which can impose a binding settlement.
The projections for the 1998 through 2002 fiscal years reflect the costs of
the settlements and arbitration awards with the United Federation of Teachers
("UFT"), a coalition of unions headed by District Council 37 of the American
Federation of State, County and Municipal Employees ("District Council 37") and
other bargaining Units, which together represent approximately 86% of the City's
workforce, and assume that the City will reach agreement with its remaining
municipal unions under terms which are generally consistent with such
settlements and arbitration awards. The settlements and arbitration awards
provide for a wage freeze in the first two years, followed by a cumulative
effective wage increase of 11% by the end of the five year period covered by the
agreements, ending in fiscal years 2000 and 2001. Additional benefit increases
would raise the total cumulative effective increase to 13%. Assuming the City
reaches similar settlements with its
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remaining municipal unions, the cost of all settlements for all City-funded
employees, as reflected in the Financial Plan, would total $459 million and $1.2
billion in the 1998 and 1999 fiscal years, respectively, and exceed $2 billion
in every fiscal year after the 1999 fiscal year. On January 23, 1998, the City
reached a tentative settlement with the Correction Officers' Benevolent
Association which is consistent with the settlements previously reached by the
City with certain other municipal unions. There can be no assurance that the
City will reach an agreement with the unions that have not yet reached a
settlement with the City on the terms contained in the Financial Plan. The
Financial Plan provides no additional wage increases for City employees after
their contracts expire in fiscal years 2000 and 2001.
Legislation passed in 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 OCB to declare impasse against the Patrolmen's Benevolent
Association and the Uniformed Firefighters Association. 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.
Outstanding Indebtedness. As of December 31, 1997, the City had $26.584
billion of outstanding net long-term indebtedness and MAC had $3.645 billion of
outstanding net long-term indebtedness.
Ratings. In 1975, S&P suspended its A rating of City bonds. This suspension
remained in effect until March 1981, at which time the City received an
investment grade rating of BBB from S&P. On July 2, 1985, S&P revised its rating
of City bonds upward to BBB+ and on November 19, 1987, to A-. On July 10, 1995,
S&P revised its rating of the City's General Obligation Bonds downward to BBB+.
On February 3, 1997, S&P placed its BBB+ rating of City bonds on CreditWatch
with positive implications. S&P stated that an upgrade will depend on adoption
of a budget for the 1999 fiscal year and a financial plan that closely resembles
the outline of the current Financial Plan by keeping expenditures and headcount
under control, by limiting growth in the already substantial capital budget and
by maintenance of conservative budget assumptions.
Moody's ratings of City bonds were revised in November 1981 from B (in effect
since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in May
1988 to A and again in February 1991 to Baa1. On July 17 1997, Moody's changed
its outlook on City bonds to positive from stable.
Since July 15, 1993, Fitch has rated City bonds A-.
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, 1997, the City
estimated its potential future liability on account of all outstanding claims to
be approximately $3.5 billion.
OTHER LOCALITIES. Certain localities outside the City have experienced
financial problems and have requested and received additional State assistance
during the last several State fiscal years. The potential impact on the State of
any future requests by localities for additional assistance is not included in
the projections of the State's receipts and disbursements for the State's
1996-97 fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment 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 State to
assist Yonkers could result in increased State expenditures for extraordinary
local assistance.
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Beginning in 1990, the City of Troy experienced a series of budgetary deficits
that resulted in the establishment of a Supervisory Board for the City of Troy
in 1994 (the "Supervisory Board"). The Supervisory Board's powers were increased
in 1995, when Troy MAC was created to help Troy avoid default on certain
obligations. The legislation creating Troy MAC prohibits the City of Troy from
seeking federal bankruptcy protection while Troy MAC bonds are outstanding.
Seventeen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities.
Municipalities and school districts have engaged in substantial short-term and
long-term borrowings. In 1994, the total indebtedness of all localities in the
State other than the City was approximately $17.7 billion. A small portion
(approximately $82.9 million) of that indebtedness represented borrowing to
finance budgetary deficits and was issued pursuant to State enabling
legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than the City authorized by State law to issue debt to finance deficits during
the period that such deficit financing is outstanding. Seventeen localities had
outstanding indebtedness for deficit financing at the close of their fiscal year
ending in 1994.
From time to time, federal expenditure reductions could reduce, or in some
cases eliminate, federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities. If
the State, the City or any of the public authorities were to suffer serious
financial difficulties jeopardizing their respective access to the public credit
markets, the marketability of notes and bonds issued by localities within the
State could be adversely affected. Localities also face anticipated and
potential problems resulting from certain pending litigation, judicial decisions
and long-range economic trends. Long-range potential problems of declining urban
population, increasing expenditures and other economic trends could adversely
affect localities and require increasing State assistance in the future.
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 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
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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) 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
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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 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 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 securities 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 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 S&P 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.
B-37
<PAGE> 743
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, B Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded as
CCC, having significant speculative characteristics with respect
CC, C to capacity to pay interest and repay principal. 'BB'
indicates the least degree of speculation and 'C' the
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 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' is more vulnerable to default than debt rated
"BB" 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' is currently vulnerable 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 Debt rated 'CC' is currently highly vulnerable to
nonpayment. The rating 'CC' also is used for debt
subordinated to senior debt that is assigned an actual or
implied 'CCC' rating.
C The 'C' rating may be used to cover a situation where a
bankruptcy petition has been filed, but debt service
payments are continued. The rating 'C' typically is applied
to debt subordinated to senior debt which is assigned an
actual or implied 'CCC-' debt rating.
CI The rating 'CI' is reserved for income bonds on which no
interest is being paid.
</TABLE>
B-38
<PAGE> 744
<TABLE>
<S> <C>
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 or the taking of similar action 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.
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.
B-39
<PAGE> 745
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-40
<PAGE> 746
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-41
<PAGE> 747
<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.
(P) (..) When applied to forward delivery bonds, indicates that the
rating is provisional pending the delivery of the bonds. The
rating may be revised prior to delivery if changes occur in
the legal documents or the underlying credit quality of the
bonds.
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 promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt form registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law.
B-42
<PAGE> 748
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 (for related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
- Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supported institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
B-43
<PAGE> 749
TRUSTEES AND OFFICERS
The tables below list the trustees and officers of the Fund and other
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with VK/AC
Holding, Inc. ("VKAC Holding"), Van Kampen American Capital, Inc. ("Van Kampen
American Capital" or "VKAC"), Van Kampen American Capital Investment Advisory
Corp. ("Advisory Corp."), Van Kampen American Capital Asset Management, Inc.
("Asset Management"), Van Kampen American Capital Distributors, Inc., the
distributor of the Fund's shares (the "Distributor"), Van Kampen American
Capital Advisors Corp., Van Kampen Merritt Equity Advisors Corp., Van Kampen
American Capital Insurance Agency of Illinois, Inc., VK/AC System, Inc., Van
Kampen American Capital Record Keeping Services, Inc., American Capital
Contractual Services, Inc., Van Kampen American Capital Trust Company, Van
Kampen American Capital Exchange Corporation, and ACCESS Investors Services
Inc., the Fund's transfer agent ("ACCESS"). Advisory Corp. and Asset Management
sometimes are referred to herein collectively as the "Advisers". For purposes
hereof, the term "Fund Complex" includes each of the open-end investment
companies advised by the Advisers (excluding the Van Kampen American Capital
Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee/Director of each of the
funds in the Fund Complex.
Richard M. DeMartini*..................... President and Chief Operating Officer, Individual Asset
Two World Trade Center Management Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Mr. DeMartini is a Director of InterCapital
New York, NY 10048 Funds, Dean Witter Distributors, Inc. and Dean Witter
Date of Birth: 10/12/52 Trust Company. Trustee of the TCW/DW Funds. Director of
the National Healthcare Resources, Inc. Formerly Vice
Chairman of the Board of the National Association of
Securities Dealers, Inc. and Chairman of the Board of the
Nasdaq Stock Market, Inc. Trustee/Director of each of the
funds in the Fund Complex.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board, The
International House Board and the Women's Board of the
University of Chicago. Trustee/Director of each of the
funds in the Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont 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.
Trustee/Director of each of the funds in the Fund
Complex.
</TABLE>
B-44
<PAGE> 750
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee/Director of each of
the funds in the Fund Complex.
Don G. Powell*............................ Chairman and a Director of VKAC. Chairman and a Director
2800 Post Oak Blvd. of the Advisers and the Distributor. Chairman and a
Houston, TX 77056 Director of ACCESS. Director or officer of certain other
Date of Birth: 10/19/39 subsidiaries of VKAC. Chairman of the Board of Governors
and the Executive Committee of the Investment Company
Institute. Prior to November 1996, President, Chief
Executive Officer and a Director of VKAC Holding.
Trustee/Director of funds in the Fund Complex advised by
Advisory Corp. and prior to July 1996, President, Chief
Executive Officer and a Trustee of the funds in the Fund
Complex.
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer services company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company; the
Date of Birth: 07/08/44 Urban Shopping Centers Inc., a retail mall management
company; and Stone Container Corp., a paper manufacturing
company. Trustee, University of Notre Dame. Formerly,
President and Chief Executive Officer, Waste Management,
Inc., an environmental services company, and prior to
that President and Chief Operating Officer, Waste
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen American Capital
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex, and other open-end and closed-end funds
advised by the Advisers or Van Kampen American Capital
Management, Inc.
</TABLE>
- ---------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
position with Morgan Stanley Dean Witter & Co. and its affiliates.
B-45
<PAGE> 751
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Wood, Sullivan, Dalmaso, Martin,
Wetherell and Hill are located at One Parkview Plaza, Oakbrook Terrace, IL
60181. The Fund's other officers are located at 2800 Post Oak Blvd., Houston, TX
77056.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Dennis J. McDonnell......... President Executive Vice President and a Director of
Date of Birth: 05/20/42 VKAC and VK/AC Holding, Inc. President,
Chief Operating Officer and a Director of
the Advisers, Van Kampen American Capital
Advisors, Inc., and Van Kampen American
Capital Management, Inc. President and a
Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he
was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996,
Mr. McDonnell was Chief Executive Officer
and Director of MCM Group, Inc., McCarthy,
Crisanti & Maffei, Inc. and Chairman and
Director of MCM Asia Pacific Company,
Limited and MCM (Europe) Limited. Prior to
November 1996, Executive Vice President and
a Director of VKAC Holding. Prior to July
of 1996, Mr. McDonnell was President, Chief
Operating Officer and Trustee of VSM Inc.
and VCJ Inc. President of each of the funds
in the Fund Complex. President, Chairman of
the Board and Trustee of other investment
companies advised by the Advisers or their
affiliates.
Peter W. Hegel.............. Vice President Executive Vice President of the Advisers,
Date of Birth: 06/25/56 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Prior to July of 1996, Mr.
Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of
McCarthy, Crisanti & Maffei, Inc. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Curtis W. Morell............ Vice President and Chief Senior Vice President of the Advisers, Vice
Date of Birth: 08/04/46 Accounting Officer President and Chief Accounting Officer of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
</TABLE>
B-46
<PAGE> 752
<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 Secretary Executive Vice President, General Counsel,
Date of Birth: 07/29/53 Secretary and Director of VKAC and VK/AC
Holding, Inc. Mr. Nyberg is also Executive
Vice President, General Counsel and a
Director of Van Kampen Merritt Equity
Holdings Corp. Executive Vice President,
General Counsel, Assistant Secretary and a
Director of the Advisers and the
Distributor, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Management, Inc., Van Kampen American
Capital Exchange Corporation, American
Capital Contractual Services, Inc. and Van
Kampen American Capital Trust Company.
Executive Vice President, General Counsel
and Assistant Secretary of ACCESS. Director
or officer of certain other subsidiaries of
VKAC. Prior to June of 1997, Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to April of 1997,
he was Executive Vice President, General
Counsel and Director of Van Kampen Merritt
Equity Advisors Corp. Prior to July of
1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc.
and Executive Vice President and General
Counsel of VCJ Inc. Prior to September of
1996, he was General Counsel of McCarthy,
Crisanti & Maffei, Inc. Vice President and
Secretary of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Alan T. Sachtleben.......... Vice President Executive Vice President of the Advisers,
Date of Birth: 04/20/42 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Vice President of each of
the funds in the Fund Complex and certain
other investment companies advised by the
Advisers or their affiliates.
Paul R. Wolkenberg.......... Vice President Executive Vice President and Director of
Date of Birth: 11/10/44 VKAC, and VK/AC Holding Inc. Executive Vice
President of the AC Adviser and the
Distributor. President and a Director of
ACCESS. President and Chief Operating
Officer of Van Kampen American Capital
Record Keeping Services, Inc. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
B-47
<PAGE> 753
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Edward C. Wood III.......... Vice President and Chief Senior Vice President of the Advisers and
Date of Birth: 01/11/56 Financial Officer Van Kampen American Capital Management,
Inc. Vice President and Chief Financial
Officer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
John L. Sullivan............ Treasurer First Vice President of the Advisers.
Date of Birth: 08/20/55 Treasurer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Tanya M. Loden.............. Controller Vice President of the Advisers. Controller
Date of Birth: 11/19/59 of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Nicholas Dalmaso............ Assistant Secretary Associate General Counsel and Assistant
Date of Birth: 03/01/65 Secretary of VKAC. Vice President,
Associate General Counsel and Assistant
Secretary of the Advisers, the Distributor,
Van Kampen American Capital Advisors, Inc.
and Van Kampen American Capital Management,
Inc. Assistant Secretary of each of the
funds in the Fund Complex and other
investment companies advised by the
Advisers or their affiliates.
Huey P. Falgout, Jr......... Assistant Secretary Vice President and a Senior Attorney of
Date of Birth: 11/15/63 VKAC. Vice President and Assistant
Secretary of the Advisers, the Distributor,
ACCESS, Van Kampen American Capital
Management, Inc., American Capital
Contractual Services, Inc., Van Kampen
American Capital Exchange Corporation and
Van Kampen American Capital Advisors, Inc.
Assistant Secretary of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
B-48
<PAGE> 754
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Scott E. Martin............. Assistant Secretary Senior Vice President, Deputy General
Date of Birth: 08/20/56 Counsel and Assistant Secretary of VKAC and
VKAC Holding, Inc. Senior Vice President,
Deputy General Counsel and Secretary of the
Advisers, the Distributor, ACCESS American
Capital Contractual Services, Inc., Van
Kampen American Capital Management, Inc.,
Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Insurance Agency of Illinois, Inc., VKAC
System, Inc., Van Kampen American Capital
Record Keeping Services, Inc. and Van
Kampen Merritt Equity Advisors Corp. Prior
to April of 1997, Senior Vice President,
Deputy General Counsel and Secretary of Van
Kampen American Capital Services, Inc. and
Van Kampen Merritt Holdings Corp. Prior to
September of 1996, Mr. Martin was Deputy
General Counsel and Secretary of McCarthy,
Crisanti & Maffei, Inc., and prior to July
of 1996, he was Senior Vice President,
Deputy General Counsel and Secretary of VSM
Inc. and VCJ Inc. Assistant Secretary of
each of the funds in the Fund Complex and
other investment companies advised by the
Advisers or their affiliates.
Weston B. Wetherell......... Assistant Secretary Vice President, Associate General Counsel
Date of Birth: 06/15/56 and Assistant Secretary of VKAC, the
Advisers, the Distributor, Van Kampen
American Capital Management, Inc. and Van
Kampen American Capital Advisors, Inc.
Prior to September of 1996, Mr. Wetherell
was Assistant Secretary of McCarthy,
Crisanti & Maffei, Inc. Assistant Secretary
of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Steven M. Hill.............. Assistant Treasurer Vice President of the Advisers. Assistant
Date of Birth: 10/16/64 Treasurer of each of the funds in the Fund
Complex and other investment companies
advised by the Advisers or their
affiliates.
Michael Robert Sullivan..... Assistant Controller Assistant Vice President of the Advisers.
Date of Birth: 03/30/33 Assistant Controller of each of the funds
in the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 64 operating funds in the Fund Complex. For purposes of the following
compensation and benefits discussion, the Fund Complex is divided into the
following three groups: the funds advised by Asset Management (the "AC Funds"),
the funds advised by Advisory Corp. excluding funds organized as series of the
Morgan Stanley Fund, Inc. (the "VK Funds") and the funds advised by Advisory
Corp. organized as series of the Morgan Stanley Fund, Inc. (the "MS Funds").
Each trustee/director who is not an affiliated person of VKAC, the Advisers, the
Distributor, ACCESS or Morgan
B-49
<PAGE> 755
Stanley Dean Witter & Co. (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 (except the money market series of the MS Funds)
provides a deferred compensation plan to its Non-Affiliated Trustees that allows
trustees/directors to defer receipt of their compensation and earn a return on
such deferred amounts. Deferring compensation has the economic effect as if the
Non-Affiliated Trustee reinvested his or her compensation into the funds. Each
fund in the Fund Complex (except the money market series of the MS Funds)
provides a retirement plan to its Non-Affiliated Trustees that provides
Non-Affiliated Trustees with compensation after retirement, provided that
certain eligibility requirements are met as more fully described below.
The trustees recently reviewed and adopted a standardized compensation and
benefits program for each fund in the Fund Complex. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes an annual retainer in
an amount equal to $50,000 per calendar year, due in four quarterly installments
on the first business day of each quarter. Payment of the annual retainer is
allocated among the funds in the Fund Complex (except the money market series of
the MS Funds) on the basis of the relative net assets of each fund as of the
last business day of the preceding calendar quarter. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes a per meeting fee from
each fund in the Fund Complex (except the money market series of the MS Funds)
in the amount of $200 per quarterly or special meeting attended by the
Non-Affiliated Trustee, due on the date of the 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.
For each AC Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from the AC
Funds includes an annual retainer in an amount equal to $35,000 per calendar
year, due in four quarterly installments on the first business day of each
calendar quarter. The AC Funds pay each Non-Affiliated Trustee a per meeting fee
in the amount of $2,000 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. Payment of the annual retainer and the regular meeting
fee is allocated among the AC Funds (i) 50% on the basis of the relative net
assets of each AC Fund to the aggregate net assets of all the AC Funds and (ii)
50% equally to each AC Fund, in each case as of the last business day of the
preceding calendar quarter. Each AC Fund which is the subject of a special
meeting of the trustees generally pays each Non-Affiliated Trustee a per meeting
fee 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.
For each VK Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from each VK
Fund includes an annual retainer 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 each VK
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 each VK 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.
For the period from July 2, 1997 up to and including December 31, 1997, the
compensation of each Non-Affiliated Trustee from the MS Funds was based
generally on the compensation amounts and methodology used by such funds prior
to their joining the current Fund Complex on July 2, 1997. Each trustee/director
was elected as a director of the MS Funds on July 2, 1997. Prior to July 2,
1997, the MS Funds were part of another fund complex (the "Prior Complex") and
the former directors of the MS Funds were paid an aggregate fee allocated among
the funds in the Prior Complex that resulted in individual directors receiving
total compensation between approximately $8,000 to $10,000 from the MS Funds
during such funds' last fiscal year.
B-50
<PAGE> 756
Under the deferred compensation plan, each Non-Affiliated Trustee generally
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 the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
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 the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is set
forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
----------------------------------------------------------
AGGREGATE AGGREGATE TOTAL
YEAR FIRST PENSION OR ESTIMATED MAXIMUM COMPENSATION
APPOINTED OR AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
ELECTED TO THE BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) BOARD FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- -------------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
J. Miles Branagan 1991 $1,125 $30,328 $60,000 $111,197
Linda Hutton Heagy 1995 1,125 3,141 60,000 111,197
R. Craig Kennedy 1995 1,125 2,229 60,000 111,197
Jack E. Nelson 1995 1,125 15,820 60,000 104,322
Jerome L. Robinson* 1995 1,125 32,020 15,750 107,947
Phillip B. Rooney** 1997 1,000 0 60,000 74,697
Dr. Fernando Sisto 1973 1,125 60,208 60,000 111,197
Wayne W. Whalen 1995 1,125 10,788 60,000 111,197
</TABLE>
- ---------------
* Mr. Robinson retired from the Board of Trustees on December 31, 1997.
** Mr. Phillip B. Rooney became a member of the Board of Trustees effective
April 14, 1997 and thus does not have a full fiscal year of information to
report.
(1) Messrs. DeMartini, McDonnell and Powell, also trustees of the Fund during
all or a portion of the Fund's last fiscal year, are not included in the
compensation table because they are not eligible for compensation or
retirement benefits from the Fund. Mr. McDonnell resigned as a Trustee of
the Fund, effective May 31, 1997.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Fund's fiscal year ended December 31, 1997. The
detail of aggregate compensation before deferral for each series, including
the Fund, are shown in Table A below. The details of amounts deferred for
each series, including the Fund, are shown in Table B below. Amounts
deferred are retained by the Fund and earn a rate of return determined by
reference to either the return on the common shares of the Fund or other
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted
by the 1940 Act, each Fund may invest in securities of those funds selected
by the Non-Affiliated Trustees in order to match the deferred compensation
obligation. The details of cumulative
B-51
<PAGE> 757
deferred compensation (including interest) owed to current Trustees by each
series, including the Fund, are shown in Table C below. The deferred
compensation plan is described above the Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for their respective fiscal years ended in 1997. The retirement
plan is described above the Compensation Table.
(4) For Mr. Robinson, this is the sum of the actual annual benefits payable by
the operating investment companies in the Fund Complex as of the date of
their retirement for each year of the 10-year period since such trustee's
retirement. For the remaining trustees, this is the sum of the estimated
maximum annual benefits payable by the operating investment companies in the
Fund Complex for each year of the 10-year period commencing in the year of
such trustee's anticipated retirement. The Retirement Plan is described
above the Compensation Table. Each Non-Affiliated Trustee of the Board of
Trustees has served as a member of the Board of Trustees since he or she was
first appointed or elected in the year set forth in Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1997 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1997. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
trustees were not trustees of such investment companies. Combining the Fund
Complex with other investment companies advised by the Advisers and their
affiliates, Mr. Whalen received Total Compensation of $268,447 during the
calendar year ended December 31, 1997.
As of April 2, 1998, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.
B-52
<PAGE> 758
TABLE A
1997 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......... 12/31 $ 3,000 $ 3,000 $3,000 $ 3,000 $ 3,000 $ 2,250 $ 3,000 $ 3,000
Tax Free High Income Fund............ 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
California Insured Tax Free Income
Fund............................... 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
Municipal Income Fund*............... 12/31 4,125 4,125 4,125 4,125 4,125 3,250 4,125 4,125
Intermediate Term Municipal Income
Fund............................... 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
Florida Insured Tax Free Income
Fund............................... 12/31 3,000 3,000 3,000 3,000 3,000 2,250 3,000 3,000
New York Tax Free Income Fund........ 12/31 1,125 1,125 1,125 1,125 1,125 1,000 1,125 1,125
Trust Total........................ 20,250 20,250 20,250 20,250 20,250 15,500 20,250 20,250
</TABLE>
*Includes the deferred compensation balances from New Jersey Tax Free Income
Fund, which was merged into the Municipal Income Fund in November 1997.
TABLE B
1997 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund........ 12/31 $ 3,000 $ 3,000 $1,500 $ 3,000 $ 3,000 $ 1,500 $ 1,500 $ 3,000
Tax Free High Income Fund........... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
California Insured Tax Free Fund.... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Municipal Income Fund............... 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Intermediate Term Municipal Income
Fund.............................. 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
Florida Insured Tax Free Income
Fund.............................. 12/31 3,000 3,000 1,500 3,000 3,000 1,500 1,500 3,000
New York Tax Free Income Fund....... 12/31 1,125 1,125 563 1,125 1,125 875 563 1,125
New Jersey Tax Free Income Fund..... 12/31 1,125 1,125 563 1,125 1,125 875 563 1,125
Trust Total....................... 20,250 20,250 10,126 20,250 20,250 10,750 10,126 20,250
</TABLE>
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
--------- -------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......... 12/31 $ 4,324 $ 6,482 $11,233 $15,086 $14,485 $ 1,513 $ 3,180 $12,966
Tax Free High Income Fund............ 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
California Insured Tax Free Fund..... 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
Municipal Income Fund*............... 12/31 5,170 7,878 14,033 19,758 18,928 1,765 8,110 17,020
Intermediate Term Municipal Income
Fund............................... 12/31 4,324 6,482 11,233 15,086 14,485 1,513 1,622 12,966
Florida Insured Tax Free Income
Fund............................... 12/31 4,324 6,482 6,853 10,650 10,391 1,513 1,622 9,946
New York Tax Free Income Fund........ 12/31 1,487 1,181 3,118 4,223 4,049 891 591 3,586
Trust Total........................ 28,277 41,469 68,936 94,975 91,308 10,221 18,369 82,416
</TABLE>
*Includes the deferred compensation balances from New Jersey Tax Free Income
Fund, which was merged into the Municipal Income Fund in November 1997.
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-----------------------------------------------------------------------------------
FUND NAME BRANAGAN DEMARTINI HEAGY KENNEDY NELSON POWELL ROONEY SISTO WHALEN
- --------- -------- --------- ----- ------- ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............... 1995 1997 1995 1993 1984 1997 1997 1995 1984
Tax Free High Income Fund.................. 1995 1997 1995 1993 1985 1997 1997 1995 1985
California Insured Tax Free Income Fund.... 1995 1997 1995 1993 1985 1997 1997 1995 1985
Municipal Income Fund...................... 1995 1997 1995 1993 1990 1997 1997 1995 1990
Intermediate Term Municipal Income Fund.... 1995 1997 1995 1993 1993 1997 1997 1995 1993
Florida Insured Tax Free Income Fund....... 1995 1997 1995 1994 1994 1997 1997 1995 1994
New Jersey Tax Free Income Fund............ 1995 1997 1995 1994 1994 1997 1997 1995 1994
New York Tax Free Income Fund.............. 1995 1997 1995 1994 1994 1997 1997 1995 1994
</TABLE>
B-53
<PAGE> 759
As of April 2, 1998, 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 2, 1998 SHARES OWNERSHIP
-------------------------- ------------- -------- ----------
<S> <C> <C> <C>
Advanced Clearing FBO 6510150911............................ 130,616 A 10.13%
P.O. Box 2226
Omaha, NE 68103-2226
August C. Casale & Valeria Casale JT TEN.................... 104,733 A 8.12%
154 Park Hill Ave.
Yonkers, NY 10705-1420
NFSC FEBO # C1B-083380...................................... 75,859 A 5.88%
Cs Bus Fam Limited Partshp
A Partnership
Charles Ben-Dayan
1411 Broadway
New York, NY 10018-3403
NFSC FEBO # C1B-081388...................................... 70,596 A 5.48%
Charles Ben-Dayan & Ariela Ben-Dayan
1411 Broadway 27th Fl
New York, NY 10018-3403
NFSC FEBO # C1B-081388...................................... 69,518 A 5.39%
Ad Bus Fam Limited Partshp
A Partnership
Abraham Ben-Dayan
1411 Broadway 27th Fl
New York, NY 10018-3403
Smith Barney Inc............................................ 45,571 C 38.60%
00114605267
388 Greenwich Street
New York, NY 10013-2339
MLPF&S for the Sole Benefit of Its Customers................ 9,828 C 8.34%
Attn: Fund Administration
4800 Deer Lake Dr. E FL 3
Jacksonville, FL 32246-6484
Patrick Truglio............................................. 7,484 C 6.34%
TOD DTD 11-07-97
Subject to ACCESS TOD Rules
1625 E 37th St
Brooklyn, NY 11234-4220
Mary Lloyd Burroughs & Paul D. Burroughs TR................. 7,271 C 6.16%
May Lloyd Burroughs Liv Trust
DTD 7/20/95
HC01 Box 126 Eagle Lake
Ticonderoga, NY 12883-9410
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
The Adviser is the Fund's investment adviser. The Adviser was incorporated as
a Delaware corporation in 1982 (and through December 31, 1987 transacted
business under the name of American Portfolio Advisory Service Inc.).
The Adviser, Van Kampen American Capital Distributors, Inc. (the
"Distributor") and ACCESS Investor Services ("ACCESS") are wholly-owned
subsidiaries of Van Kampen American Capital, Inc. ("VKAC"), which is an indirect
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co.. The principal
office of the Fund, the Adviser, the Distributor and VKAC is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181.
B-54
<PAGE> 760
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management, Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending.
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, 1997, 1996 and 1995, the Fund paid no
advisory expenses.
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT. The Fund has also entered into an accounting
services agreement pursuant to which Asset Management provides accounting
services to the Fund. The Fund shares together with the other Van Kampen
American Capital mutual funds 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 each of the years ended December 31, 1997, 1996 and 1995, Asset Management
and its affiliates waived its cost of providing accounting services to the Fund.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital funds advised by the 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
B-55
<PAGE> 761
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 each of the years ended December 31, 1997, 1996 and 1995, Van Kampen
American Capital waived its cost of providing legal services to the Fund.
CUSTODIAN AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, 225 West 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 accountants for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent accountants 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.
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.
B-56
<PAGE> 762
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.
For the years ended December 31, 1997, 1996 and 1995 the Fund paid no
brokerage commissions.
TAX STATUS OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal 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 table below illustrates approximate equivalent taxable and tax-free yields
at the 1998 federal and New York State individual income tax rates in effect on
the date of this Statement of Additional Information.
1998 FEDERAL, NEW YORK STATE AND NEW YORK CITY TAXABLE VS. TAX-FREE YIELDS
<TABLE>
<CAPTION>
FEDERAL STATE AND COMBINED TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
TAX CITY TAX TAX -----------------------------------------
SINGLE RETURN JOINT RETURN BRACKET BRACKET* BRACKET* 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ---------------- ---------------- ------- --------- -------- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25,350 15.00% 11.250% 24.60% 4.64% 5.31% 5.97% 6.63% 7.29% 7.96%
$ 0-42,350 15.00% 11.239% 24.60% 4.64% 5.31% 5.97% 6.63% 7.29% 7.96%
25,350-61,400 42,350-102,300 28.00% 11.307% 36.10% 5.48% 6.26% 7.04% 7.82% 8.61% 9.39%
61,400-128,100 102,300-155,950 31.00% 11.307% 38.80% 5.72% 6.54% 7.35% 8.17% 8.99% 9.80%
128,100-278,450 155,950-278,450 36.00% 11.307% 43.20% 6.16% 7.04% 7.92% 8.80% 9.68% 10.56%
Over 278,450 Over 278,450 39.60% 11.307% 46.40% 6.53% 7.46% 8.40% 9.33% 10.26% 11.19%
<CAPTION>
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
-------------------------------------
SINGLE RETURN 6.5% 7.0% 7.5% 8.0% 8.5%
- ---------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
$ 0-25,350 8.62% 9.28% 9.95% 10.61% 11.27%
8.62% 9.28% 9.95% 10.61% 11.27%
25,350-61,400 10.17% 10.95% 11.74% 12.52% 13.30%
61,400-128,100 10.62% 11.44% 12.25% 13.07% 13.89%
128,100-278,450 11.44% 12.32% 13.20% 14.08% 14.96%
Over 278,450 12.13% 13.06% 13.99% 14.93% 15.86%
</TABLE>
- ---------------
* Combined Tax Bracket includes Federal, State and New York City income taxes.
Please note that the table does not reflect (i) any federal or state
limitations on the amounts of allowable itemized deductions, phase-outs of
personal or dependent exemption credits or other allowable credits, (ii) any
local taxes imposed (other than New York City), or (iii) any taxes other than
personal income taxes. 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 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 State 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.
B-57
<PAGE> 763
1998 FEDERAL AND NEW YORK STATE TAXABLE VS. TAX-FREE YIELDS*
<TABLE>
<CAPTION>
FEDERAL STATE COMBINED TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
TAX TAX TAX ------------------------------------------------
SINGLE RETURN JOINT RETURN BRACKET BRACKET BRACKET* 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
- ---------------- ---------------- -------- -------- -------- ---- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25,350 $ 0-42,350 15.00% 6.850% 20.80% 4.42% 5.05% 5.68% 6.31% 6.94% 7.58% 8.21%
25,350-61,400 42,350-102,300 28.00% 6.850% 32.90% 5.22% 5.96% 6.71% 7.45% 8.20% 8.94% 9.69%
61,400-128,100 102,300-155,950 31.00% 6.850% 35.70% 5.44% 6.22% 7.00% 7.78% 8.55% 9.33% 10.11%
128,100-278,450 155,950-278,450 36.00% 6.850% 40.40% 5.87% 6.71% 7.55% 8.39% 9.23% 10.07% 10.91%
Over 278,450 Over 278,450 39.60% 6.850% 43.70% 6.22% 7.10% 7.99% 8.88% 9.77% 10.66% 11.55%
<CAPTION>
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
-----------------------------
SINGLE RETURN 7.0% 7.5% 8.0% 8.5%
- ---------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
$ 0-25,350 8.84% 9.47% 10.10% 10.73%
25,350-61,400 10.43% 11.18% 11.92% 12.67%
61,400-128,100 10.89% 11.66% 12.44% 13.22%
128,100-278,450 11.74% 12.58% 13.42% 14.26%
Over 278,450 12.43% 13.32% 14.21% 15.10%
</TABLE>
- ---------------
* Please note that the table does not reflect (i) any federal or state
limitations on the amounts of allowable itemized deductions, phase-outs of
personal or dependent exemption credits or other allowable credits, (ii) any
local taxes imposed, or (iii) any taxes other than personal income taxes. 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 tax
bracket, the highest state rate corresponding to the highest 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 State 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. VKAC
manages or supervises more than $60 billion in mutual funds, closed-end funds
and unit investment trusts -- assets which have been entrusted to VKAC in more
than 2 million investor accounts. VKAC has one of the largest research teams
(outside of the rating agencies) in the country. Each of our high yield
analysts, based either in San Francisco, Chicago, Houston or Boston, has the
responsibility to cover a specific region of the country. This regional focus
enables each high yield analyst to provide more specialized coverage of the
market and alert the portfolio manager to issues of local importance.
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. ("VKAC"), which is an
indirect wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The
principal office of the Fund, the Adviser, the Distributor and VKAC is located
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management, Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending.
Pursuant to a distribution agreement, the Distributor will purchase shares of
the Fund for resale to the public, either directly or through securities
dealers, and is obligated to purchase only those shares for which it has
received purchase orders. A discussion of how to purchase and redeem the Fund's
shares and how the Fund's shares are priced is contained in the Prospectus.
B-58
<PAGE> 764
Total underwriting commissions on the sale of shares of the Fund for the last
three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
TOTAL AMOUNTS
UNDERWRITING RETAINED BY
COMMISSIONS DISTRIBUTOR
------------------ --------------
<S> <C> <C>
Fiscal Year Ended December 31, 1995......................... $ 80,593 $ 9,607
Fiscal Year Ended December 31, 1996......................... $ 63,306 $10,787
Fiscal Year Ended December 31, 1997......................... $163,312 $12,562
</TABLE>
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 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 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 fiscal year ending December 31, 1997, the Fund's aggregate expenses
under the Class A Plan were $24,711, or 0.25% of the Class A shares' average net
assets. For the fiscal year ended December 31, 1997, the Fund's aggregate
expenses under the Class B Plan were $113,031, or 1.00%, of the Class B shares'
average net assets. Such expenses were paid to reimburse the Distributor for the
following payments: $85,409 for commissions and transaction fees paid to
financial intermediaries in respect of sales of Class B shares of the Fund and
$27,622 for fees paid to financial intermediaries for servicing Class B
shareholders and administering the Class B Plan. For the fiscal year ended
December 31, 1997, the Fund's aggregate expenses under the Class C Plan were
$8,503 or 1.00% of the Class C shares' average net assets. Such expenses were
paid to reimburse the Distributor for the following payments: $6,061 for the
commissions and transactions fees paid to financial intermediaries in respect of
sales of Class C shares of the Fund and $2,442 for fees paid to financial
intermediaries for servicing Class C shareholders and administering the Class C
Plan.
B-59
<PAGE> 765
TRANSFER AGENT
During the fiscal years ended December 31, 1995, 1996 and 1997, ACCESS,
shareholder service agent and dividend disbursing agent for the Fund, received
fees approximately aggregating $3,400, $7,457 and $14,238, respectively, for
these services. The transfer agency prices are determined through negotiations
with the Fund's Board of Trustees and are based on competitive market
benchmarks.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (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 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.
B-60
<PAGE> 766
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, 1997 was 5.63% and (ii) the approximate three years, 5 month period from
July 29, 1994 (the commencement of investment operations of the Fund) through
December 31, 1997 was 7.10%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending December 30, 1997 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.60%. The tax-equivalent yield with
respect to the Class A Shares for the 30 day period ending December 30, 1997
(calculated in the manner described in the Prospectus under the heading "Fund
Performance" and assuming a 40.4% tax rate) was 7.72%. The SEC yield without a
waiver was 3.71%. The Fund's current distribution rate with respect to the Class
A Shares for the month ending December 31, 1997 (calculated in the manner
described in the Prospectus under the heading "Fund Performance") was 4.83%. The
Fund's taxable equivalent distribution rate with respect to the Class A Shares
for the month ending December 31, 1997 was 8.10%.
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, 1997 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 26.53%.
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, 1997 was 32.82%.
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, 1997 was 6.07% and
(ii) the approximate three years, 5 month period from July 29, 1994 (the
commencement of investment operations of the Fund) through December 31, 1997 was
7.22%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending December 30, 1997 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.06%. The tax-equivalent yield with
respect to the Class B Shares for the 30 day period ending December 30, 1997
(calculated in the manner described in the Prospectus under the heading "Fund
Performance" and assuming a 40.4% tax rate) was 6.81%. The SEC yield without a
waiver was 3.13%. The Fund's current distribution rate with respect to the Class
B Shares for the month ending December 31, 1997 (calculated in the manner
described in the Prospectus under the heading "Fund Performance") was 4.39%. The
Fund's current taxable equivalent distribution rate with respect to the Class B
Shares for the month ending December 31, 1997 was 7.37%.
B-61
<PAGE> 767
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, 1997
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 27.02%.
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to December 31, 1997
was 29.52%.
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, 1997 was 9.07% and
(ii) the approximate three years, 5 month period from July 29, 1994 (the
commencement of investment operations of the Fund) through December 31, 1997 was
7.83%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending December 30, 1997 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.04%. The tax-equivalent yield with
respect to the Class C shares for the 30 day period ending December 30, 1997
(calculated in the manner described in the Prospectus under the heading "Fund
Performance" and assuming a 40.4% tax rate) was 6.78%. The SEC yield without a
waiver was 3.11%. The Fund's current distribution rate with respect to the Class
C Shares for the month ending December 31, 1997 (calculated in the manner
described in the Prospectus under the heading "Fund Performance") was 4.39%. The
Fund's current taxable equivalent distribution rate with respect to the Class C
Shares for the month ending December 31, 1997 was 7.37%.
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, 1997
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 23.53%.
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, 1997
was 29.53%.
B-62
<PAGE> 768
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
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, 1997, 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, 1997, 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, 1997,
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 3, 1998
B-63
<PAGE> 769
PORTFOLIO OF INVESTMENTS
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS 102.1%
NEW YORK 100.5%
$ 750 Clifton Springs, NY Hosp & Clinic Ser A Rfdg &
Impt............................................. 7.650% 01/01/12 $ 828,975
500 Islip, NY Cmnty Dev Agy Cmnty Dev Rev NY
Institute of Technology Rfdg..................... 7.500 03/01/26 554,665
1,645 Metropolitan Tran Auth NY Commuter Fac Rev (a)... 5.500 07/01/14 1,649,129
800 Metropolitan Tran Auth NY Commuter Fac Rev Ser A
(MBIA Insd)...................................... 5.625 07/01/27 837,624
600 Nassau Cnty, NY Bridge Auth Rev Ser B (Connie Lee
Insd)............................................ 5.250 10/01/26 599,946
750 New York City Indl Dev Agy Brooklyn Navy Yard.... 5.650 10/01/28 759,937
500 New York City Indl Dev Agy Civic Fac Rev Cmnty
Res Developmentally Disabled (b)................. 7.500 08/01/26 531,105
500 New York City Indl Dev Agy Civic Fac Rev College
of New Rochelle Proj............................. 5.750 09/01/17 514,960
500 New York City Indl Dev Agy Rev Visy Paper Inc
Proj (b)......................................... 7.950 01/01/28 577,570
375 New York City Indl Dev Agy Spl Fac Rev Terminal
One Group Assn Proj.............................. 5.700 01/01/04 394,208
750 New York City Indl Dev Agy Spl Fac United
Airlines Inc Proj................................ 5.650 10/01/32 759,638
500 New York City Indl Dev Civic YMCA Greater NY
Proj............................................. 6.000 08/01/07 536,890
515 New York City Indl Dev Civic YMCA Greater NY
Proj............................................. 5.800 08/01/16 533,952
2,000 New York City Muni Wtr Fin Auth Wtr & Swr Sys
Rev.............................................. 5.250 06/15/29 1,981,700
500 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev
Ser B (AMBAC Insd) (b)........................... 5.375 06/15/19 504,110
500 New York City Ser B.............................. 5.700 08/15/07 533,530
360 New York City Ser C.............................. 7.250 08/15/24 392,850
140 New York City Ser C (Prerefunded @ 08/15/01)..... 7.250 08/15/24 154,918
1,000 New York City Ser F (a).......................... 5.250 08/01/12 1,000,840
240 New York City Ser H (FSA Insd)................... 7.000 02/01/21 265,997
260 New York City Ser H (Prerefunded @ 02/01/02) (FSA
Insd)............................................ 7.000 02/01/21 291,356
300 New York St Dorm Auth Rev City Univ Ser F........ 5.000 07/01/14 292,113
600 New York St Dorm Auth Rev City Univ Sys 3rd Genl
Res 2 Rfdg....................................... 6.000 07/01/05 651,192
750 New York St Dorm Auth Rev Cons City Univ Sys Ser
A................................................ 5.625 07/01/16 796,792
500 New York St Dorm Auth Rev Court Fac Lease Ser
A................................................ 5.700 05/15/22 510,205
570 New York St Dorm Auth Rev Dept Ed St of NY Issue
Ser A............................................ 5.800 07/01/22 593,313
750 New York St Dorm Auth Rev FHA Nursing Home
Menorah (FHA Gtd)................................ 5.950 02/01/17 796,897
665 New York St Dorm Auth Rev FHA Sarah Neuman
Nursing Home (AMBAC Insd)........................ 5.375 08/01/17 672,687
500 New York St Dorm Auth Rev St Univ Edl Fac........ 5.750 05/15/10 542,040
1,200 New York St Dorm Auth Rev Svc Contract Albany
Cnty (a)......................................... 5.250 04/01/13 1,202,052
1,000 New York St Dorm Auth Rev Svc Contract Albany
Cnty (a)......................................... 5.250 04/01/17 991,540
</TABLE>
See Notes to Financial Statements
B-64
<PAGE> 770
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$ 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 $ 533,355
500 New York St Energy Resh & Dev Auth Gas Fac Rev
Brooklyn Union Gas Co Ser B (Inverse Fltg) (c)... 9.311 07/01/26 653,125
300 New York St Energy Resh & Dev Auth St Svc
Contract Rev Western NY Nuclear Svc Cent Proj.... 6.000 04/01/00 312,111
500 New York St Environmental Fac Corp Pollutn Ctl
Rev St Wtr Revolving Fund Ser D (b).............. 6.850 11/15/11 571,330
500 New York St Hsg Fin Agy Rev Insd Multi-Family Mtg
Ser B (AMBAC Insd)............................... 6.250 08/15/14 534,640
500 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg
Ser A (AMBAC Insd)............................... 6.200 08/15/05 561,500
500 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg
Ser A (AMBAC Insd) (b)........................... 6.600 02/15/11 563,115
300 New York St Med Care Fac Fin Agy Rev Presbyterian
Hosp Mtg Ser A Rfdg (FHA Gtd).................... 5.250 08/15/14 304,617
500 New York St Mtg Agy Rev Homeowner Mtg Ser 30B.... 6.650 10/01/25 534,230
750 New York St Mtg Agy Rev Homeowner Mtg Ser 58..... 6.400 04/01/27 807,315
290 New York St Thruway Auth Svc Contract Rev Loc Hwy
& Brdg........................................... 5.750 04/01/09 309,413
370 New York St Urban Dev Corp Rev Correctional Cap
Fac Rfdg......................................... 5.625 01/01/07 388,866
450 New York St Urban Dev Corp Rev Correctional Cap
Fac Ser 7........................................ 5.700 01/01/27 461,840
500 New York St Urban Dev Corp Rev Correctional Cap
Fac Ser A Rfdg................................... 5.500 01/01/14 524,215
300 New York St Urban Dev Corp Rev Correctional Fac
Rfdg............................................. 5.750 01/01/13 310,290
420 Niagara Falls, NY Pub Impt (MBIA Insd)........... 6.900 03/01/20 479,371
500 Oneida Cnty, NY Pub Impt (b)..................... 5.850 03/15/12 521,385
300 Port Auth NY & NJ Spl Oblig...................... 7.000 10/01/07 341,154
500 Port Auth NY & NJ Spl Oblig Rev Spl Proj JFK Intl
Arpt Terminal 6 (MBIA Insd)...................... 5.750 12/01/25 522,255
625 Rockland Cnty, NY Solid Waste Mgmt Auth Ser B
(AMBAC Insd)..................................... 5.550 12/15/16 654,088
500 Suffolk Cnty, NY Indl Dev Agy Indl Dev Rev....... 6.375 06/01/17 501,165
225 Syracuse, NY Hsg Auth Rev Sub Proj Loretto Rest
Ser B............................................ 7.500 08/01/10 229,457
400 Triborough Brdg & Tunl Auth NY Rev Genl Purp Ser
A Rfdg........................................... 5.000 01/01/12 401,756
-----------
32,273,324
-----------
PUERTO RICO 1.6%
500 Puerto Rico Indl Tourist Edl Mennonite Genl Hosp
Proj Ser A....................................... 5.625 07/01/27 507,855
-----------
TOTAL LONG-TERM INVESTMENTS 102.1%
(Cost $30,696,039)......................................................... 32,781,179
-----------
</TABLE>
See Notes to Financial Statements
B-65
<PAGE> 771
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Market Value
- -------------------------------------------------------------------------------------------
<S> <C>
SHORT-TERM INVESTMENTS 11.5%
New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev ($400,000 par, 5.000%
coupon, maturing on 06/15/24).............................................. $ 400,000
New York City 1993 Ser B ($1,000,000 par, 4.150% coupon, maturing
10/01/21).................................................................. 1,000,000
New York City 1994 Ser B ($2,000,000 par, 4.150% coupon, maturing
08/15/22).................................................................. 2,000,000
New York City Subser 4 ($300,000 par, 4.950% coupon, maturing 08/01/21).... 300,000
-----------
TOTAL SHORT-TERM INVESTMENTS 11.5%
(Cost $3,700,000).......................................................... 3,700,000
-----------
TOTAL INVESTMENTS 113.6%
(Cost $34,396,039)......................................................... 36,481,179
LIABILITIES IN EXCESS OF OTHER ASSETS (13.6%)............................... (4,364,591)
-----------
NET ASSETS 100.0%........................................................... $32,116,588
===========
</TABLE>
(a) Securities purchased on a when issued or delayed delivery basis.
(b) Assets segregated as collateral for when issued or delayed delivery purchase
commitments.
(c) 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. The price of these
securities may be more volatile than the price of a comparable fixed rate
security.
See Notes to Financial Statements
B-66
<PAGE> 772
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $34,396,039)........................ $36,481,179
Cash........................................................ 8,775
Receivables:
Interest.................................................. 568,738
Fund Shares Sold.......................................... 3,081
Unamortized Organizational Costs............................ 23,580
Other....................................................... 221
-----------
Total Assets.......................................... 37,085,574
-----------
LIABILITIES:
Payables:
Investments Purchased..................................... 4,766,150
Income Distributions...................................... 73,644
Distributor and Affiliates................................ 65,300
Fund Shares Repurchased................................... 275
Accrued Expenses............................................ 43,019
Trustees' Deferred Compensation and Retirement Plans........ 20,598
-----------
Total Liabilities..................................... 4,968,986
-----------
NET ASSETS.................................................. $32,116,588
===========
NET ASSETS CONSIST OF:
Capital..................................................... $29,990,469
Net Unrealized Appreciation................................. 2,085,140
Accumulated Net Realized Gain............................... 40,951
Accumulated Undistributed Net Investment Income............. 28
-----------
NET ASSETS.................................................. $32,116,588
===========
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $17,974,339 and 1,142,337 shares of
beneficial interest issued and outstanding)........... $ 15.73
Maximum sales charge (4.75%* of offering price)......... .78
-----------
Maximum offering price to public........................ $ 16.51
===========
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $13,110,477 and 833,648 shares of
beneficial interest issued and outstanding)........... $ 15.73
===========
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $1,031,772 and 65,610 shares of
beneficial interest issued and outstanding)........... $ 15.73
===========
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
B-67
<PAGE> 773
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest..................................................... $1,350,276
----------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $28,117, $113,878 and $5,783, respectively).. 147,778
Investment Advisory Fee...................................... 139,021
Accounting Services.......................................... 28,263
Legal........................................................ 26,500
Shareholder Services......................................... 23,700
Shareholder Reports.......................................... 20,778
Audit........................................................ 19,197
Custody...................................................... 13,497
Trustees' Fees and Expenses.................................. 6,690
Other........................................................ 956
----------
Total Expenses........................................... 426,380
Less Fees Waived and Expenses Reimbursed ($139,021 and
$52,808, respectively)................................. 191,829
----------
Net Expenses............................................. 234,551
----------
NET INVESTMENT INCOME........................................ $1,115,725
==========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments................................................ $ 302,167
Futures.................................................... (47,138)
----------
Net Realized Gain............................................ 255,029
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period.................................... 967,758
End of the Period.......................................... 2,085,140
----------
Net Unrealized Appreciation.................................. 1,117,382
----------
NET REALIZED AND UNREALIZED GAIN............................. $1,372,411
==========
NET INCREASE IN NET ASSETS FROM OPERATIONS................... $2,488,136
==========
</TABLE>
See Notes to Financial Statements
B-68
<PAGE> 774
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................ $ 1,115,725 $ 861,604
Net Realized Gain.................................... 255,029 178,372
Net Unrealized Appreciation/Depreciation............. 1,117,382 (185,185)
------------ ------------
Change in Net Assets from Operations................. 2,488,136 854,791
------------ ------------
Distributions from Net Investment Income:
Class A Shares..................................... (584,822) (354,322)
Class B Shares..................................... (515,371) (471,468)
Class C Shares..................................... (25,931) (17,599)
------------ ------------
(1,126,124) (843,389)
------------ ------------
Distributions from Net Realized Gain:
Class A Shares..................................... (46,829) -0-
Class B Shares..................................... (34,234) -0-
Class C Shares..................................... (2,691) -0-
------------ ------------
(83,754) -0-
------------ ------------
TOTAL DISTRIBUTIONS.................................. (1,209,878) (843,389)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES......................................... 1,278,258 11,402
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold............................ 16,610,486 5,845,364
Net Asset Value of Shares Issued Through Dividend
Reinvestment....................................... 683,838 429,768
Cost of Shares Repurchased........................... (4,637,600) (3,618,542)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS... 12,656,724 2,656,590
------------ ------------
TOTAL INCREASE IN NET ASSETS......................... 13,934,982 2,667,992
NET ASSETS:
Beginning of the Period.............................. 18,181,606 15,513,614
------------ ------------
End of the Period (Including accumulated
undistributed net investment income of $28 and
$10,427, respectively)............................. $32,116,588 $ 18,181,606
============ ============
</TABLE>
See Notes to Financial Statements
B-69
<PAGE> 775
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 29, 1994
(Commencement
of Investment
Year Ended December 31 Operations) to
--------------------------- December 31,
Class A Shares 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.... $14.992 $15.048 $13.579 $ 14.300
------- ------- ------- ----------
Net Investment Income..................... .786 .816 .821 .302
Net Realized and Unrealized Gain/Loss..... .795 (.074) 1.476 (.722)
------- ------- ------- ----------
Total from Investment Operations............ 1.581 .742 2.297 (.420)
Less:
Distributions from and in Excess of Net
Investment Income....................... .798 .798 .828 .301
Distributions from Net Realized Gain...... .041 0 0 0
------- ------- ------- ----------
Total Distributions......................... $ .839 $ .798 $ .828 $ .301
------- ------- ------- ----------
Net Asset Value, End of the Period.......... $15.734 $14.992 $15.048 $ 13.579
======= ======= ======= ==========
Total Return*(a)............................ 10.92 5.14% 17.33% (2.93%)**
Net Assets at End of the Period (In
millions)................................. $ 18.0 $ 7.7 $ 5.4 $ 2.9
Ratio of Expenses to Average Net Assets*.... .64% .31% .21% .26%
Ratio of Net Investment Income to Average
Net Assets*............................... 5.16% 5.56% 5.63% 5.27%
Portfolio Turnover.......................... 60% 126% 51% 68%**
*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..... 1.47% 1.82% 2.10% 2.73%
Ratio of Net Investment Income to Average
Net Assets................................ 4.33% 4.04% 3.74% 2.81%
</TABLE>
**Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
See Notes to Financial Statements
B-70
<PAGE> 776
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 29, 1994
(Commencement
of Investment
Year Ended December 31, Operations) to
---------------------------------------- December 31,
Class B Shares 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period................................. $14.992 $ 15.046 $ 13.578 $ 14.300
------- ---------- ---------- ----------
Net Investment Income.................. .684 .704 .713 .263
Net Realized and Unrealized
Gain/Loss............................ .782 (.068) 1.476 (.722)
------- ---------- ---------- ----------
Total from Investment Operations......... 1.466 .636 2.189 (.459)
Less:
Distributions from and in Excess of Net
Investment Income.................... .690 .690 .721 .263
Distributions from Net Realized Gain... .041 0 0 0
------- ---------- ---------- ----------
Total Distributions...................... $ .731 $ .690 $ .721 $ .263
------- ---------- ---------- ----------
Net Asset Value, End of the Period....... $15.727 $ 14.992 $ 15.046 $ 13.578
======= ========== ========== ==========
Total Return*(a)......................... 10.07% 4.37% 16.47% (3.20%)**
Net Assets at End of the Period (In
millions).............................. $ 13.1 $ 10.1 $ 9.7 $ 8.1
Ratio of Expenses to Average Net
Assets*................................ 1.36% 1.07% .93% .96%
Ratio of Net Investment Income to Average
Net Assets*............................ 4.49% 4.79% 4.93% 4.58%
Portfolio Turnover....................... 60% 126% 51% 68%**
*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................................. 2.18% 2.60% 2.82% 3.42%
Ratio of Net Investment Income to Average
Net Assets............................. 3.67% 3.26% 3.04% 2.12%
**Non-Annualized
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
See Notes to Financial Statements
B-71
<PAGE> 777
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 29, 1994
(Commencement
of Investment
Year Ended December 31, Operations) to
---------------------------------------- December 31,
Class C Shares 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period................................. $14.992 $ 15.041 $ 13.579 $ 14.300
------- ---------- ---------- ----------
Net Investment Income.................. .676 .701 .711 .267
Net Realized and Unrealized
Gain/Loss............................ .789 (.060) 1.472 (.725)
------- ---------- ---------- ----------
Total from Investment Operations......... 1.465 .641 2.183 (.458)
Less:
Distributions from and in Excess of Net
Investment Income.................... .690 .690 .721 .263
Distributions from Net Realized Gain... .041 0 0 0
------- ---------- ---------- ----------
Total Distributions...................... $ .731 $ .690 $ .721 $ .263
------- ---------- ---------- ----------
Net Asset Value, End of the Period....... $15.726 $ 14.992 $ 15.041 $ 13.579
======= ========== ========== ==========
Total Return*(a)......................... 10.07% 4.44% 16.39% (3.20%)**
Net Assets at End of the Period (In
millions).............................. $ 1.0 $ .4 $ .4 $ .2
Ratio of Expenses to Average Net
Assets*................................ 1.41% 1.08% .98% .96%
Ratio of Net Investment Income to Average
Net Assets*............................ 4.37% 4.78% 4.81% 4.58%
Portfolio Turnover....................... 60% 126% 51% 68%**
*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................................. 2.23% 2.61% 2.86% 3.42%
Ratio of Net Investment Income to Average
Net Assets............................. 3.55% 3.25% 2.93% 2.12%
**Non-Annualized
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
See Notes to Financial Statements
B-72
<PAGE> 778
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
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 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. 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. 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.
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 60 or less 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. INCOME AND EXPENSES--Interest income is recorded on an accrual basis. Bond
premium and original issue discount on securities purchased are amortized over
the expected life of each applicable security. Expenses of the Fund are
allocated on a pro rata
B-73
<PAGE> 779
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
basis to each class of shares, except for distribution and service fees and
transfer agency costs which are unique to each class of shares.
D. ORGANIZATIONAL 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. During the period, the original
estimate of organizational costs of $120,000 was reduced to $75,000, reflecting
the actual costs incurred. The amortization of these costs has been revised and
adjusted accordingly. 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 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, if any, to its shareholders.
Therefore, no provision for federal income taxes is required.
At December 31, 1997, for federal income tax purposes, cost of long- and
short-term investments is $34,396,039; the aggregate gross unrealized
appreciation is $2,085,140 and the aggregate gross unrealized depreciation is
$0, resulting in net unrealized appreciation of $2,085,140.
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.
For Federal income tax purposes, the following information is furnished with
respect to the distributions paid by the Fund during its taxable year ended
December 31, 1997. The Fund designated $17,010 as a 28% rate capital gain
distribution and $66,744 as a 20% rate capital gain distribution. Shareholders
were sent a 1997 Form 1099-DIV in January 1998 representing their proportionate
share of the capital gain distribution to be reported on their income tax
returns. The Fund designated 98.82% of the income distributions as a tax-exempt
income distribution.
B-74
<PAGE> 780
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
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>
For the year ended December 31, 1997, the Fund recognized expenses of
approximately $16,300 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person. All of this expense has been assumed by VKAC.
For the year ended December 31, 1997, the Fund recognized expenses of
approximately $38,800 representing VKAC's cost of providing accounting services,
cash management and legal services to the Fund. A portion of this cost has been
assumed by VKAC.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the year ended
December 31, 1997, the Fund recognized expenses of approximately $14,200,
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 provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Fund. The maximum annual
benefit per trustee under the plan is equal to $2,500.
At December 31, 1997, VKAC owned 100 shares each of Classes A, B and C.
3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of shares of beneficial interest, 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-75
<PAGE> 781
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
At December 31, 1997, capital aggregated $17,012,428, $11,991,922, and
$986,119 for Classes A, B and C, respectively. For the year ended December 31,
1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A..................................... 704,992 $10,792,140
Class B..................................... 335,132 5,071,998
Class C..................................... 48,608 746,348
--------- -----------
Total Sales................................... 1,088,732 $16,610,486
========= ===========
Dividend Reinvestment:
Class A..................................... 27,283 $ 418,784
Class B..................................... 15,994 244,789
Class C..................................... 1,318 20,265
--------- -----------
Total Dividend Reinvestment................... 44,595 $ 683,838
========= ===========
Repurchases:
Class A..................................... (103,563) $(1,589,463)
Class B..................................... (193,090) (2,927,339)
Class C..................................... (7,857) (120,798)
--------- -----------
Total Repurchases............................. (304,510) $(4,637,600)
========= ===========
</TABLE>
B-76
<PAGE> 782
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
At December 31, 1996, capital aggregated $7,390,967, $9,602,474 and $340,304
for Classes A, B and C, respectively. For the year ended December 31, 1996,
transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A...................................... 221,959 $ 3,267,016
Class B...................................... 167,902 2,467,305
Class C...................................... 7,482 111,043
-------- -----------
Total Sales.................................... 397,343 $ 5,845,364
======== ===========
Dividend Reinvestment:
Class A...................................... 14,548 $ 214,270
Class B...................................... 13,908 204,781
Class C...................................... 727 10,717
-------- -----------
Total Dividend Reinvestment.................... 29,183 $ 429,768
======== ===========
Repurchases:
Class A...................................... (78,724) $(1,167,300)
Class B...................................... (154,018) (2,273,282)
Class C...................................... (12,034) (177,960)
-------- -----------
Total Repurchases.............................. (244,776) $(3,618,542)
======== ===========
</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.
<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-77
<PAGE> 783
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
For the year ended December 31, 1997, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$12,600 and CDSC on redeemed shares of approximately $59,300. Sales charges do
not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $27,073,236 and $13,692,692.
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 unrealized
appreciation/depreciation. Upon disposition, a realized gain or loss is
recognized accordingly, except when taking delivery of a security underlying a
futures contract. In these instances, the recognition of gain or loss is
postponed until the disposal of the security underlying the futures contract.
During the period, the Fund invested in futures contracts, a type of
derivative. 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.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin).
B-78
<PAGE> 784
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
Transactions in futures contracts for the year ended December 1997, were as
follows:
<TABLE>
<CAPTION>
CONTRACTS
- -----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1996........................... -0-
Futures Opened............................................. 55
Futures Closed............................................. (55)
---------
Outstanding at December 31, 1997........................... -0-
=========
</TABLE>
6. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a 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 net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the year ended December 31, 1997, are payments retained by VKAC of
approximately $92,600.
B-79
<PAGE> 785
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:
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; 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:
Report of Independent Accountants
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 such series has not yet
commenced investment operations.
(B) EXHIBITS:
<TABLE>
<C> <S> <C> <C>
(1) (a) Agreement and Declaration of Trust(39)
(b) Amended and Restated 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 York Tax Free
Income Fund+
(viii) Van Kampen American Capital California Tax Free
Income Fund+
(ix) Van Kampen American Capital Michigan Tax Free
Income Fund+
(x) Van Kampen American Capital Missouri Tax Free
Income Fund+
(xi) Van Kampen American Capital Ohio Tax Free Income
Fund+
(2) By-Laws(39)
(4) Specimen Certificate of Share of Beneficial Interest of:
(i) Van Kampen American Capital Insured Tax Free
Income Fund(39)
(ii) Van Kampen American Capital Tax Free High Income
Fund(39)
(iii) Van Kampen American Capital California Insured Tax
Free Fund(39)
(iv) Van Kampen American Capital Municipal Income
Fund(39)
(v) Van Kampen American Capital Intermediate Term
Municipal Income Fund(39)
(vi) Van Kampen American Capital Florida Insured Tax
Free Income Fund(39)
(vii) Van Kampen American Capital New York Tax Free
Income Fund(39)
(viii) Van Kampen American Capital California Tax Free
Income Fund
1. Class A Shares(31)
2. Class B Shares(31)
3. Class C Shares(31)
</TABLE>
C-1
<PAGE> 786
<TABLE>
<C> <S> <C> <C>
(ix) Van Kampen American Capital Michigan Tax Free
Income Fund
1. Class A Shares(31)
2. Class B Shares(31)
3. Class C Shares(31)
(x) Van Kampen American Capital Missouri Tax Free
Income Fund
1. Class A Shares(31)
2. Class B Shares(31)
3. Class C Shares(31)
(xi) 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 York Tax Free
Income Fund+
(viii) Van Kampen American Capital California Tax Free
Income Fund(31)
(ix) Van Kampen American Capital Michigan Tax Free
Income Fund(31)
(x) Van Kampen American Capital Missouri Tax Free
Income Fund(31)
(xi) 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 York Tax Free
Income Fund+
(viii) Van Kampen American Capital California Tax Free
Income Fund(31)
(ix) Van Kampen American Capital Michigan Tax Free
Income Fund(31)
(x) Van Kampen American Capital Missouri Tax Free
Income Fund(31)
(xi) 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) Custodian Contract for:
(i) Van Kampen American Capital Insured Tax Free
Income Fund(42)
(ii) Van Kampen American Capital Tax Free High Income
Fund(42)
(iii) Van Kampen American Capital California Insured Tax
Free Fund(42)
(iv) Van Kampen American Capital Municipal Income
Fund(10) and (42)
(v) Van Kampen American Capital Intermediate Term
Municipal Income Fund(42)
(vi) Van Kampen American Capital Florida Insured Tax
Free Income Fund(42)
(vii) Van Kampen American Capital New York Tax Free
Income Fund(42)
(viii) Van Kampen American Capital California Tax Free
Income Fund(42)
(ix) Van Kampen American Capital Michigan Tax Free
Income Fund(31) and (6)
(x) Van Kampen American Capital Missouri Tax Free
Income Fund(31) and (6)
(xi) Van Kampen American Capital Ohio Tax Free Income
Fund(31) and (6)
(b) Transfer Agency and Service Agreement(42)
(9) (a) Fund Accounting Agreement(42)
(b) Legal Services Agreement+
</TABLE>
C-2
<PAGE> 787
<TABLE>
<C> <S> <C> <C>
(10) Opinion and Consent of Skadden, Arps, Slate, Meagher &
Flom (Illinois) for:
(i) Van Kampen American Capital Insured Tax Free
Income Fund(40)
(ii) Van Kampen American Capital Tax Free High Income
Fund(40)
(iii) Van Kampen American Capital California Insured Tax
Free Fund(40)
(iv) Van Kampen American Capital Municipal Income
Fund(40)
(v) Van Kampen American Capital Intermediate Term
Municipal Income Fund(40)
(vi) Van Kampen American Capital Florida Insured Tax
Free Income Fund(40)
(vii) Van Kampen American Capital New York Tax Free
Income Fund(40)
(viii) Van Kampen American Capital California Tax Free
Income Fund(40)
(ix) Van Kampen American Capital Michigan Tax Free
Income Fund(40)
(x) Van Kampen American Capital Missouri Tax Free
Income Fund(40)
(xi) Van Kampen American Capital Ohio Tax Free Income
Fund(40)
(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 York Tax Free
Income Fund+
(viii) Van Kampen American Capital California Tax Free
Income Fund(31)
(ix) Van Kampen American Capital Michigan Tax Free
Income Fund(31)
(x) Van Kampen American Capital Missouri Tax Free
Income Fund(31)
(xi) 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(39)
(ii) Van Kampen American Capital Tax Free High Income
Fund(39)
(iii) Van Kampen American Capital California Insured Tax
Free Fund(39)
(iv) Van Kampen American Capital Municipal Income
Fund(39)
(v) Van Kampen American Capital Intermediate Term
Municipal Income Fund(39)
(vi) Van Kampen American Capital Florida Insured Tax
Free Income Fund(39)
(vii) Van Kampen American Capital New York Tax Free
Income Fund(39)
(viii) Van Kampen American Capital California Tax Free
Income Fund(31)
(ix) Van Kampen American Capital Michigan Tax Free
Income Fund(31)
(x) Van Kampen American Capital Missouri Tax Free
Income Fund(31)
(xi) Van Kampen American Capital Ohio Tax Free Income
Fund(31)
(b) Form of Shareholder Assistance Agreement(37)
(c) Form of Administrative Services Agreement(37)
(d) Service Plan for:
(i) Van Kampen American Capital Insured Tax Free
Income Fund(39)
(ii) Van Kampen American Capital Tax Free High Income
Fund(39)
(iii) Van Kampen American Capital California Insured Tax
Free Fund(39)
(iv) Van Kampen American Capital Municipal Income
Fund(39)
(v) Van Kampen American Capital Intermediate Term
Municipal Income Fund(39)
(vi) Van Kampen American Capital Florida Insured Tax
Free Income Fund(39)
(vii) Van Kampen American Capital New York Tax Free
Income Fund(39)
(viii) Van Kampen American Capital California Tax Free
Income Fund(31)
(ix) Van Kampen American Capital Michigan Tax Free
Income Fund(31)
(x) Van Kampen American Capital Missouri Tax Free
Income Fund(31)
(xi) Van Kampen American Capital Ohio Tax Free Income
Fund(31)
</TABLE>
C-3
<PAGE> 788
<TABLE>
<C> <S> <C> <C>
(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 York Tax Free
Income Fund+
(17) (a) List of certain investment companies in response to Item
29(a)(41)
(b) List of officers and directors of Van Kampen American
Capital Distributors, Inc.
in response to Item 29(b)(41)
(18) Amended Multi-Class Plan(40)
(24) Power of Attorney+
(27) Financial Data Schedules+
</TABLE>
- ---------------
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form N-1A, File Number 2-99715, filed August 15, 1985.
(2) Incorporated herein by reference to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed May 9, 1986.
(6) Incorporated herein by reference to Post-Effective Amendment No. 6 to
Registrant's Registration
on Form N-1A, File Number 2-99715, filed February 22, 1988.
(10) Incorporated herein by reference to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed May 25, 1990.
(19) Incorporated herein by reference to Post-Effective Amendment No. 19 to
Registrant's Registration Statement on Form N-1A, File Number 299715 filed
February 12, 1993.
(20) Incorporated herein by reference to Post-Effective Amendment No. 20 to
Registrant's Registration Statement on Form N-1A, File Number 299715 filed
March 1, 1993.
(23) Incorporated herein by reference to Post-Effective Amendment No. 23 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715 filed
April 30, 1993.
(26) Incorporated herein by reference to Post-Effective Amendment No. 26 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed December 30, 1993.
(27) Incorporated herein by reference to Post-Effective Amendment No. 27 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on February 25, 1994.
(29) Incorporated herein by reference to Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on April 5, 1994.
(31) Incorporated herein by reference to Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on September 30, 1994.
(35) Incorporated herein by reference to Post-Effective Amendment No. 35 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on April 24, 1995.
(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.
(39) Incorporated herein by reference to Post-Effective Amendment No. 39 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on April 27, 1996.
(40) Incorporated herein by reference to Post-Effective Amendment No. 40 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on April 29, 1997.
(41) Incorporated herein by reference to Post-Effective Amendment No. 75 to Van
Kampen American Capital Growth and Income Fund, File Nos. 2-21657 and
811-1228 filed on March 27, 1998.
(42) Incorporated herein by reference to Post-Effective Amendment No. 50 to Van
Kampen American Capital Comstock Fund, File No. 2-27778 filed on April 27,
1998.
+ Filed herewith.
C-4
<PAGE> 789
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of April 7, 1998:
<TABLE>
<CAPTION>
(2)
NUMBER OF
(1) RECORD
TITLE OF CLASS HOLDERS
-------------- ---------
<S> <C> <C>
Shares of Beneficial Interest, without par value:
(i) Van Kampen American Capital Insured Tax Free Income Fund
Class A Shares.............................................. 41,395
Class B Shares.............................................. 1,664
Class C Shares.............................................. 154
(ii) Van Kampen American Capital Tax Free High Income Fund
Class A Shares.............................................. 20,732
Class B Shares.............................................. 5,371
Class C Shares.............................................. 761
(iii) Van Kampen American Capital California Insured Tax Free Fund
Class A Shares.............................................. 3,307
Class B Shares.............................................. 789
Class C Shares.............................................. 59
(iv) Van Kampen American Capital Municipal Income Fund
Class A Shares.............................................. 21,507
Class B Shares.............................................. 5,947
Class C Shares.............................................. 513
(v) Van Kampen American Capital Intermediate Term Municipal
Income Fund
Class A Shares.............................................. 470
Class B Shares.............................................. 419
Class C Shares.............................................. 49
(vi) Van Kampen American Capital Florida Insured Tax Free Income
Fund
Class A Shares.............................................. 507
Class B Shares.............................................. 401
Class C Shares.............................................. 39
(vii) Van Kampen American Capital New York Tax Free Income Fund
Class A Shares.............................................. 362
Class B Shares.............................................. 373
Class C Shares.............................................. 43
(viii) Van Kampen American Capital California Tax Free Income Fund
Class A Shares.............................................. 0
Class B Shares.............................................. 0
Class C Shares.............................................. 0
(ix) Van Kampen American Capital Michigan Tax Free Income Fund
Class A Shares.............................................. 0
Class B Shares.............................................. 0
Class C Shares.............................................. 0
(x) Van Kampen American Capital Missouri Tax Free Income Fund
Class A Shares.............................................. 0
Class B Shares.............................................. 0
Class C Shares.............................................. 0
(xi) Van Kampen American Capital Ohio Tax Free Income Fund
Class A Shares.............................................. 0
Class B Shares.............................................. 0
Class C Shares.............................................. 0
</TABLE>
C-5
<PAGE> 790
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 (i) not
acting in good faith in the reasonable belief that such person's actions were
not in the best interests of the Trust, (ii) willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his or her office (iii) for a criminal proceeding, not having a reasonable cause
to believe that such conduct was unlawful (collectively, "Disabling Conduct").
Absent a court determination that an officer or trustee seeking indemnification
was not liable on the merits or guilty of Disabling Conduct 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 Disabling Conduct 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 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.
C-6
<PAGE> 791
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> 792
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, VAN KAMPEN AMERICAN CAPITAL TAX
FREE TRUST, certifies that it meets all of the requirements for effectiveness of
this Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Amendment to 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 28th day of April, 1998.
VAN KAMPEN AMERICAN CAPITAL
TAX FREE TRUST
By: /s/ RONALD A. NYBERG
---------------------------------------
Ronald A. Nyberg, Vice President and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to this Registration Statement has been signed on April 28, 1998 by the
following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
Principal Executive Officer:
/s/ DENNIS J. McDONNELL* President and Trustee
- -----------------------------------------------------
Dennis J. McDonnell
Principal Financial Officer:
/s/ EDWARD C. WOOD III Vice President and Chief Financial Officer
- -----------------------------------------------------
Edward C. Wood III
Trustees:
/s/ J. MILES BRANAGAN* Trustee
- -----------------------------------------------------
J. Miles Branagan
/s/ RICHARD M. DeMARTINI* Trustee
- -----------------------------------------------------
Richard M. DeMartini
/s/ LINDA HUTTON HEAGY* Trustee
- -----------------------------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY* Trustee
- -----------------------------------------------------
R. Craig Kennedy
/s/ DENNIS J. MCDONNELL* Trustee
- -----------------------------------------------------
Dennis J. McDonnell
/s/ JACK E. NELSON* Trustee
- -----------------------------------------------------
Jack E. Nelson
/s/ DON G. POWELL* Trustee
- -----------------------------------------------------
Don G. Powell
/s/ PHILLIP B. ROONEY* Trustee
- -----------------------------------------------------
Phillip B. Rooney
/s/ FERNANDO SISTO* Trustee
- -----------------------------------------------------
Fernando Sisto
/s/ WAYNE W. WHALEN* Trustee
- -----------------------------------------------------
Wayne W. Whalen
- ------------
* Signed by Ronald A. Nyberg pursuant to a power of attorney.
/s/ RONALD A. NYBERG April 28, 1998
- -----------------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact
</TABLE>
C-8
<PAGE> 793
SCHEDULE OF EXHIBITS TO
POST-EFFECTIVE AMENDMENT 41 TO FORM N-1A
AS SUBMITTED TO THE SECURITIES AND EXCHANGE
COMMISSION ON APRIL 30, 1998
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S> <C> <C> <C>
(1)
(b) Amended and Restated 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 York Tax Free
Income Fund
(viii) Van Kampen American Capital California Tax Free
Income Fund
(ix) Van Kampen American Capital Michigan Tax Free
Income Fund
(x) Van Kampen American Capital Missouri Tax Free
Income Fund
(xi) Van Kampen American Capital Ohio 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 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 York Tax Free
Income Fund
(9) (b) 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
(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 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 York Tax Free
Income Fund
</TABLE>
<PAGE> 794
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S> <C> <C> <C>
(24) Power of Attorney
(27) Financial Data Schedules
</TABLE>
<PAGE> 1
EXHIBIT (1)(b)(i)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Amended and Restated 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 amend and restate in its entirety the
Certificate of Designation of the Van Kampen American Capital Insured Tax Free
Income Fund Series of the Trust dated May 10, 1995 by redesignating the
following classes of Shares of the Van Kampen American Capital Insured Tax Free
Income Fund (the "Fund") with the following 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 and certain Class C Shares 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.
<PAGE> 2
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
any 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.
December 12, 1996
/s/ Ronald A. Nyberg
------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(b)(ii)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Amended and Restated 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 amend and restate in its entirety the
Certificate of Designation of the Van Kampen American Capital Tax Free High
Income Fund Series of the Trust dated May 10, 1995 by redesignating the
following classes of Shares of the Van Kampen American Capital Tax Free High
Income Fund (the "Fund") with the following 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 and certain Class C Shares 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.
<PAGE> 2
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
any 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.
December 12, 1996
/s/ Ronald A. Nyberg
------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(b)(iii)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Amended and Restated 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 amend and restate in its entirety the
Certificate of Designation of the Van Kampen American Capital California
Insured Tax Free Fund Series of the Trust dated May 10, 1995 by redesignating
the following classes of Shares of the Van Kampen American Capital California
Insured Tax Free Fund (the "Fund") with the following 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 and certain Class C Shares 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.
<PAGE> 2
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
any 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.
December 12, 1996
/s/ Ronald A. Nyberg
------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(b)(iv)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Amended and Restated 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 amend and restate in its entirety the
Certificate of Designation of the Van Kampen American Capital Municipal Income
Fund Series of the Trust dated May 10, 1995 by redesignating the following
classes of Shares of the Van Kampen American Capital Municipal Income Fund (the
"Fund") with the following 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 and certain Class C Shares 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.
<PAGE> 2
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
any 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.
December 12, 1996
/s/ Ronald A. Nyberg
------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(b)(v)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Second Amended and Restated Certificate of Designation
of
Van Kampen American Capital Intermediate 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 amend and restate in its entirety the
Amended and Restated Certificate of Designation of the Van Kampen American
Capital Intermediate Term Municipal Income Fund Series of the Trust dated April
29, 1996 by redesignating the following classes of Shares of the Van Kampen
American Capital Intermediate Term Municipal Income Fund (the "Fund") with the
following 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 and certain Class C Shares 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.
<PAGE> 2
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
any 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.
December 12, 1996
/s/ Ronald A. Nyberg
------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(b)(vi)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Amended and Restated 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 amend and restate in its entirety the
Certificate of Designation of the Van Kampen American Capital Florida Insured
Tax Free Income Fund Series of the Trust dated May 10, 1995 by redesignating
the following classes of Shares of the Van Kampen American Capital Florida
Insured Tax Free Income Fund (the "Fund") with the following 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 and certain Class C Shares 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.
<PAGE> 2
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
any 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.
December 12, 1996
/s/ Ronald A. Nyberg
------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(b)(vii)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Amended and Restated 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 amend and restate in its entirety the
Certificate of Designation of the Van Kampen American Capital New York Tax Free
Income Fund Series of the Trust dated May 10, 1995 by redesignating the
following classes of Shares of the Van Kampen American Capital New York Tax
Free Income Fund (the "Fund") with the following 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 and certain Class C Shares 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.
<PAGE> 2
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
any 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.
December 12, 1996
/s/ Ronald A. Nyberg
------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(b)(viii)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Amended and Restated Certificate of Designation
of
Van Kampen American Capital California 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 amend and restate in its entirety the
Certificate of Designation of the Van Kampen American Capital California Tax
Free Income Fund Series of the Trust dated May 10, 1995 by redesignating the
following classes of Shares of the Van Kampen American Capital California Tax
Free Income Fund (the "Fund") with the following 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 and certain Class C Shares 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.
<PAGE> 2
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
any 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.
December 12, 1996
/s/ Ronald A. Nyberg
------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(b)(ix)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Amended and Restated Certificate of Designation
of
Van Kampen American Capital Michigan 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 amend and restate in its entirety the
Certificate of Designation of the Van Kampen American Capital Michigan Tax Free
Income Fund Series of the Trust dated May 10, 1995 by redesignating the
following classes of Shares of the Van Kampen American Capital Michigan Tax
Free Income Fund (the "Fund") with the following 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 and certain Class C Shares 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.
<PAGE> 2
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
any 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.
December 12, 1996
/s/ Ronald A. Nyberg
------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(b)(x)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Amended and Restated Certificate of Designation
of
Van Kampen American Capital Missouri 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 amend and restate in its entirety the
Certificate of Designation of the Van Kampen American Capital Missouri Tax Free
Income Fund Series of the Trust dated May 10, 1995 by redesignating the
following classes of Shares of the Van Kampen American Capital Missouri Tax
Free Income Fund (the "Fund") with the following 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 and certain Class C Shares 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.
<PAGE> 2
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
any 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.
December 12, 1996
/s/ Ronald A. Nyberg
------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(b)(xi)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Amended and Restated Certificate of Designation
of
Van Kampen American Capital Ohio 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 amend and restate in its entirety the
Certificate of Designation of the Van Kampen American Capital Ohio Tax Free
Income Fund Series of the Trust dated May 10, 1995 by redesignating the
following classes of Shares of the Van Kampen American Capital Missouri Tax
Free Income Fund (the "Fund") with the following 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 and certain Class C Shares 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.
<PAGE> 2
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
any 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.
December 12, 1996
/s/ Ronald A. Nyberg
------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (5)(i)
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT, dated as of May 31, 1997 (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
INVESTMENT ADVISORY CORP. (the "ADVISER"), a Delaware corporation.
1. (a) RETENTION OF ADVISER BY FUND. Subject to the terms and conditions
set forth herein, 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 objectives 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) ESSENTIAL PERSONNEL. For a period of one year commencing on the
effective date of this Agreement, the Adviser and the Fund agree that the
retention of (i) the chief executive officer, president, chief financial
officer and secretary of the Adviser and (ii) each director, officer and
employee of the Adviser or any of its Affiliates (as defined in the Investment
Company Act of 1940, as amended (the "1940 Act")) who serves as an officer of
the Fund (each person referred to in (i) or (ii) hereinafter being referred to
as an "Essential Person"), in his or her current capacities, is in the best
interest of the Fund and the Fund's shareholders. In connection with the
Adviser's acceptance of employment hereunder, the Adviser hereby agrees and
covenants for itself and on behalf of its Affiliates that neither the Adviser
nor any of its Affiliates shall make any material or significant personnel
changes or replace or seek to replace any Essential Person or cause to be
replaced any Essential Person, in each case without first informing the Board
of Trustees of the Fund in a timely manner. In Addition, neither the Adviser
nor any Affiliate of the Adviser shall change or seek to change or cause to be
changed, in any material respect, the duties and responsibilities of any
Essential Person, in each case without first informing the Board of Trustees of
the Fund in a timely manner.
(d) 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.
(e) 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 computed based on a fee rate (expressed as a
percentage per annum) applied to the average daily net assets of the Fund as
follows:
<PAGE> 2
<TABLE>
<CAPTION>
FEE PERCENT
PER ANNUM OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS (MILLIONS) NET ASSETS
--------------------- ----------
<S> <C>
First $500 0.525%
Next $500 0.500%
Next $2,000 0.475%
Over $1,500 0.450%
</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 limitation
in any 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 statue 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 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.
(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 changes 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 on the New York Stock Exchange or other exchange,
interest (if any) on obligations incurred by the Fund, costs of shares
certificates, membership dues in the Investment Company Institute or any
similar organization, costs of reports and notices to shareholders, cost 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
<PAGE> 3
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 the 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 interested 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 May 31, 1999 unless sooner terminated as
hereinafter provided. This Agreement shall continue in force from year to year
thereafter, but only for so long as such continuance is specifically approved
as least annually, in the manner required by the 1940 Act.
(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, statue, rule or otherwise, the remainder
shall not thereby be 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.
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.
11. NAME. In connection with its employment hereunder, the Adviser
hereby agrees and covenants
<PAGE> 4
not to change its name without the prior consent of the Board of Trustees of
the Fund.
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 VAN KAMPEN AMERICAN
CAPITAL INVESTMENT ADVISORY CAPITAL TAX FREE TRUST,
CORP. on behalf of its series,
INSURED TAX FREE INCOME FUND
By: /s/ Dennis J. McDonnell By: /s/ Ronald A. Nyberg
----------------------------- -------------------------
Name: Dennis J. McDonnell Name: Ronald A. Nyberg
Title: President Title: Vice President & Secretary
<PAGE> 1
EXHIBIT (5)(ii)
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT, dated as of May 31, 1997 (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 INVESTMENT
ADVISORY CORP. (the "ADVISER"), a Delaware corporation.
1. (a) RETENTION OF ADVISER BY FUND. Subject to the terms and conditions
set forth herein, 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 objectives 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) ESSENTIAL PERSONNEL. For a period of one year commencing on the
effective date of this Agreement, the Adviser and the Fund agree that the
retention of (i) the chief executive officer, president, chief financial
officer and secretary of the Adviser and (ii) each director, officer and
employee of the Adviser or any of its Affiliates (as defined in the Investment
Company Act of 1940, as amended (the "1940 Act")) who serves as an officer of
the Fund (each person referred to in (i) or (ii) hereinafter being referred to
as an "Essential Person"), in his or her current capacities, is in the best
interest of the Fund and the Fund's shareholders. In connection with the
Adviser's acceptance of employment hereunder, the Adviser hereby agrees and
covenants for itself and on behalf of its Affiliates that neither the Adviser
nor any of its Affiliates shall make any material or significant personnel
changes or replace or seek to replace any Essential Person or cause to be
replaced any Essential Person, in each case without first informing the Board
of Trustees of the Fund in a timely manner. In Addition, neither the Adviser
nor any Affiliate of the Adviser shall change or seek to change or cause to be
changed, in any material respect, the duties and responsibilities of any
Essential Person, in each case without first informing the Board of Trustees of
the Fund in a timely manner.
(d) 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.
(e) 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 computed based on a fee rate (expressed as a
percentage per annum) applied to the average daily net assets of the Fund as
follows:
<PAGE> 2
<TABLE>
<CAPTION>
FEE PERCENT
PER ANNUM OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS (MILLIONS) NET ASSETS
--------------------- ----------
<S> <C>
First $500 0.50 of 1.00%
Over $500 0.45 of 1.00%
</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 limitation
in any 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 statue 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 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.
(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 changes 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 on the New York Stock Exchange or other exchange,
interest (if any) on obligations incurred by the Fund, costs of shares
certificates, membership dues in the Investment Company Institute or any
similar organization, costs of reports and notices to shareholders, cost 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 the law.
<PAGE> 3
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 interested 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 May 31, 1999 unless sooner terminated as
hereinafter provided. This Agreement shall continue in force from year to year
thereafter, but only for so long as such continuance is specifically approved
as least annually, in the manner required by the 1940 Act.
(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, statue, rule or otherwise, the remainder
shall not thereby be 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.
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.
11. NAME. In connection with its employment hereunder, the Adviser
hereby agrees and covenants not to change its name without the prior consent of
the Board of Trustees of the Fund.
<PAGE> 4
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 VAN KAMPEN AMERICAN
CAPITAL INVESTMENT ADVISORY CAPITAL TAX FREE TRUST,
CORP. on behalf of its series,
TAX FREE HIGH INCOME FUND
By: /s/ Dennis J. McDonnell By: /s/ Ronald A. Nyberg
---------------------------- -------------------------
Name: Dennis J. McDonnell Name: Ronald A. Nyberg
Title: President Title: Vice President & Secretary
<PAGE> 1
EXHIBIT (5)(iii)
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT, dated as of May 31, 1997 (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
INVESTMENT ADVISORY CORP. (the "ADVISER"), a Delaware corporation.
1. (a) RETENTION OF ADVISER BY FUND. Subject to the terms and conditions
set forth herein, 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 objectives 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) ESSENTIAL PERSONNEL. For a period of one year commencing on the
effective date of this Agreement, the Adviser and the Fund agree that the
retention of (i) the chief executive officer, president, chief financial
officer and secretary of the Adviser and (ii) each director, officer and
employee of the Adviser or any of its Affiliates (as defined in the Investment
Company Act of 1940, as amended (the "1940 Act")) who serves as an officer of
the Fund (each person referred to in (i) or (ii) hereinafter being referred to
as an "Essential Person"), in his or her current capacities, is in the best
interest of the Fund and the Fund's shareholders. In connection with the
Adviser's acceptance of employment hereunder, the Adviser hereby agrees and
covenants for itself and on behalf of its Affiliates that neither the Adviser
nor any of its Affiliates shall make any material or significant personnel
changes or replace or seek to replace any Essential Person or cause to be
replaced any Essential Person, in each case without first informing the Board
of Trustees of the Fund in a timely manner. In Addition, neither the Adviser
nor any Affiliate of the Adviser shall change or seek to change or cause to be
changed, in any material respect, the duties and responsibilities of any
Essential Person, in each case without first informing the Board of Trustees of
the Fund in a timely manner.
(d) 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.
(e) 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 computed based on a fee rate (expressed as a
percentage per annum) applied to the average daily net assets of the Fund as
follows:
<PAGE> 2
<TABLE>
<CAPTION>
FEE PERCENT
PER ANNUM OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS (MILLIONS) NET ASSETS
--------------------- ----------
<S> <C>
First $100 0.500%
Next $150 0.450%
Next $250 0.425%
Over $500 0.400%
</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 limitation
in any 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 statue 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 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.
(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 changes 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 on the New York Stock Exchange or other exchange,
interest (if any) on obligations incurred by the Fund, costs of shares
certificates, membership dues in the Investment Company Institute or any
similar organization, costs of reports and notices to shareholders, cost 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
<PAGE> 3
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 the 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 interested 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 May 31, 1999 unless sooner terminated as
hereinafter provided. This Agreement shall continue in force from year to year
thereafter, but only for so long as such continuance is specifically approved
as least annually, in the manner required by the 1940 Act.
(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, statue, rule or otherwise, the remainder
shall not thereby be 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.
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.
11. NAME. In connection with its employment hereunder, the Adviser
hereby agrees and covenants not to change its name without the prior consent of
the Board of Trustees of the Fund.
<PAGE> 4
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 VAN KAMPEN AMERICAN
CAPITAL INVESTMENT ADVISORY CAPITAL TAX FREE TRUST,
CORP. on behalf of its series,
CALIFORNIA INSURED TAX FREE FUND
By: /s/ Dennis J. McDonnell By: /s/ Ronald A. Nyberg
---------------------------- --------------------------
Name: Dennis J. McDonnell Name: Ronald A. Nyberg
Title: President Title: Vice President & Secretary
<PAGE> 1
EXHIBIT (5)(iv)
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT, dated as of May 31, 1997 (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 INVESTMENT
ADVISORY CORP. (the "ADVISER"), a Delaware corporation.
1. (a) RETENTION OF ADVISER BY FUND. Subject to the terms and conditions
set forth herein, 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 objectives 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) ESSENTIAL PERSONNEL. For a period of one year commencing on the
effective date of this Agreement, the Adviser and the Fund agree that the
retention of (i) the chief executive officer, president, chief financial
officer and secretary of the Adviser and (ii) each director, officer and
employee of the Adviser or any of its Affiliates (as defined in the Investment
Company Act of 1940, as amended (the "1940 Act")) who serves as an officer of
the Fund (each person referred to in (i) or (ii) hereinafter being referred to
as an "Essential Person"), in his or her current capacities, is in the best
interest of the Fund and the Fund's shareholders. In connection with the
Adviser's acceptance of employment hereunder, the Adviser hereby agrees and
covenants for itself and on behalf of its Affiliates that neither the Adviser
nor any of its Affiliates shall make any material or significant personnel
changes or replace or seek to replace any Essential Person or cause to be
replaced any Essential Person, in each case without first informing the Board
of Trustees of the Fund in a timely manner. In Addition, neither the Adviser
nor any Affiliate of the Adviser shall change or seek to change or cause to be
changed, in any material respect, the duties and responsibilities of any
Essential Person, in each case without first informing the Board of Trustees of
the Fund in a timely manner.
(d) 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.
(e) 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 computed based on a fee rate (expressed as a
percentage per annum) applied to the average daily net assets of the Fund as
follows:
<PAGE> 2
<TABLE>
<CAPTION>
FEE PERCENT
PER ANNUM OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS (MILLIONS) NET ASSETS
--------------------- ----------
<S> <C>
First $500 0.500 of 1.00%
Over $500 0.450 of 1.00%
</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 limitation
in any 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 statue 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 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.
(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 changes 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 on the New York Stock Exchange or other exchange,
interest (if any) on obligations incurred by the Fund, costs of shares
certificates, membership dues in the Investment Company Institute or any
similar organization, costs of reports and notices to shareholders, cost 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 the law.
<PAGE> 3
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 interested 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 May 31, 1999 unless sooner terminated as
hereinafter provided. This Agreement shall continue in force from year to year
thereafter, but only for so long as such continuance is specifically approved
as least annually, in the manner required by the 1940 Act.
(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, statue, rule or otherwise, the remainder
shall not thereby be 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.
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.
11. NAME. In connection with its employment hereunder, the Adviser hereby
agrees and covenants not to change its name without the prior consent of the
Board of Trustees of the Fund.
<PAGE> 4
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 VAN KAMPEN AMERICAN
CAPITAL INVESTMENT ADVISORY CAPITAL TAX FREE TRUST,
CORP. on behalf of its series,
MUNICIPAL INCOME FUND
By: /s/ Dennis J. McDonnell By: /s/ Ronald A. Nyberg
----------------------------- --------------------------
Name: Dennis J. McDonnell Name: Ronald A. Nyberg
Title: President Title: Vice President & Secretary
<PAGE> 1
EXHIBIT (5)(v)
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT, dated as of May 31, 1997 (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
INTERMEDIATE TERM MUNICIPAL INCOME FUND (the "Fund") and VAN KAMPEN AMERICAN
CAPITAL INVESTMENT ADVISORY CORP. (the "ADVISER"), a Delaware corporation.
1. (a) RETENTION OF ADVISER BY FUND. Subject to the terms and conditions
set forth herein, 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 objectives 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) ESSENTIAL PERSONNEL. For a period of one year commencing on the
effective date of this Agreement, the Adviser and the Fund agree that the
retention of (i) the chief executive officer, president, chief financial
officer and secretary of the Adviser and (ii) each director, officer and
employee of the Adviser or any of its Affiliates (as defined in the Investment
Company Act of 1940, as amended (the "1940 Act")) who serves as an officer of
the Fund (each person referred to in (i) or (ii) hereinafter being referred to
as an "Essential Person"), in his or her current capacities, is in the best
interest of the Fund and the Fund's shareholders. In connection with the
Adviser's acceptance of employment hereunder, the Adviser hereby agrees and
covenants for itself and on behalf of its Affiliates that neither the Adviser
nor any of its Affiliates shall make any material or significant personnel
changes or replace or seek to replace any Essential Person or cause to be
replaced any Essential Person, in each case without first informing the Board
of Trustees of the Fund in a timely manner. In Addition, neither the Adviser
nor any Affiliate of the Adviser shall change or seek to change or cause to be
changed, in any material respect, the duties and responsibilities of any
Essential Person, in each case without first informing the Board of Trustees of
the Fund in a timely manner.
(d) 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.
(e) 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 computed based on a fee rate (expressed as a
percentage per annum) applied to the average daily net assets of the Fund as
follows:
<PAGE> 2
<TABLE>
<CAPTION>
FEE PERCENT
PER ANNUM OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS (MILLIONS) NET ASSETS
--------------------- ----------
<S> <C>
First $500 0.500 of 1.00%
Over $500 0.450 of 1.00%
</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 limitation
in any 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 statue 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 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.
(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 changes 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 on the New York Stock Exchange or other exchange,
interest (if any) on obligations incurred by the Fund, costs of shares
certificates, membership dues in the Investment Company Institute or any
similar organization, costs of reports and notices to shareholders, cost 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 the law.
<PAGE> 3
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 interested 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 May 31, 1999 unless sooner terminated as
hereinafter provided. This Agreement shall continue in force from year to year
thereafter, but only for so long as such continuance is specifically approved
as least annually, in the manner required by the 1940 Act.
(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, statue, rule or otherwise, the remainder
shall not thereby be 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.
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.
11. NAME. In connection with its employment hereunder, the Adviser
hereby agrees and covenants not to change its name without the prior consent of
the Board of Trustees of the Fund.
<PAGE> 4
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 VAN KAMPEN AMERICAN
CAPITAL INVESTMENT ADVISORY CAPITAL TAX FREE TRUST,
CORP. on behalf of its series,
INTERMEDIATE TERM MUNICIPAL INCOME FUND
By: /s/ Dennis J. McDonnell By: /s/ Ronald A. Nyberg
----------------------------- --------------------------
Name: Dennis J. McDonnell Name: Ronald A. Nyberg
Title: President Title: Vice President & Secretary
<PAGE> 1
EXHIBIT (5)(vi)
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT, dated as of May 31, 1997 (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 INVESTMENT ADVISORY CORP. (the "ADVISER"), a Delaware corporation.
1. (a) RETENTION OF ADVISER BY FUND. Subject to the terms and conditions
set forth herein, 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 objectives 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) ESSENTIAL PERSONNEL. For a period of one year commencing on the
effective date of this Agreement, the Adviser and the Fund agree that the
retention of (i) the chief executive officer, president, chief financial
officer and secretary of the Adviser and (ii) each director, officer and
employee of the Adviser or any of its Affiliates (as defined in the Investment
Company Act of 1940, as amended (the "1940 Act")) who serves as an officer of
the Fund (each person referred to in (i) or (ii) hereinafter being referred to
as an "Essential Person"), in his or her current capacities, is in the best
interest of the Fund and the Fund's shareholders. In connection with the
Adviser's acceptance of employment hereunder, the Adviser hereby agrees and
covenants for itself and on behalf of its Affiliates that neither the Adviser
nor any of its Affiliates shall make any material or significant personnel
changes or replace or seek to replace any Essential Person or cause to be
replaced any Essential Person, in each case without first informing the Board
of Trustees of the Fund in a timely manner. In Addition, neither the Adviser
nor any Affiliate of the Adviser shall change or seek to change or cause to be
changed, in any material respect, the duties and responsibilities of any
Essential Person, in each case without first informing the Board of Trustees of
the Fund in a timely manner.
(d) 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 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 computed based on a fee rate (expressed as a
percentage per annum) applied to the average daily net assets of the Fund as
follows:
<PAGE> 2
<TABLE>
<CAPTION>
FEE PERCENT
PER ANNUM OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS (MILLIONS) NET ASSETS
--------------------- ----------
<S> <C>
First $500 0.500 of 1.00%
Over $500 0.450 of 1.00%
</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 limitation
in any 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 statue 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 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.
(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 changes 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 on the New York Stock Exchange or other exchange,
interest (if any) on obligations incurred by the Fund, costs of shares
certificates, membership dues in the Investment Company Institute or any
similar organization, costs of reports and notices to shareholders, cost 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 the law.
<PAGE> 3
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 interested 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 May 31, 1999 unless sooner terminated as
hereinafter provided. This Agreement shall continue in force from year to year
thereafter, but only for so long as such continuance is specifically approved
as least annually, in the manner required by the 1940 Act.
(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, statue, rule or otherwise, the remainder
shall not thereby be 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.
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.
11. NAME. In connection with its employment hereunder, the Adviser
hereby agrees and covenants not to change its name without the prior consent of
the Board of Trustees of the Fund.
<PAGE> 4
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 VAN KAMPEN AMERICAN
CAPITAL INVESTMENT ADVISORY CAPITAL TAX FREE TRUST,
CORP. on behalf of its series,
FLORIDA INSURED TAX FREE INCOME FUND
By: /s/ Dennis J. McDonnell By: /s/ Ronald A. Nyberg
---------------------------- --------------------------
Name: Dennis J. McDonnell Name: Ronald A. Nyberg
Title: President Title: Vice President & Secretary
<PAGE> 1
EXHIBIT (5)(vii)
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT, dated as of May 31, 1997 (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
INVESTMENT ADVISORY CORP. (the "ADVISER"), a Delaware corporation.
1. (a) RETENTION OF ADVISER BY FUND. Subject to the terms and conditions
set forth herein, 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 objectives 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) ESSENTIAL PERSONNEL. For a period of one year commencing on the
effective date of this Agreement, the Adviser and the Fund agree that the
retention of (i) the chief executive officer, president, chief financial
officer and secretary of the Adviser and (ii) each director, officer and
employee of the Adviser or any of its Affiliates (as defined in the Investment
Company Act of 1940, as amended (the "1940 Act")) who serves as an officer of
the Fund (each person referred to in (i) or (ii) hereinafter being referred to
as an "Essential Person"), in his or her current capacities, is in the best
interest of the Fund and the Fund's shareholders. In connection with the
Adviser's acceptance of employment hereunder, the Adviser hereby agrees and
covenants for itself and on behalf of its Affiliates that neither the Adviser
nor any of its Affiliates shall make any material or significant personnel
changes or replace or seek to replace any Essential Person or cause to be
replaced any Essential Person, in each case without first informing the Board
of Trustees of the Fund in a timely manner. In Addition, neither the Adviser
nor any Affiliate of the Adviser shall change or seek to change or cause to be
changed, in any material respect, the duties and responsibilities of any
Essential Person, in each case without first informing the Board of Trustees of
the Fund in a timely manner.
(d) 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.
(e) 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 computed based on a fee rate (expressed as a
percentage per annum) applied to the average daily net assets of the Fund as
follows:
<PAGE> 2
<TABLE>
<CAPTION>
FEE PERCENT
PER ANNUM OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS (MILLIONS) NET ASSETS
--------------------- ----------
<S> <C>
First $500 0.600 of 1.00%
Over $500 0.500 of 1.00%
</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 limitation
in any 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 statue 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 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.
(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 changes 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 on the New York Stock Exchange or other exchange,
interest (if any) on obligations incurred by the Fund, costs of shares
certificates, membership dues in the Investment Company Institute or any
similar organization, costs of reports and notices to shareholders, cost 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 the law.
<PAGE> 3
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 interested 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 May 31, 1999 unless sooner terminated as
hereinafter provided. This Agreement shall continue in force from year to year
thereafter, but only for so long as such continuance is specifically approved
as least annually, in the manner required by the 1940 Act.
(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, statue, rule or otherwise, the remainder
shall not thereby be 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.
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.
11. NAME. In connection with its employment hereunder, the Adviser
hereby agrees and covenants not to change its name without the prior consent of
the Board of Trustees of the Fund.
<PAGE> 4
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 VAN KAMPEN AMERICAN
CAPITAL INVESTMENT ADVISORY CAPITAL TAX FREE TRUST,
CORP. on behalf of its series,
NEW YORK TAX FREE INCOME FUND
By: /s/ Dennis J. McDonnell By: /s/ Ronald A. Nyberg
----------------------------- --------------------------
Name: Dennis J. McDonnell Name: Ronald A. Nyberg
Title: President Title: Vice President & Secretary
<PAGE> 1
EXHIBIT (6)(a)(i)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of May 31, 1997 (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. (a) 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.
(b) Best Efforts. The Distributor shall 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. Without
the prior approval of the Board of Trustees, the Distributor shall not, directly
or indirectly, distribute, sell or market, through its organization or other
brokers, dealers or agents, shares of any investment companies unless the Board
of Trustees of the Fund determines that such companies do not compete, or
potentially compete, with the Fund.
(c) Positions in the 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.
(d) Essential Personnel. The Distributor and the Fund agree that the
retention of (i) the chief executive officer, president, treasurer and secretary
of the Distributor, and (ii) each director, officer and employee of the
Distributor or any of its affiliates (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) who serves as an officer of the Fund (each
person referred to in (i) or (ii) hereinafter being referred to as an "Essential
Person "), in his or her current capacities, is in the best interest of the Fund
and the Fund's shareholders. In connection with the Distributor's acceptance of
employment hereunder, the Distributor hereby agrees and covenants for itself and
on behalf of its Affiliates that neither the Distributor nor any of its
Affiliates shall replace or seek to replace any Essential Person or cause to be
replaced any Essential Person, in each case without first consulting with the
Board of Trustees of the Fund in a timely manner. In addition, neither the
Distributor nor any Affiliate of the Distributor shall change or seek to change
or cause to be changed, in any material respect, the duties and responsibilities
of any Essential Person, in each case without first consulting with the Board of
Trustees of the Fund in a timely manner.
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
1
<PAGE> 2
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 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. (the
parent company of the Distributor), VK/AC Holding, Inc. (the parent company of
The Van Kampen American Capital, Inc.), Morgan Stanley, Dean Witter, Discover &
Co. (the parent company of VK/AC Holding, Inc.) and to the subsidiaries of Van
Kampen American Capital, Inc.; (f) to any trust, pension, profit-sharing or
other benefit plan for any of the aforesaid persons; and (g) to any group of
persons as permitted by Rule 22d-1 under the 1940 Act approved from time to time
by the Board of Trustees and set forth in the then current Prospectus of the
Fund.
The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of transmission and cancellation of
orders) to fill unconditional orders for Shares received by the Distributor
from dealers, agents and investors during each period when particular net asset
values and public offering prices are in effect as provided in Section 3
hereof; and the price which the Distributor shall pay for the Shares so
purchased shall be the respective net asset value used in determining the
public offering price on which such orders were based. The Distributor shall
notify the Fund at the end of each such period, or as soon thereafter on that
business day as the orders received in such period have been compiled, of the
number of Shares of each class that the Distributor elects to purchase
hereunder.
3. (a) 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 Fund's
Multiple Class Plan adopted by the Board of Trustees in accordance with Section
18 of the 1940 Act and Rule 18f-3 thereunder. 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.
(b) Discounts to Dealers. 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. In connection with
the Distributor's employment hereunder, the Distributor hereby agrees to
distribute the Shares through brokers, dealers and other agents of Dean Witter
Distributors, Inc. on a "proprietary basis" substantially identical to the
distribution of shares of proprietary open-end investment companies distributed
by Dean Witter Distributors, Inc.
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
2
<PAGE> 3
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.
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 and subject to 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
3
<PAGE> 4
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 class of
Shares setting forth the amounts so paid, the purposes for which such
expenditures were made for each such class of Shares, comparing the amounts paid
by such class of Shares with amounts paid by classes of shares issued by
investment companies not governed by the Board of Trustees and distributed by
the Distributor or by direct or indirect Affiliates of the Distributor and such
other information as the Board of Trustees may from time to time request.
(d) The Fund shall compensate the Distributor for providing services
to, and the maintenance of, shareholder accounts in the Fund (including
prepaying service fees to eligible brokers, dealers and financial intermediaries
and expenses incurred in connection therewith) and the Distributor may pay as
agent for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"), as
such Service Plan may be in effect from time to time; provided, however, that no
service fee payments shall be due or paid to the Distributor hereunder with
respect to a class of Shares unless and until this Agreement shall have been
approved for each such class by a majority of the Board of Trustees of the Fund
and by a majority of the Disinterested Trustees by vote cast in person at a
meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The persons
authorized to direct the payment of funds pursuant to this Agreement and the
Service Plan shall provide to the Fund's Board of Trustees, and the Trustees
shall review, at least quarterly, a written report with respect to each class of
Shares setting forth the amounts paid as service fees for each such class of
Shares comparing the amounts paid as service fees by such class of Shares with
amounts paid by classes of shares issued by investment companies not governed by
the Board of Trustees and distributed by the Distributor or by direct or
indirect Affiliates of the Distributor and such other information as the Board
of Trustees may from time to time request.
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,
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<PAGE> 5
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.
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
5
<PAGE> 6
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 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.
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<PAGE> 7
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. Name. In connection with its employment hereunder, the Distributor
hereby agrees and covenants not to change its name without the prior consent of
the Board of Trustees.
12. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY, THE
LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.
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<PAGE> 8
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/ Dennis J. McDonnell
---------------------------
Name: Dennis J. McDonnell
Title: President
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS,
INC.
By: /s Ronald A. Nyberg
---------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
8
<PAGE> 1
EXHIBIT (6)(a)(ii)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of May 31, 1997 (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. (a) 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.
(b) Best Efforts. The Distributor shall 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. Without
the prior approval of the Board of Trustees, the Distributor shall not, directly
or indirectly, distribute, sell or market, through its organization or other
brokers, dealers or agents, shares of any investment companies unless the Board
of Trustees of the Fund determines that such companies do not compete, or
potentially compete, with the Fund.
(c) Positions in the 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.
(d) Essential Personnel. The Distributor and the Fund agree that the
retention of (i) the chief executive officer, president, treasurer and secretary
of the Distributor, and (ii) each director, officer and employee of the
Distributor or any of its affiliates (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) who serves as an officer of the Fund (each
person referred to in (i) or (ii) hereinafter being referred to as an "Essential
Person "), in his or her current capacities, is in the best interest of the Fund
and the Fund's shareholders. In connection with the Distributor's acceptance of
employment hereunder, the Distributor hereby agrees and covenants for itself and
on behalf of its Affiliates that neither the Distributor nor any of its
Affiliates shall replace or seek to replace any Essential Person or cause to be
replaced any Essential Person, in each case without first consulting with the
Board of Trustees of the Fund in a timely manner. In addition, neither the
Distributor nor any Affiliate of the Distributor shall change or seek to change
or cause to be changed, in any material respect, the duties and responsibilities
of any Essential Person, in each case without first consulting with the Board of
Trustees of the Fund in a timely manner.
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
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<PAGE> 2
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 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. (the
parent company of the Distributor), VK/AC Holding, Inc. (the parent company of
The Van Kampen American Capital, Inc.), Morgan Stanley, Dean Witter, Discover &
Co. (the parent company of VK/AC Holding, Inc.) and to the subsidiaries of Van
Kampen American Capital, Inc.; (f) to any trust, pension, profit-sharing or
other benefit plan for any of the aforesaid persons; and (g) to any group of
persons as permitted by Rule 22d-1 under the 1940 Act approved from time to time
by the Board of Trustees and set forth in the then current Prospectus of the
Fund.
The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of transmission and cancellation of
orders) to fill unconditional orders for Shares received by the Distributor
from dealers, agents and investors during each period when particular net asset
values and public offering prices are in effect as provided in Section 3
hereof; and the price which the Distributor shall pay for the Shares so
purchased shall be the respective net asset value used in determining the
public offering price on which such orders were based. The Distributor shall
notify the Fund at the end of each such period, or as soon thereafter on that
business day as the orders received in such period have been compiled, of the
number of Shares of each class that the Distributor elects to purchase
hereunder.
3. (a) 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 Fund's
Multiple Class Plan adopted by the Board of Trustees in accordance with Section
18 of the 1940 Act and Rule 18f-3 thereunder. 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.
(b) Discounts to Dealers. 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. In connection with
the Distributor's employment hereunder, the Distributor hereby agrees to
distribute the Shares through brokers, dealers and other agents of Dean Witter
Distributors, Inc. on a "proprietary basis" substantially identical to the
distribution of shares of proprietary open-end investment companies distributed
by Dean Witter Distributors, Inc.
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
2
<PAGE> 3
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.
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 and subject to 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
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<PAGE> 4
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 class of
Shares setting forth the amounts so paid, the purposes for which such
expenditures were made for each such class of Shares, comparing the amounts paid
by such class of Shares with amounts paid by classes of shares issued by
investment companies not governed by the Board of Trustees and distributed by
the Distributor or by direct or indirect Affiliates of the Distributor and such
other information as the Board of Trustees may from time to time request.
(d) The Fund shall compensate the Distributor for providing services
to, and the maintenance of, shareholder accounts in the Fund (including
prepaying service fees to eligible brokers, dealers and financial intermediaries
and expenses incurred in connection therewith) and the Distributor may pay as
agent for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"), as
such Service Plan may be in effect from time to time; provided, however, that no
service fee payments shall be due or paid to the Distributor hereunder with
respect to a class of Shares unless and until this Agreement shall have been
approved for each such class by a majority of the Board of Trustees of the Fund
and by a majority of the Disinterested Trustees by vote cast in person at a
meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The persons
authorized to direct the payment of funds pursuant to this Agreement and the
Service Plan shall provide to the Fund's Board of Trustees, and the Trustees
shall review, at least quarterly, a written report with respect to each class of
Shares setting forth the amounts paid as service fees for each such class of
Shares comparing the amounts paid as service fees by such class of Shares with
amounts paid by classes of shares issued by investment companies not governed by
the Board of Trustees and distributed by the Distributor or by direct or
indirect Affiliates of the Distributor and such other information as the Board
of Trustees may from time to time request.
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,
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<PAGE> 5
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.
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
5
<PAGE> 6
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 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.
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<PAGE> 7
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. Name. In connection with its employment hereunder, the Distributor
hereby agrees and covenants not to change its name without the prior consent of
the Board of Trustees.
12. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY, THE
LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.
7
<PAGE> 8
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/ Dennis J. McDonnell
-----------------------------
Name: Dennis J. McDonnell
Title: President
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS,
INC.
By: /s Ronald A. Nyberg
-----------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
8
<PAGE> 1
EXHIBIT (6)(a)(iii)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of May 31, 1997 (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. (a) 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.
(b) Best Efforts. The Distributor shall 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. Without
the prior approval of the Board of Trustees, the Distributor shall not, directly
or indirectly, distribute, sell or market, through its organization or other
brokers, dealers or agents, shares of any investment companies unless the Board
of Trustees of the Fund determines that such companies do not compete, or
potentially compete, with the Fund.
(c) Positions in the 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.
(d) Essential Personnel. The Distributor and the Fund agree that the
retention of (i) the chief executive officer, president, treasurer and secretary
of the Distributor, and (ii) each director, officer and employee of the
Distributor or any of its affiliates (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) who serves as an officer of the Fund (each
person referred to in (i) or (ii) hereinafter being referred to as an "Essential
Person "), in his or her current capacities, is in the best interest of the Fund
and the Fund's shareholders. In connection with the Distributor's acceptance of
employment hereunder, the Distributor hereby agrees and covenants for itself and
on behalf of its Affiliates that neither the Distributor nor any of its
Affiliates shall replace or seek to replace any Essential Person or cause to be
replaced any Essential Person, in each case without first consulting with the
Board of Trustees of the Fund in a timely manner. In addition, neither the
Distributor nor any Affiliate of the Distributor shall change or seek to change
or cause to be changed, in any material respect, the duties and responsibilities
of any Essential Person, in each case without first consulting with the Board of
Trustees of the Fund in a timely manner.
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
1
<PAGE> 2
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 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. (the
parent company of the Distributor), VK/AC Holding, Inc. (the parent company of
The Van Kampen American Capital, Inc.), Morgan Stanley, Dean Witter, Discover &
Co. (the parent company of VK/AC Holding, Inc.) and to the subsidiaries of Van
Kampen American Capital, Inc.; (f) to any trust, pension, profit-sharing or
other benefit plan for any of the aforesaid persons; and (g) to any group of
persons as permitted by Rule 22d-1 under the 1940 Act approved from time to time
by the Board of Trustees and set forth in the then current Prospectus of the
Fund.
The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of transmission and cancellation of
orders) to fill unconditional orders for Shares received by the Distributor
from dealers, agents and investors during each period when particular net asset
values and public offering prices are in effect as provided in Section 3
hereof; and the price which the Distributor shall pay for the Shares so
purchased shall be the respective net asset value used in determining the
public offering price on which such orders were based. The Distributor shall
notify the Fund at the end of each such period, or as soon thereafter on that
business day as the orders received in such period have been compiled, of the
number of Shares of each class that the Distributor elects to purchase
hereunder.
3. (a) 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 Fund's
Multiple Class Plan adopted by the Board of Trustees in accordance with Section
18 of the 1940 Act and Rule 18f-3 thereunder. 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.
(b) Discounts to Dealers. 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. In connection with
the Distributor's employment hereunder, the Distributor hereby agrees to
distribute the Shares through brokers, dealers and other agents of Dean Witter
Distributors, Inc. on a "proprietary basis" substantially identical to the
distribution of shares of proprietary open-end investment companies distributed
by Dean Witter Distributors, Inc.
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
2
<PAGE> 3
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.
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 and subject to 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
3
<PAGE> 4
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 class of
Shares setting forth the amounts so paid, the purposes for which such
expenditures were made for each such class of Shares, comparing the amounts paid
by such class of Shares with amounts paid by classes of shares issued by
investment companies not governed by the Board of Trustees and distributed by
the Distributor or by direct or indirect Affiliates of the Distributor and such
other information as the Board of Trustees may from time to time request.
(d) The Fund shall compensate the Distributor for providing services
to, and the maintenance of, shareholder accounts in the Fund (including
prepaying service fees to eligible brokers, dealers and financial intermediaries
and expenses incurred in connection therewith) and the Distributor may pay as
agent for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"), as
such Service Plan may be in effect from time to time; provided, however, that no
service fee payments shall be due or paid to the Distributor hereunder with
respect to a class of Shares unless and until this Agreement shall have been
approved for each such class by a majority of the Board of Trustees of the Fund
and by a majority of the Disinterested Trustees by vote cast in person at a
meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The persons
authorized to direct the payment of funds pursuant to this Agreement and the
Service Plan shall provide to the Fund's Board of Trustees, and the Trustees
shall review, at least quarterly, a written report with respect to each class of
Shares setting forth the amounts paid as service fees for each such class of
Shares comparing the amounts paid as service fees by such class of Shares with
amounts paid by classes of shares issued by investment companies not governed by
the Board of Trustees and distributed by the Distributor or by direct or
indirect Affiliates of the Distributor and such other information as the Board
of Trustees may from time to time request.
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,
4
<PAGE> 5
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.
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
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<PAGE> 6
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 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.
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<PAGE> 7
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. Name. In connection with its employment hereunder, the Distributor
hereby agrees and covenants not to change its name without the prior consent of
the Board of Trustees.
12. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY, THE
LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.
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<PAGE> 8
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/ Dennis J. McDonnell
-----------------------------
Name: Dennis J. McDonnell
Title: President
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS,
INC.
By: /s Ronald A. Nyberg
-----------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
8
<PAGE> 1
EXHIBIT (6)(a)(iv)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of May 31, 1997 (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. (a) 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.
(b) Best Efforts. The Distributor shall 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. Without
the prior approval of the Board of Trustees, the Distributor shall not, directly
or indirectly, distribute, sell or market, through its organization or other
brokers, dealers or agents, shares of any investment companies unless the Board
of Trustees of the Fund determines that such companies do not compete, or
potentially compete, with the Fund.
(c) Positions in the 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.
(d) Essential Personnel. The Distributor and the Fund agree that the
retention of (i) the chief executive officer, president, treasurer and secretary
of the Distributor, and (ii) each director, officer and employee of the
Distributor or any of its affiliates (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) who serves as an officer of the Fund (each
person referred to in (i) or (ii) hereinafter being referred to as an "Essential
Person "), in his or her current capacities, is in the best interest of the Fund
and the Fund's shareholders. In connection with the Distributor's acceptance of
employment hereunder, the Distributor hereby agrees and covenants for itself and
on behalf of its Affiliates that neither the Distributor nor any of its
Affiliates shall replace or seek to replace any Essential Person or cause to be
replaced any Essential Person, in each case without first consulting with the
Board of Trustees of the Fund in a timely manner. In addition, neither the
Distributor nor any Affiliate of the Distributor shall change or seek to change
or cause to be changed, in any material respect, the duties and responsibilities
of any Essential Person, in each case without first consulting with the Board of
Trustees of the Fund in a timely manner.
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
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<PAGE> 2
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 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. (the parent company of the Distributor), VK/AC Holding, Inc. (the parent
company of The Van Kampen American Capital, Inc.), Morgan Stanley, Dean Witter,
Discover & Co. (the parent company of VK/AC Holding, Inc.) and to the
subsidiaries of Van Kampen American Capital, Inc.; (f) to any trust, pension,
profit-sharing or other benefit plan for any of the aforesaid persons; and (g)
to any group of persons as permitted by Rule 22d-1 under the 1940 Act approved
from time to time by the Board of Trustees and set forth in the then current
Prospectus of the Fund.
The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of transmission and cancellation of
orders) to fill unconditional orders for Shares received by the Distributor
from dealers, agents and investors during each period when particular net asset
values and public offering prices are in effect as provided in Section 3
hereof; and the price which the Distributor shall pay for the Shares so
purchased shall be the respective net asset value used in determining the
public offering price on which such orders were based. The Distributor shall
notify the Fund at the end of each such period, or as soon thereafter on that
business day as the orders received in such period have been compiled, of the
number of Shares of each class that the Distributor elects to purchase
hereunder.
3. (a) 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 Fund's
Multiple Class Plan adopted by the Board of Trustees in accordance with Section
18 of the 1940 Act and Rule 18f-3 thereunder. 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.
(b) Discounts to Dealers. 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. In connection with
the Distributor's employment hereunder, the Distributor hereby agrees to
distribute the Shares through brokers, dealers and other agents of Dean Witter
Distributors, Inc. on a "proprietary basis" substantially identical to the
distribution of shares of proprietary open-end investment companies distributed
by Dean Witter Distributors, Inc.
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
2
<PAGE> 3
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.
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 and subject to 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
3
<PAGE> 4
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 class of Shares setting forth the amounts so paid, the purposes for which
such expenditures were made for each such class of Shares, comparing the amounts
paid by such class of Shares with amounts paid by classes of shares issued by
investment companies not governed by the Board of Trustees and distributed by
the Distributor or by direct or indirect Affiliates of the Distributor and such
other information as the Board of Trustees may from time to time request.
(d) The Fund shall compensate the Distributor for providing services
to, and the maintenance of, shareholder accounts in the Fund (including
prepaying service fees to eligible brokers, dealers and financial intermediaries
and expenses incurred in connection therewith) and the Distributor may pay as
agent for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"), as
such Service Plan may be in effect from time to time; provided, however, that no
service fee payments shall be due or paid to the Distributor hereunder with
respect to a class of Shares unless and until this Agreement shall have been
approved for each such class by a majority of the Board of Trustees of the Fund
and by a majority of the Disinterested Trustees by vote cast in person at a
meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The persons
authorized to direct the payment of funds pursuant to this Agreement and the
Service Plan shall provide to the Fund's Board of Trustees, and the Trustees
shall review, at least quarterly, a written report with respect to each class of
Shares setting forth the amounts paid as service fees for each such class of
Shares comparing the amounts paid as service fees by such class of Shares with
amounts paid by classes of shares issued by investment companies not governed by
the Board of Trustees and distributed by the Distributor or by direct or
indirect Affiliates of the Distributor and such other information as the Board
of Trustees may from time to time request.
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.
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<PAGE> 5
(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.
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
5
<PAGE> 6
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 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
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<PAGE> 7
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. Name. In connection with its employment hereunder, the Distributor
hereby agrees and covenants not to change its name without the prior consent of
the Board of Trustees.
12. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY, THE
LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.
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<PAGE> 8
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/ Dennis J. McDonnell
-----------------------------
Name: Dennis J. McDonnell
Title: President
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS,
INC.
By: /s Ronald A. Nyberg
-----------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
8
<PAGE> 1
EXHIBIT (6)(a)(v)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of May 31, 1997 (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 INTERMEDIATE TERM MUNICIPAL INCOME FUND (the "Fund"), and VAN
KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC., a Delaware corporation (the
"Distributor").
1. (a) 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.
(b) Best Efforts. The Distributor shall 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. Without
the prior approval of the Board of Trustees, the Distributor shall not, directly
or indirectly, distribute, sell or market, through its organization or other
brokers, dealers or agents, shares of any investment companies unless the Board
of Trustees of the Fund determines that such companies do not compete, or
potentially compete, with the Fund.
(c) Positions in the 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.
(d) Essential Personnel. The Distributor and the Fund agree that the
retention of (i) the chief executive officer, president, treasurer and secretary
of the Distributor, and (ii) each director, officer and employee of the
Distributor or any of its affiliates (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) who serves as an officer of the Fund (each
person referred to in (i) or (ii) hereinafter being referred to as an "Essential
Person "), in his or her current capacities, is in the best interest of the Fund
and the Fund's shareholders. In connection with the Distributor's acceptance of
employment hereunder, the Distributor hereby agrees and covenants for itself and
on behalf of its Affiliates that neither the Distributor nor any of its
Affiliates shall replace or seek to replace any Essential Person or cause to be
replaced any Essential Person, in each case without first consulting with the
Board of Trustees of the Fund in a timely manner. In addition, neither the
Distributor nor any Affiliate of the Distributor shall change or seek to change
or cause to be changed, in any material respect, the duties and responsibilities
of any Essential Person, in each case without first consulting with the Board of
Trustees of the Fund in a timely manner.
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
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<PAGE> 2
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 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. (the parent company of the Distributor), VK/AC Holding, Inc. (the parent
company of The Van Kampen American Capital, Inc.), Morgan Stanley, Dean Witter,
Discover & Co. (the parent company of VK/AC Holding, Inc.) and to the
subsidiaries of Van Kampen American Capital, Inc.; (f) to any trust, pension,
profit-sharing or other benefit plan for any of the aforesaid persons; and (g)
to any group of persons as permitted by Rule 22d-1 under the 1940 Act approved
from time to time by the Board of Trustees and set forth in the then current
Prospectus of the Fund.
The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of transmission and cancellation of
orders) to fill unconditional orders for Shares received by the Distributor
from dealers, agents and investors during each period when particular net asset
values and public offering prices are in effect as provided in Section 3
hereof; and the price which the Distributor shall pay for the Shares so
purchased shall be the respective net asset value used in determining the
public offering price on which such orders were based. The Distributor shall
notify the Fund at the end of each such period, or as soon thereafter on that
business day as the orders received in such period have been compiled, of the
number of Shares of each class that the Distributor elects to purchase
hereunder.
3. (a) 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 Fund's
Multiple Class Plan adopted by the Board of Trustees in accordance with Section
18 of the 1940 Act and Rule 18f-3 thereunder. 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.
(b) Discounts to Dealers. 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. In connection with
the Distributor's employment hereunder, the Distributor hereby agrees to
distribute the Shares through brokers, dealers and other agents of Dean Witter
Distributors, Inc. on a "proprietary basis" substantially identical to the
distribution of shares of proprietary open-end investment companies distributed
by Dean Witter Distributors, Inc.
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
2
<PAGE> 3
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.
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 and subject to 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
3
<PAGE> 4
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 class of Shares setting forth the amounts so paid, the purposes for which
such expenditures were made for each such class of Shares, comparing the amounts
paid by such class of Shares with amounts paid by classes of shares issued by
investment companies not governed by the Board of Trustees and distributed by
the Distributor or by direct or indirect Affiliates of the Distributor and such
other information as the Board of Trustees may from time to time request.
(d) The Fund shall compensate the Distributor for providing services
to, and the maintenance of, shareholder accounts in the Fund (including
prepaying service fees to eligible brokers, dealers and financial intermediaries
and expenses incurred in connection therewith) and the Distributor may pay as
agent for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"), as
such Service Plan may be in effect from time to time; provided, however, that no
service fee payments shall be due or paid to the Distributor hereunder with
respect to a class of Shares unless and until this Agreement shall have been
approved for each such class by a majority of the Board of Trustees of the Fund
and by a majority of the Disinterested Trustees by vote cast in person at a
meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The persons
authorized to direct the payment of funds pursuant to this Agreement and the
Service Plan shall provide to the Fund's Board of Trustees, and the Trustees
shall review, at least quarterly, a written report with respect to each class of
Shares setting forth the amounts paid as service fees for each such class of
Shares comparing the amounts paid as service fees by such class of Shares with
amounts paid by classes of shares issued by investment companies not governed by
the Board of Trustees and distributed by the Distributor or by direct or
indirect Affiliates of the Distributor and such other information as the Board
of Trustees may from time to time request.
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.
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<PAGE> 5
(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.
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
5
<PAGE> 6
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 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
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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. Name. In connection with its employment hereunder, the Distributor
hereby agrees and covenants not to change its name without the prior consent of
the Board of Trustees.
12. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY, THE
LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.
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<PAGE> 8
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 INTERMEDIATE TERM
MUNICIPAL INCOME FUND
By: /s/ Dennis J. McDonnell
-----------------------------
Name: Dennis J. McDonnell
Title: President
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS,
INC.
By: /s Ronald A. Nyberg
-----------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
8
<PAGE> 1
EXHIBIT (6)(a)(vi)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of May 31, 1997 (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. (a) 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.
(b) Best Efforts. The Distributor shall 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. Without
the prior approval of the Board of Trustees, the Distributor shall not, directly
or indirectly, distribute, sell or market, through its organization or other
brokers, dealers or agents, shares of any investment companies unless the Board
of Trustees of the Fund determines that such companies do not compete, or
potentially compete, with the Fund.
(c) Positions in the 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.
(d) Essential Personnel. The Distributor and the Fund agree that the
retention of (i) the chief executive officer, president, treasurer and secretary
of the Distributor, and (ii) each director, officer and employee of the
Distributor or any of its affiliates (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) who serves as an officer of the Fund (each
person referred to in (i) or (ii) hereinafter being referred to as an "Essential
Person "), in his or her current capacities, is in the best interest of the Fund
and the Fund's shareholders. In connection with the Distributor's acceptance of
employment hereunder, the Distributor hereby agrees and covenants for itself and
on behalf of its Affiliates that neither the Distributor nor any of its
Affiliates shall replace or seek to replace any Essential Person or cause to be
replaced any Essential Person, in each case without first consulting with the
Board of Trustees of the Fund in a timely manner. In addition, neither the
Distributor nor any Affiliate of the Distributor shall change or seek to change
or cause to be changed, in any material respect, the duties and responsibilities
of any Essential Person, in each case without first consulting with the Board of
Trustees of the Fund in a timely manner.
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
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<PAGE> 2
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 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. (the
parent company of the Distributor), VK/AC Holding, Inc. (the parent company of
The Van Kampen American Capital, Inc.), Morgan Stanley, Dean Witter, Discover &
Co. (the parent company of VK/AC Holding, Inc.) and to the subsidiaries of Van
Kampen American Capital, Inc.; (f) to any trust, pension, profit-sharing or
other benefit plan for any of the aforesaid persons; and (g) to any group of
persons as permitted by Rule 22d-1 under the 1940 Act approved from time to time
by the Board of Trustees and set forth in the then current Prospectus of the
Fund.
The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of transmission and cancellation of
orders) to fill unconditional orders for Shares received by the Distributor
from dealers, agents and investors during each period when particular net asset
values and public offering prices are in effect as provided in Section 3
hereof; and the price which the Distributor shall pay for the Shares so
purchased shall be the respective net asset value used in determining the
public offering price on which such orders were based. The Distributor shall
notify the Fund at the end of each such period, or as soon thereafter on that
business day as the orders received in such period have been compiled, of the
number of Shares of each class that the Distributor elects to purchase
hereunder.
3. (a) 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 Fund's
Multiple Class Plan adopted by the Board of Trustees in accordance with Section
18 of the 1940 Act and Rule 18f-3 thereunder. 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.
(b) Discounts to Dealers. 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. In connection with
the Distributor's employment hereunder, the Distributor hereby agrees to
distribute the Shares through brokers, dealers and other agents of Dean Witter
Distributors, Inc. on a "proprietary basis" substantially identical to the
distribution of shares of proprietary open-end investment companies distributed
by Dean Witter Distributors, Inc.
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
2
<PAGE> 3
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.
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 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 and subject to 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
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<PAGE> 4
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 class of
Shares setting forth the amounts so paid, the purposes for which such
expenditures were made for each such class of Shares, comparing the amounts paid
by such class of Shares with amounts paid by classes of shares issued by
investment companies not governed by the Board of Trustees and distributed by
the Distributor or by direct or indirect Affiliates of the Distributor and such
other information as the Board of Trustees may from time to time request.
(d) The Fund shall compensate the Distributor for providing services
to, and the maintenance of, shareholder accounts in the Fund (including
prepaying service fees to eligible brokers, dealers and financial intermediaries
and expenses incurred in connection therewith) and the Distributor may pay as
agent for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"), as
such Service Plan may be in effect from time to time; provided, however, that no
service fee payments shall be due or paid to the Distributor hereunder with
respect to a class of Shares unless and until this Agreement shall have been
approved for each such class by a majority of the Board of Trustees of the Fund
and by a majority of the Disinterested Trustees by vote cast in person at a
meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The persons
authorized to direct the payment of funds pursuant to this Agreement and the
Service Plan shall provide to the Fund's Board of Trustees, and the Trustees
shall review, at least quarterly, a written report with respect to each class of
Shares setting forth the amounts paid as service fees for each such class of
Shares comparing the amounts paid as service fees by such class of Shares with
amounts paid by classes of shares issued by investment companies not governed by
the Board of Trustees and distributed by the Distributor or by direct or
indirect Affiliates of the Distributor and such other information as the Board
of Trustees may from time to time request.
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,
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<PAGE> 5
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.
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
5
<PAGE> 6
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 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.
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<PAGE> 7
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. Name. In connection with its employment hereunder, the Distributor
hereby agrees and covenants not to change its name without the prior consent of
the Board of Trustees.
12. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY, THE
LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.
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<PAGE> 8
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/ Dennis J. McDonnell
-----------------------------
Name: Dennis J. McDonnell
Title: President
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS,
INC.
By: /s Ronald A. Nyberg
-----------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
8
<PAGE> 1
EXHIBIT (6)(a)(vii)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of May 31, 1997 (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. (a) 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.
(b) Best Efforts. The Distributor shall 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. Without
the prior approval of the Board of Trustees, the Distributor shall not, directly
or indirectly, distribute, sell or market, through its organization or other
brokers, dealers or agents, shares of any investment companies unless the Board
of Trustees of the Fund determines that such companies do not compete, or
potentially compete, with the Fund.
(c) Positions in the 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.
(d) Essential Personnel. The Distributor and the Fund agree that the
retention of (i) the chief executive officer, president, treasurer and secretary
of the Distributor, and (ii) each director, officer and employee of the
Distributor or any of its affiliates (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) who serves as an officer of the Fund (each
person referred to in (i) or (ii) hereinafter being referred to as an "Essential
Person "), in his or her current capacities, is in the best interest of the Fund
and the Fund's shareholders. In connection with the Distributor's acceptance of
employment hereunder, the Distributor hereby agrees and covenants for itself and
on behalf of its Affiliates that neither the Distributor nor any of its
Affiliates shall replace or seek to replace any Essential Person or cause to be
replaced any Essential Person, in each case without first consulting with the
Board of Trustees of the Fund in a timely manner. In addition, neither the
Distributor nor any Affiliate of the Distributor shall change or seek to change
or cause to be changed, in any material respect, the duties and responsibilities
of any Essential Person, in each case without first consulting with the Board of
Trustees of the Fund in a timely manner.
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
1
<PAGE> 2
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 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. (the parent company of the Distributor), VK/AC Holding, Inc. (the parent
company of The Van Kampen American Capital, Inc.), Morgan Stanley, Dean Witter,
Discover & Co. (the parent company of VK/AC Holding, Inc.) and to the
subsidiaries of Van Kampen American Capital, Inc.; (f) to any trust, pension,
profit-sharing or other benefit plan for any of the aforesaid persons; and (g)
to any group of persons as permitted by Rule 22d-1 under the 1940 Act approved
from time to time by the Board of Trustees and set forth in the then current
Prospectus of the Fund.
The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of transmission and cancellation of
orders) to fill unconditional orders for Shares received by the Distributor
from dealers, agents and investors during each period when particular net asset
values and public offering prices are in effect as provided in Section 3
hereof; and the price which the Distributor shall pay for the Shares so
purchased shall be the respective net asset value used in determining the
public offering price on which such orders were based. The Distributor shall
notify the Fund at the end of each such period, or as soon thereafter on that
business day as the orders received in such period have been compiled, of the
number of Shares of each class that the Distributor elects to purchase
hereunder.
3. (a) 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 Fund's
Multiple Class Plan adopted by the Board of Trustees in accordance with Section
18 of the 1940 Act and Rule 18f-3 thereunder. 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.
(b) Discounts to Dealers. 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. In connection with
the Distributor's employment hereunder, the Distributor hereby agrees to
distribute the Shares through brokers, dealers and other agents of Dean Witter
Distributors, Inc. on a "proprietary basis" substantially identical to the
distribution of shares of proprietary open-end investment companies distributed
by Dean Witter Distributors, Inc.
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
2
<PAGE> 3
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.
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 and subject to 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
3
<PAGE> 4
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 class of Shares setting forth the amounts so paid, the purposes for which
such expenditures were made for each such class of Shares, comparing the amounts
paid by such class of Shares with amounts paid by classes of shares issued by
investment companies not governed by the Board of Trustees and distributed by
the Distributor or by direct or indirect Affiliates of the Distributor and such
other information as the Board of Trustees may from time to time request.
(d) The Fund shall compensate the Distributor for providing services
to, and the maintenance of, shareholder accounts in the Fund (including
prepaying service fees to eligible brokers, dealers and financial intermediaries
and expenses incurred in connection therewith) and the Distributor may pay as
agent for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"), as
such Service Plan may be in effect from time to time; provided, however, that no
service fee payments shall be due or paid to the Distributor hereunder with
respect to a class of Shares unless and until this Agreement shall have been
approved for each such class by a majority of the Board of Trustees of the Fund
and by a majority of the Disinterested Trustees by vote cast in person at a
meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The persons
authorized to direct the payment of funds pursuant to this Agreement and the
Service Plan shall provide to the Fund's Board of Trustees, and the Trustees
shall review, at least quarterly, a written report with respect to each class of
Shares setting forth the amounts paid as service fees for each such class of
Shares comparing the amounts paid as service fees by such class of Shares with
amounts paid by classes of shares issued by investment companies not governed by
the Board of Trustees and distributed by the Distributor or by direct or
indirect Affiliates of the Distributor and such other information as the Board
of Trustees may from time to time request.
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.
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<PAGE> 5
(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.
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
5
<PAGE> 6
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 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
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<PAGE> 7
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. Name. In connection with its employment hereunder, the Distributor
hereby agrees and covenants not to change its name without the prior consent of
the Board of Trustees.
12. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY, THE
LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.
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<PAGE> 8
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/ Dennis J. McDonnell
-----------------------------
Name: Dennis J. McDonnell
Title: President
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS,
INC.
By: /s Ronald A. Nyberg
-----------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
8
<PAGE> 1
EXHIBIT (9)(b)
AMENDED AND RESTATED
LEGAL SERVICES AGREEMENT
THIS AGREEMENT, dated as of May 31, 1997, 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., 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 Expenses will be paid by Van Kampen and reimbursed by the Funds.
Van Kampen will
<PAGE> 2
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. 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 officer 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 admitting any claim against it
which may be subject to this indemnification, Van Kampen shall give the Fund
reasonable opportunity to defend against said claim on its own name or in the
name of Van Kampen.
<PAGE> 3
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 admitting 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, 1997, 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 and the address of Van Kampen. for this
purpose is One Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attention:
General Counsel.
<PAGE> 4
14. Personal Liability. As provided for in the Declaration of Trust of the
various Funds, under which the Funds are organized as unincorporated trusts
under the laws of the State of Delaware, Massachusetts or Pennsylvania, as the
case may be, the shareholders, trustees, officers, employees and other agents of
the Fund shall not personally be bound 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.
<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/ Ronald A. Nyberg
--------------------------
Ronald A. Nyberg
Vice President & Secretary
VAN KAMPEN AMERICAN CAPITAL, INC.
By: /s/ Dennis J. McDonnell
--------------------------
Dennis J. McDonnell
Executive Vice President
<PAGE> 6
SCHEDULE 1
1. VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST, on behalf of its
series, Van Kampen American Capital U.S. Government Fund
2. VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, on behalf of its series,
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 New York Tax Free Income Fund,
Van Kampen American Capital New Jersey Tax Free Income Fund, Van Kampen
American Capital Florida Insured Tax Free Income Fund, 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
3. VAN KAMPEN AMERICAN CAPITAL TRUST, on behalf of its series, Van Kampen
American Capital High Yield Fund, Van Kampen American Capital
Short-Term Global Income Fund and Van Kampen American Capital Strategic
Income Fund
4. VAN KAMPEN AMERICAN CAPITAL EQUITY TRUST, on behalf of its series, Van
Kampen American Capital Utility Fund, Van Kampen American Capital Value
Fund, Van Kampen American Capital Growth Fund, Van Kampen American
Capital Great American Companies Fund, Van Kampen American Capital
Prospector Fund and Van Kampen American Capital Aggressive Growth Fund
5. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUND
6. VAN KAMPEN AMERICAN CAPITAL TAX FREE MONEY FUND
7. VAN KAMPEN AMERICAN CAPITAL FOREIGN SECURITIES FUND
8. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME TRUST
9. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA MUNICIPAL TRUST
10. VAN KAMPEN AMERICAN CAPITAL HIGH INCOME TRUST
11. VAN KAMPEN AMERICAN CAPITAL HIGH INCOME TRUST II
12. VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
13. VAN KAMPEN AMERICAN CAPITAL INVESTMENT GRADE MUNICIPAL TRUST
14. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL TRUST
15. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA QUALITY MUNICIPAL TRUST
16. VAN KAMPEN AMERICAN CAPITAL FLORIDA QUALITY MUNICIPAL TRUST
17. VAN KAMPEN AMERICAN CAPITAL NEW YORK QUALITY MUNICIPAL TRUST
18. VAN KAMPEN AMERICAN CAPITAL OHIO QUALITY MUNICIPAL TRUST
19. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA QUALITY MUNICIPAL TRUST
20. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INSURED MUNICIPALS
<PAGE> 7
21. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE MUNICIPALS
22. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE CALIFORNIA
MUNICIPALS
23. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE FLORIDA
MUNICIPALS
24. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE NEW JERSEY
MUNICIPALS
25. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE NEW YORK
MUNICIPALS
26. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE PENNSYLVANIA
MUNICIPALS
27. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST
28. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE MUNICIPAL INCOME TRUST
29. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE PENNSYLVANIA MUNICIPAL INCOME
TRUST
30. VAN KAMPEN AMERICAN CAPITAL STRATEGIC SECTOR MUNICIPAL TRUST
31. VAN KAMPEN AMERICAN CAPITAL VALUE MUNICIPAL INCOME TRUST
32. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA VALUE MUNICIPAL INCOME TRUST
33. VAN KAMPEN AMERICAN CAPITAL MASSACHUSETTS VALUE MUNICIPAL INCOME TRUST
34. VAN KAMPEN AMERICAN CAPITAL NEW JERSEY VALUE MUNICIPAL INCOME TRUST
35. VAN KAMPEN AMERICAN CAPITAL NEW YORK VALUE MUNICIPAL INCOME TRUST
36. VAN KAMPEN AMERICAN CAPITAL OHIO VALUE MUNICIPAL INCOME TRUST
37. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA VALUE MUNICIPAL INCOME TRUST
38. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST II
39. VAN KAMPEN AMERICAN CAPITAL FLORIDA MUNICIPAL OPPORTUNITY TRUST
40. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE MUNICIPAL INCOME TRUST II
41. VAN KAMPEN AMERICAN CAPITAL SELECT SECTOR MUNICIPAL TRUST
42. THE EXPLORER INSTITUTIONAL TRUST, on behalf of its sub-trusts, Explorer
Institutional Active Core Fund and Explorer Institutional Limited
Duration Fund
<PAGE> 8
AMENDMENT ONE
TO THE
AMENDED AND RESTATED LEGAL SERVICES AGREEMENT
DATED MAY 31, 1997
THIS AMENDMENT ONE to the Amended and Restated Legal Services Agreement
dated May 31, 1997 by and between the parties as set forth in Schedule 1,
attached hereto and incorporated by reference and VAN KAMPEN AMERICAN CAPITAL,
INC.
W I T N E S S E T H
WHEREAS, Morgan Stanley Fund, Inc. being an open-end management
investment company as that term is defined in the Investment Company Act of
1940, as amended, wishes to become a party to the Agreement; and
WHEREAS, the original parties desire to add the aforementioned
additional entity as a party to the Agreement;
NOW, THEREFORE, in consideration of the promises and mutual covenants
spelled out in the Agreement and herein, it is hereby agreed that Schedule 1 of
the Agreement be amended to add Morgan Stanley Fund, Inc.
<PAGE> 9
IN WITNESS WHEREOF, the parties have caused this Amendment One to be
executed this 31st day of May, 1997.
ALL OF THE PARTIES SET FORTH IN SCHEDULE 1
ATTACHED HERETO
By: /s/ Ronald A. Nyberg
------------------------------
Ronald A. Nyberg
Executive Vice President
VAN KAMPEN AMERICAN CAPITAL, INC.
By: Dennis J. McDonnell
------------------------------
Dennis J. McDonnell
Executive Vice President
MORGAN STANLEY FUND, INC.
By: /s/ Ronald A. Nyberg
------------------------------
Ronald A. Nyberg
Vice President, Secretary
<PAGE> 10
SCHEDULE 1
1. VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST, on behalf of its
series, Van Kampen American Capital U.S. Government Fund
2. VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, on behalf of its series,
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 New York Tax Free Income Fund,
Van Kampen American Capital New Jersey Tax Free Income Fund, Van Kampen
American Capital Florida Insured Tax Free Income Fund, 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
3. VAN KAMPEN AMERICAN CAPITAL TRUST, on behalf of its series, Van Kampen
American Capital High Yield Fund, Van Kampen American Capital
Short-Term Global Income Fund and Van Kampen American Capital Strategic
Income Fund
4. VAN KAMPEN AMERICAN CAPITAL EQUITY TRUST, on behalf of its series, Van
Kampen American Capital Utility Fund, Van Kampen American Capital Value
Fund, Van Kampen American Capital Growth Fund, Van Kampen American
Capital Great American Companies Fund, Van Kampen American Capital
Prospector Fund and Van Kampen American Capital Aggressive Growth Fund
5. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUND
6. VAN KAMPEN AMERICAN CAPITAL TAX FREE MONEY FUND
7. VAN KAMPEN AMERICAN CAPITAL FOREIGN SECURITIES FUND
8. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME TRUST
9. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA MUNICIPAL TRUST
10. VAN KAMPEN AMERICAN CAPITAL HIGH INCOME TRUST
11. VAN KAMPEN AMERICAN CAPITAL HIGH INCOME TRUST II
12. VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
13. VAN KAMPEN AMERICAN CAPITAL INVESTMENT GRADE MUNICIPAL TRUST
14. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL TRUST
15. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA QUALITY MUNICIPAL TRUST
16. VAN KAMPEN AMERICAN CAPITAL FLORIDA QUALITY MUNICIPAL TRUST
17. VAN KAMPEN AMERICAN CAPITAL NEW YORK QUALITY MUNICIPAL TRUST
18. VAN KAMPEN AMERICAN CAPITAL OHIO QUALITY MUNICIPAL TRUST
<PAGE> 11
19. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA QUALITY MUNICIPAL TRUST
20. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INSURED MUNICIPALS
21. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE MUNICIPALS
22. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE CALIFORNIA
MUNICIPALS
23. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE FLORIDA
MUNICIPALS
24. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE NEW JERSEY
MUNICIPALS
25. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE NEW YORK
MUNICIPALS
26. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE PENNSYLVANIA
MUNICIPALS
27. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST
28. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE MUNICIPAL INCOME TRUST
29. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE PENNSYLVANIA MUNICIPAL INCOME
TRUST
30. VAN KAMPEN AMERICAN CAPITAL STRATEGIC SECTOR MUNICIPAL TRUST
31. VAN KAMPEN AMERICAN CAPITAL VALUE MUNICIPAL INCOME TRUST
32. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA VALUE MUNICIPAL INCOME TRUST
33. VAN KAMPEN AMERICAN CAPITAL MASSACHUSETTS VALUE MUNICIPAL INCOME TRUST
34. VAN KAMPEN AMERICAN CAPITAL NEW JERSEY VALUE MUNICIPAL INCOME TRUST
35. VAN KAMPEN AMERICAN CAPITAL NEW YORK VALUE MUNICIPAL INCOME TRUST
36. VAN KAMPEN AMERICAN CAPITAL OHIO VALUE MUNICIPAL INCOME TRUST
37. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA VALUE MUNICIPAL INCOME TRUST
38. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST II
39. VAN KAMPEN AMERICAN CAPITAL FLORIDA MUNICIPAL OPPORTUNITY TRUST
40. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE MUNICIPAL INCOME TRUST II
41. VAN KAMPEN AMERICAN CAPITAL SELECT SECTOR MUNICIPAL TRUST
43. THE EXPLORER INSTITUTIONAL TRUST, on behalf of its sub-trusts, Explorer
Institutional Active Core Fund and Explorer Institutional Limited
Duration Fund
43. MORGAN STANLEY EMERGING MARKETS DEBT FUND
44. MORGAN STANLEY GLOBAL FIXED INCOME FUND
45. MORGAN STANLEY HIGH YIELD FUND
<PAGE> 12
46. MORGAN STANLEY WORLDWIDE HIGH INCOME FUND
47. MORGAN STANLEY AMERICAN VALUE FUND
48. MORGAN STANLEY AGGRESSIVE EQUITY FUND
49. MORGAN STANLEY U.S. REAL ESTATE FUND
50. MORGAN STANLEY EQUITY GROWTH FUND
51. MORGAN STANLEY MIDCAP GROWTH FUND
52. MORGAN STANLEY VALUE FUND
53. MORGAN STANLEY GLOBAL EQUITY ALLOCATION FUND
54. MORGAN STANLEY GLOBAL EQUITY FUND
55. MORGAN STANLEY ASIAN GROWTH FUND
56. MORGAN STANLEY EMERGING MARKETS FUND
57. MORGAN STANLEY LATIN AMERICAN FUND
58. MORGAN STANLEY INTERNATIONAL MAGNUM FUND
59. MORGAN STANLEY JAPANESE EQUITY FUND
60. MORGAN STANLEY MONEY MARKET FUND
61. MORGAN STANLEY TAX FREE MONEY MARKET FUND
62. MORGAN STANLEY GOVERNMENT OBLIGATIONS MONEY MARKET FUND
<PAGE> 13
AMENDMENT TWO
TO THE
AMENDED AND RESTATED LEGAL SERVICES AGREEMENT
DATED MAY 31, 1997
THIS AMENDMENT TWO to the Amended and Restated Legal Services Agreement
dated May 31, 1997 by and between the parties as set forth in Schedule 1,
attached hereto and incorporated by reference and VAN KAMPEN AMERICAN CAPITAL,
INC.
W I T N E S S E T H
WHEREAS, Van Kampen American Capital Senior Floating Rate Fund, being a
closed-end registered investment company as that term is defined in the
Investment Company Act of 1940, as amended, wishes to become a party to the
Agreement; and
WHEREAS, the original parties desire to add the aforementioned
additional entity as a party to the Agreement;
NOW, THEREFORE, in consideration of the promises and mutual covenants
spelled out in the Agreement and herein, it is hereby agreed that Schedule 1 of
the Agreement be amended to add Van Kampen American Capital Senior Floating Rate
Fund
<PAGE> 14
IN WITNESS WHEREOF, the parties have caused this Amendment Two to be
executed this 19th day of December, 1997.
ALL OF THE PARTIES SET FORTH IN SCHEDULE 1
ATTACHED HERETO
By: /s/ Ronald A. Nyberg
------------------------------
Ronald A. Nyberg
Executive Vice President
VAN KAMPEN AMERICAN CAPITAL, INC.
By: /s/ Dennis J. McDonnell
------------------------------
Dennis J. McDonnell
Executive Vice President
<PAGE> 15
SCHEDULE 1
1. VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST, on behalf of its
series, Van Kampen American Capital U.S. Government Fund
2. VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, on behalf of its series,
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 New York Tax Free Income Fund,
Van Kampen American Capital Florida Insured Tax Free Income Fund, 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
3. VAN KAMPEN AMERICAN CAPITAL TRUST, on behalf of its series, Van Kampen
American Capital High Yield Fund, Van Kampen American Capital
Short-Term Global Income Fund and Van Kampen American Capital Strategic
Income Fund
4. VAN KAMPEN AMERICAN CAPITAL EQUITY TRUST, on behalf of its series, Van
Kampen American Capital Utility Fund, Van Kampen American Capital Value
Fund, Van Kampen American Capital Growth Fund, Van Kampen American
Capital Great American Companies Fund, Van Kampen American Capital
Prospector Fund and Van Kampen American Capital Aggressive Growth Fund
5. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUND
6. VAN KAMPEN AMERICAN CAPITAL TAX FREE MONEY FUND
7. VAN KAMPEN AMERICAN CAPITAL FOREIGN SECURITIES FUND
8. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME TRUST
9. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA MUNICIPAL TRUST
10. VAN KAMPEN AMERICAN CAPITAL HIGH INCOME TRUST
11. VAN KAMPEN AMERICAN CAPITAL HIGH INCOME TRUST II
12. VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
13. VAN KAMPEN AMERICAN CAPITAL INVESTMENT GRADE MUNICIPAL TRUST
14. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL TRUST
15. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA QUALITY MUNICIPAL TRUST
16. VAN KAMPEN AMERICAN CAPITAL FLORIDA QUALITY MUNICIPAL TRUST
17. VAN KAMPEN AMERICAN CAPITAL NEW YORK QUALITY MUNICIPAL TRUST
18. VAN KAMPEN AMERICAN CAPITAL OHIO QUALITY MUNICIPAL TRUST
19. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA QUALITY MUNICIPAL TRUST
<PAGE> 16
20. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INSURED MUNICIPALS
21. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE MUNICIPALS
22. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE CALIFORNIA
MUNICIPALS
23. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE FLORIDA
MUNICIPALS
24. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE NEW JERSEY
MUNICIPALS
25. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE NEW YORK
MUNICIPALS
26. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE PENNSYLVANIA
MUNICIPALS
27. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST
28. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE MUNICIPAL INCOME TRUST
29. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE PENNSYLVANIA MUNICIPAL INCOME
TRUST
30. VAN KAMPEN AMERICAN CAPITAL STRATEGIC SECTOR MUNICIPAL TRUST
31. VAN KAMPEN AMERICAN CAPITAL VALUE MUNICIPAL INCOME TRUST
32. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA VALUE MUNICIPAL INCOME TRUST
33. VAN KAMPEN AMERICAN CAPITAL MASSACHUSETTS VALUE MUNICIPAL INCOME TRUST
34. VAN KAMPEN AMERICAN CAPITAL NEW JERSEY VALUE MUNICIPAL INCOME TRUST
35. VAN KAMPEN AMERICAN CAPITAL NEW YORK VALUE MUNICIPAL INCOME TRUST
36. VAN KAMPEN AMERICAN CAPITAL OHIO VALUE MUNICIPAL INCOME TRUST
37. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA VALUE MUNICIPAL INCOME TRUST
38. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST II
39. VAN KAMPEN AMERICAN CAPITAL FLORIDA MUNICIPAL OPPORTUNITY TRUST
40. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE MUNICIPAL INCOME TRUST II
41. VAN KAMPEN AMERICAN CAPITAL SELECT SECTOR MUNICIPAL TRUST
44. THE EXPLORER INSTITUTIONAL TRUST, on behalf of its sub-trusts, Explorer
Institutional Active Core Fund and Explorer Institutional Limited
Duration Fund
<PAGE> 17
43. MORGAN STANLEY FUND INC., on behalf of its series
Morgan Stanley Emerging Markets Debt Fund
Morgan Stanley Global Fixed Income Fund
Morgan Stanley High Yield Fund
Morgan Stanley Worldwide High Income Fund
Morgan Stanley American Value Fund
Morgan Stanley Aggressive Equity Fund
Morgan Stanley U.S. Real Estate Fund
Morgan Stanley Equity Growth Fund
Morgan Stanley Midcap Growth Fund
Morgan Stanley Value Fund
Morgan Stanley Global Equity Allocation Fund
Morgan Stanley Global Equity Fund
Morgan Stanley Asian Growth Fund
Morgan Stanley Emerging Markets Fund
Morgan Stanley Latin American Fund
Morgan Stanley International Magnum Fund
Morgan Stanley Japanese Equity Fund
Morgan Stanley Money Market Fund
Morgan Stanley Tax-Free Money Market Fund
Morgan Stanley Government Obligations Money Market Fund.
<PAGE> 18
AMENDMENT THREE
TO THE
AMENDED AND RESTATED LEGAL SERVICES AGREEMENT
DATED MAY 31, 1997
THIS AMENDMENT THREE to the Amended and Restated Legal Services
Agreement dated May 31, 1997 by and between the parties as set forth in Schedule
1, attached hereto and incorporated by reference and VAN KAMPEN AMERICAN
CAPITAL, INC.
W I T N E S S E T H
WHEREAS, Van Kampen American Capital Senior Income Trust, being a
closed-end registered investment company as that term is defined in the
Investment Company Act of 1940, as amended, wishes to become a party to the
Agreement; and
WHEREAS, the original parties desire to add the aforementioned
additional entity as a party to the Agreement;
NOW, THEREFORE, in consideration of the promises and mutual covenants
spelled out in the Agreement and herein, it is hereby agreed that Schedule 1 of
the Agreement be amended to add Van Kampen American Capital Senior Income Trust.
<PAGE> 19
IN WITNESS WHEREOF, the parties have caused this Amendment Three to be
executed this 22nd day of April, 1998.
ALL OF THE PARTIES SET FORTH IN SCHEDULE 1
ATTACHED HERETO
By: /s/ Ronald A. Nyberg
------------------------------
Ronald A. Nyberg
Executive Vice President
VAN KAMPEN AMERICAN CAPITAL, INC.
By: /s/ Dennis J. McDonnell
------------------------------
Dennis J. McDonnell
Executive Vice President
<PAGE> 20
SCHEDULE 1
1. VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST, on behalf of its
series, Van Kampen American Capital U.S. Government Fund
2. VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, on behalf of its series,
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 New York Tax Free Income Fund,
Van Kampen American Capital Florida Insured Tax Free Income Fund, 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
3. VAN KAMPEN AMERICAN CAPITAL TRUST, on behalf of its series, Van Kampen
American Capital High Yield Fund, Van Kampen American Capital
Short-Term Global Income Fund and Van Kampen American Capital Strategic
Income Fund
4. VAN KAMPEN AMERICAN CAPITAL EQUITY TRUST, on behalf of its series, Van
Kampen American Capital Utility Fund, Van Kampen American Capital Value
Fund, Van Kampen American Capital Growth Fund, Van Kampen American
Capital Great American Companies Fund, Van Kampen American Capital
Prospector Fund and Van Kampen American Capital Aggressive Growth Fund
5. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUND
6. VAN KAMPEN AMERICAN CAPITAL TAX FREE MONEY FUND
7. VAN KAMPEN AMERICAN CAPITAL FOREIGN SECURITIES FUND
8. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME TRUST
9. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA MUNICIPAL TRUST
10. VAN KAMPEN AMERICAN CAPITAL HIGH INCOME TRUST
11. VAN KAMPEN AMERICAN CAPITAL HIGH INCOME TRUST II
12. VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
13. VAN KAMPEN AMERICAN CAPITAL SENIOR FLOATING RATE FUND
14. VAN KAMPEN AMERICAN CAPITAL INVESTMENT GRADE MUNICIPAL TRUST
15. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL TRUST
16. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA QUALITY MUNICIPAL TRUST
17. VAN KAMPEN AMERICAN CAPITAL FLORIDA QUALITY MUNICIPAL TRUST
18. VAN KAMPEN AMERICAN CAPITAL NEW YORK QUALITY MUNICIPAL TRUST
19. VAN KAMPEN AMERICAN CAPITAL OHIO QUALITY MUNICIPAL TRUST
20. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA QUALITY MUNICIPAL TRUST
<PAGE> 21
21. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INSURED MUNICIPALS
22. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE MUNICIPALS
23. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE CALIFORNIA
MUNICIPALS
24. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE FLORIDA
MUNICIPALS
25. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE NEW JERSEY
MUNICIPALS
26. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE NEW YORK
MUNICIPALS
27. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE PENNSYLVANIA
MUNICIPALS
28. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST
29. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE MUNICIPAL INCOME TRUST
30. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE PENNSYLVANIA MUNICIPAL INCOME
TRUST
31. VAN KAMPEN AMERICAN CAPITAL STRATEGIC SECTOR MUNICIPAL TRUST
32. VAN KAMPEN AMERICAN CAPITAL VALUE MUNICIPAL INCOME TRUST
33. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA VALUE MUNICIPAL INCOME TRUST
34. VAN KAMPEN AMERICAN CAPITAL MASSACHUSETTS VALUE MUNICIPAL INCOME TRUST
35. VAN KAMPEN AMERICAN CAPITAL NEW JERSEY VALUE MUNICIPAL INCOME TRUST
36. VAN KAMPEN AMERICAN CAPITAL NEW YORK VALUE MUNICIPAL INCOME TRUST
37. VAN KAMPEN AMERICAN CAPITAL OHIO VALUE MUNICIPAL INCOME TRUST
38. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA VALUE MUNICIPAL INCOME TRUST
39. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST II
40. VAN KAMPEN AMERICAN CAPITAL FLORIDA MUNICIPAL OPPORTUNITY TRUST
41. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE MUNICIPAL INCOME TRUST II
42. VAN KAMPEN AMERICAN CAPITAL SELECT SECTOR MUNICIPAL TRUST
43. THE EXPLORER INSTITUTIONAL TRUST, on behalf of its sub-trusts,
Explorer Institutional Active Core Fund and Explorer Institutional
Limited Duration Fund
<PAGE> 22
44. MORGAN STANLEY FUND INC., on behalf of its series
Morgan Stanley Emerging Markets Debt Fund
Morgan Stanley Global Fixed Income Fund
Morgan Stanley High Yield Fund
Morgan Stanley Worldwide High Income Fund
Morgan Stanley American Value Fund
Morgan Stanley Aggressive Equity Fund
Morgan Stanley U.S. Real Estate Fund
Morgan Stanley Equity Growth Fund
Morgan Stanley Midcap Growth Fund
Morgan Stanley Value Fund
Morgan Stanley Global Equity Allocation Fund
Morgan Stanley Global Equity Fund
Morgan Stanley Asian Growth Fund
Morgan Stanley Emerging Markets Fund
Morgan Stanley Latin American Fund
Morgan Stanley International Magnum Fund
Morgan Stanley Japanese Equity Fund
Morgan Stanley Money Market Fund
Morgan Stanley Tax-Free Money Market Fund
Morgan Stanley Government Obligations Money Market Fund.
<PAGE> 1
EXHIBIT 11(i)
CONSENT OF INDEPENDENT ACCOUNTANTS
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 Accountants" in the Statement of
Additional Information.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
April 24, 1998
<PAGE> 1
EXHIBIT 11(ii)
CONSENT OF INDEPENDENT ACCOUNTANTS
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 Accountants" in the Statement of
Additional Information.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
April 24, 1998
<PAGE> 1
EXHIBIT 11(iii)
CONSENT OF INDEPENDENT ACCOUNTANTS
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 Accountants" in the Statement of
Additional Information.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
April 24, 1998
<PAGE> 1
EXHIBIT 11(iv)
CONSENT OF INDEPENDENT ACCOUNTANTS
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 Accountants" in the Statement of
Additional Information.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
April 24, 1998
<PAGE> 1
EXHIBIT 11(v)
CONSENT OF INDEPENDENT ACCOUNTANTS
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 Accountants" in the Statement of
Additional Information.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
April 24, 1998
<PAGE> 1
EXHIBIT 11(vi)
CONSENT OF INDEPENDENT ACCOUNTANTS
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 Accountants" in the Statement of
Additional Information.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
April 24, 1998
<PAGE> 1
EXHIBIT 11(vii)
CONSENT OF INDEPENDENT ACCOUNTANTS
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 Accountants" in the Statement of
Additional Information.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
April 24, 1998
<PAGE> 1
Exhibit (16)(a)(i)
INSURED TAX FREE INCOME FUND
CALCULATION OF YIELD
The Fund calculates its yield quotations based on a 30-day period ended
on the date of the most recent balance sheet included in the registration
statement, by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
a - b 6
YIELD (y) = 2[(------- + 1) - 1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
<TABLE>
<CAPTION>
Class A Class B Class C
----------- ----------- -----------
<S> <C> <C>
a = 5,434,938 a = 292,040 a = 21,846
b = 874,470 b = 92,974 b = 7,057
c = 66,260,002 c = 3,559,912 c = 269,299
d = 20.61 d = 19.63 d = 19.63
y = 4.04 y = 3.44 y = 3.38
</TABLE>
<PAGE> 2
INSURED TAX FREE INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED DECEMBER 31, 1997
Current Annual Income Per Share
-------------------------------
Current Offering Price
<TABLE>
<CAPTION>
<S> <C> <C>
Class A Shares
$0.960
------
$20.61 = 4.66%
Class B Shares
$0.812
------
$19.63 = 4.14%
Class C Shares
$0.812
------
$19.63 = 4.14%
</TABLE>
<PAGE> 3
INSURED TAX FREE INCOME FUND
CALCULATION OF TAXABLE EQUIVALENT SEC YIELD
PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
Formula Sec Yield
-----------
1- Tax Rate
Class A Shares 4.04%
-----
1-36% =6.31%
Class B Shares 3.44%
-----
1-36% =5.38%
Class C Shares 3.38%
-----
1-36% =5.28%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula Distribution Rate
-----------------
1 -Tax Rate
Class A Shares 4.66%
-----
1-36% =7.28%
Class B Shares 4.14%
-----
1-36% =6.47%
Class C Shares 4.14%
-----
1-36% =6.47%
</TABLE>
<PAGE> 4
INSURED TAX FREE INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,030.50 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 3.05% = T
Excluding Payment of the Sales Charge
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,081.87 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 8.19% = T
TOTAL RETURN CALCULATION FIVE YEARS ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,320.82 = ERV
Five years ended 12/31/97 5 = n
TOTAL RETURN FOR THE PERIOD 5.72% = T
Excluding Payment of the Sales Charge
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,386.41 = ERV
Five years ended 12/31/97 5 = n
TOTAL RETURN FOR THE PERIOD 6.75% = T
</TABLE>
<PAGE> 5
INSURED TAX FREE INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION TEN YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,088.71 = ERV
Ten years ended 12/31/97 10 = n
TOTAL RETURN FOR THE PERIOD 7.64% = T
Excluding Payment of the Sales Charge
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,192.55 = ERV
Ten years ended 12/31/97 10 = n
TOTAL RETURN FOR THE PERIOD 8.17% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $3,074.45 = ERV
Inception through 12/31/97 13.05 = n
TOTAL RETURN FOR THE PERIOD 8.99% = T
Excluding Payment of the Sales Charge
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $3,227.25 = ERV
Inception through 12/31/97 13.05 = n
TOTAL RETURN FOR THE PERIOD 9.39% = T
</TABLE>
<PAGE> 6
INSURED TAX FREE INCOME FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Formula ERV - P
-------
P = T
Including Payment of the Sales Charge
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $3,074.45 = ERV
TOTAL RETURN FOR THE PERIOD 207.44% = T
Excluding Payment of the Sales Charge
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $3,227.25 = ERV
TOTAL RETURN FOR THE PERIOD 222.72% = T
</TABLE>
<PAGE> 7
INSURED TAX FREE INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,033.55 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 3.36% = T
Excluding Payment of the CDSC
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,073.55 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 7.36% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,253.27 = ERV
Inception through 12/31/97 4.67 = n
TOTAL RETURN FOR THE PERIOD 4.95% = T
Excluding Payment of the CDSC
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,268.27 = ERV
Inception through 12/31/97 4.67 = n
TOTAL RETURN FOR THE PERIOD 5.22% = T
</TABLE>
<PAGE> 8
INSURED TAX FREE INCOME FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,253.27 = ERV
TOTAL RETURN FOR THE PERIOD 25.33% = T
Excluding Payment of the CDSC
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,268.27 = ERV
TOTAL RETURN FOR THE PERIOD 26.83% = T
</TABLE>
<PAGE> 9
INSURED TAX FREE INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> n <C> <C>
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,063.55 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 6.36% = T
Excluding Payment of the CDSC
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,073.55 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 7.36% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,229.68 = ERV
Inception through 12/31/97 4.39 = n
TOTAL RETURN FOR THE PERIOD 4.82% = T
Excluding Payment of the CDSC
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,229.68 = ERV
Inception through 12/31/97 4.39 = n
TOTAL RETURN FOR THE PERIOD 4.82% = T
</TABLE>
<PAGE> 10
INSURED TAX FREE INCOME FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,229.68 = ERV
TOTAL RETURN FOR THE PERIOD 22.97% = T
Excluding Payment of the CDSC
Net Asset Value $19.63
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,229.68 = ERV
TOTAL RETURN FOR THE PERIOD 22.97% = T
</TABLE>
<PAGE> 1
EXHIBIT (16)(a)(ii)
TAX FREE HIGH INCOME
CALCULATION OF YIELD
The Fund calculates its yield quotations based on a 30-day period ended
on the date of the most recent balance sheet included in the registration
statement, by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
a - b 6
YIELD (y) = 2[(------- + 1) - 1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
<TABLE>
<CAPTION>
Class A Class B Class C
----------- ----------- -----------
<S> <C> <C>
a = 3,658,251 a = 1,175,525 a = 191,984
b = 538,619 b = 321,670 b = 53,043
c = 47,460,529 c = 15,248,695 c = 2,490,063
d = 15.59 d = 14.84 d = 14.84
y = 5.11 y = 4.57 y = 4.56
</TABLE>
<PAGE> 2
TAX FREE HIGH TOTAL RETURNS
TAX FREE HIGH INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED DECEMBER 31, 1997
Current Annual Income Per Share
-------------------------------
Current Offering Price
Class A Shares
$ .876
------
$15.59 = 5.62%
Class B Shares
$ .764
------
$14.84 = 5.15%
Class C Shares
$ .764
------
$14.84 = 5.15%
<PAGE> 3
TAX FREE HIGH INCOME FUND
CALCULATION OF TAXABLE EQUIVALENT SEC YIELD
Formula
SEC Yield
------------
1 - Tax Rate
Class A Shares
5.11%
-----
1-36% = 7.98%
Class B Shares
4.57%
-----
1-36% = 7.14%
Class C Shares
4.56%
-----
1-36% = 7.13%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula
Distribution Rate
-----------------
1 - Tax Rate
Class A Shares
5.62%
-----
1-36% = 8.78%
Class B Shares
5.15%
-----
1-36% = 8.05%
Class C Shares
5.15%
-----
1-36% = 8.05%
<PAGE> 4
TAX FREE HIGH INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,038.87 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 3.89% = T
Excluding Payment of the Sales Charge
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,090.52 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 9.05% = T
</TABLE>
TOTAL RETURN CALCULATION FIVE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,364.02 = ERV
Five years ended 12/31/97 5 = n
TOTAL RETURN FOR THE PERIOD 6.41% = T
Excluding Payment of the Sales Charge
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,431.66 = ERV
Five years ended 12/31/97 5 = n
TOTAL RETURN FOR THE PERIOD 7.44% = T
</TABLE>
<PAGE> 5
TAX FREE HIGH INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION TEN YEARS ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,856.22 = ERV
Ten years ended 12/31/97 10 = n
TOTAL RETURN FOR THE PERIOD 6.38% = T
Excluding Payment of the Sales Charge
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,948.48 = ERV
Ten years ended 12/31/97 10 = n
TOTAL RETURN FOR THE PERIOD 6.90% = T
</TABLE>
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,515.28 = ERV
Inception through 12/31/97 12.51 = n
TOTAL RETURN FOR THE PERIOD 7.65% = T
Excluding Payment of the Sales Charge
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,640.47 = ERV
Inception through 12/31/97 12.51 = n
TOTAL RETURN FOR THE PERIOD 8.07% = T
</TABLE>
<PAGE> 6
TAX FREE HIGH INCOME FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
Formula ERV - P
-------
P = T
Including Payment of the Sales Charge
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,515.28 = ERV
TOTAL RETURN FOR THE PERIOD 151.53% = T
Excluding Payment of the Sales Charge
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,640.47 = ERV
TOTAL RETURN FOR THE PERIOD 164.05% = T
</TABLE>
<PAGE> 7
TAX FREE HIGH INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,042.27 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 4.23% = T
Excluding Payment of the CDSC
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,082.27 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 8.23% = T
</TABLE>
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,316.21 = ERV
Inception through 12/31/97 4.67 = n
TOTAL RETURN FOR THE PERIOD 6.06% = T
Excluding Payment of the CDSC
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,331.21 = ERV
Inception through 12/31/97 4.67 = n
TOTAL RETURN FOR THE PERIOD 6.32% = T
</TABLE>
<PAGE> 8
TAX FREE HIGH INCOME FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
-------
P = T
<TABLE>
<S> <C> <C> <C>
Including Payment of the CDSC
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,316.21 = ERV
TOTAL RETURN FOR THE PERIOD 31.62% = T
Excluding Payment of the CDSC
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,331.21 = ERV
TOTAL RETURN FOR THE PERIOD 33.12% = T
</TABLE>
<PAGE> 9
TAX FREE HIGH INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,072.27 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 7.23% = T
Excluding Payment of the CDSC
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,082.27 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 8.23% = T
</TABLE>
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,275.25 = ERV
Inception through 12/31/97 4.39 = n
TOTAL RETURN FOR THE PERIOD 5.69% = T
Excluding Payment of the CDSC
Net Asset Value $ 14.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,275.25 = ERV
Inception through 12/31/97 4.39 = n
TOTAL RETURN FOR THE PERIOD 5.69% = T
</TABLE>
<PAGE> 1
Exhibit (16)(a)(iii)
CALIFORNIA INSURED TAX FREE INCOME FUND
CALCULATION OF YIELD
The Fund calculates its yield quotations based on a 30-day period ended
on the date of the most recent balance sheet included in the registration
statement, by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
a - b 6
YIELD (y) = 2[(------- + 1) - 1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
<TABLE>
<CAPTION>
Class A Class B Class C
------------- ------------- -----------
<S> <C> <C>
a = 593,262 a = 129,818 a = 15,360
b = 85,368 b = 38,468 b = 4,645
c = 7,645,267 c = 1,673,229 c = 198,217
d = 18.90 d = 18.29 d = 18.29
y = 4.26 y = 3.61 y = 3.57
</TABLE>
<PAGE> 2
CALIFORNIA INSURED TAX FREE FUND
CALCULATION OF TAXABLE EQUIVALENT SEC YIELD
Formula
SEC Yield
---------
1 - Tax Rate
Class A Shares
4.26%
-----
1-42% = 7.34%
Class B Shares
3.61%
-----
1-42% = 6.22%
Class C Shares
3.57%
-----
1-42% = 6.16%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula
Distribution Rate
-----------------
1 - Tax Rate
Class A Shares
4.67%
-----
1-42% = 8.05%
Class B Shares
4.10%
-----
1-42% = 7.07%
Class C Shares
4.10%
-----
1-42% = 7.07%
<PAGE> 3
CALIFORNIA INSURED TAX FREE FUND - CLASS A
SHARES TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED
DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,054.00 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 5.40% = T
Excluding Payment of the Sales Charge
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,089.32 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 8.93% = T
TOTAL RETURN CALCULATION FIVE YEARS ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,358.01 = ERV
Five years ended 12/31/97 5 = n
TOTAL RETURN FOR THE PERIOD 6.31% = T
Excluding Payment of the Sales Charge
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,404.11 = ERV
Five years ended 12/31/97 5 = n
TOTAL RETURN FOR THE PERIOD 7.02% = T
<PAGE> 4
CALIFORNIA INSURED TAX FREE FUND - CLASS A SHARES TOTAL RETURN CALCULATION
TEN YEARS ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,133.24 = ERV
Ten years ended 12/31/97 10 = n
TOTAL RETURN FOR THE PERIOD 7.87% = T
Excluding Payment of the Sales Charge
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,204.27 = ERV
Ten years ended 12/31/97 10 = n
TOTAL RETURN FOR THE PERIOD 8.22% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,518.99 = ERV
Inception through 12/31/97 12.05 = n
TOTAL RETURN FOR THE PERIOD 7.97% = T
Excluding Payment of the Sales Charge
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,603.89 = ERV
Inception through 12/31/97 12.05 = n
TOTAL RETURN FOR THE PERIOD 8.27% = T
<PAGE> 5
CALIFORNIA INSURED TAX FREE FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
-------
P = T
Including Payment of the Sales Charge
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,518.99 = ERV
TOTAL RETURN FOR THE PERIOD 151.90% = T
Excluding Payment of the Sales Charge
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,603.89 = ERV
TOTAL RETURN FOR THE PERIOD 160.39% = T
<PAGE> 6
CALIFORNIA INSURED TAX FREE FUND - CLASS B
SHARES TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED
DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,051.91 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 5.19% = T
Excluding Payment of the CDSC
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,081.91 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 8.19% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,274.90 = ERV
Inception through 12/31/97 4.67 = n
TOTAL RETURN FOR THE PERIOD 5.34% = T
Excluding Payment of the CDSC
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,274.90 = ERV
Inception through 12/31/97 4.67 = n
TOTAL RETURN FOR THE PERIOD 5.34% = T
<PAGE> 7
CALIFORNIA INSURED TAX FREE FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,274.90 = ERV
TOTAL RETURN FOR THE PERIOD 27.49% = T
Excluding Payment of the CDSC
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,274.90 = ERV
TOTAL RETURN FOR THE PERIOD 27.49% = T
<PAGE> 8
CALIFORNIA INSURED TAX FREE FUND - CLASS C
SHARES TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED
DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,071.91 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 7.19% = T
Excluding Payment of the CDSC
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,081.91 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 8.19% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,227.08 = ERV
Inception through 12/31/97 4.39 = n
TOTAL RETURN FOR THE PERIOD 4.77% = T
Excluding Payment of the CDSC
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,227.08 = ERV
Inception through 12/31/97 4.39 = n
TOTAL RETURN FOR THE PERIOD 4.77% = T
<PAGE> 9
CALIFORNIA INSURED TAX FREE FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,227.08 = ERV
TOTAL RETURN FOR THE PERIOD 22.71% = T
Excluding Payment of the CDSC
Net Asset Value $18.29
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,227.08 = ERV
TOTAL RETURN FOR THE PERIOD 22.71% = T
<PAGE> 1
EXHIBIT (16)(a)(iv)
MUNICIPAL INCOME FUND
CALCULATION OF YIELD
The Fund calculates its yield quotation based on a 30-day period ended on
the date of the most recent balance sheet included in the registration
statement, by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
a - b
YIELD (y) = 2[(------- + 1)6-1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
<TABLE>
<CAPTION>
Class A Class B Class C
------------- ------------- -------------
<S> <C> <C>
a = 3,607,413 a = 941,185 a = 65,052
b = 565,498 b = 283,517 b = 19,817
c =49,946,002 c =13,029,614 c = 900,817
d = 16.56 d = 15.76 d = 15.75
y = 4.45 y = 3.87 y = 3.86
</TABLE>
<PAGE> 2
MUNICIPAL INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED DECEMBER 31, 1997
Current Annual Income Per Share
-------------------------------
Current Offering Price
Class A Shares
$.846
------
$16.56 = 5.11%
Class B Shares
$.732
------
$15.76 = 4.64%
Class C Shares
$.732
------
$15.75 = 4.65%
<PAGE> 3
MUNICIPAL INCOME FUND
CALCULATION OF TAXABLE EQUIVALENT SEC YIELD
Formula
SEC Yield
------------
1 - Tax Rate
Class A Shares
4.45%
-----
1-36% = 6.95%
Class B Shares
3.87%
-----
1-36% = 6.05%
Class C Shares
3.86%
-----
1-36% = 6.03%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula
Distribution Rate
-----------------
1 - Tax Rate
Class A Shares
5.11%
-----
1-36% = 7.98%
Class B Shares
4.64%
-----
1-36% = 7.25%
Class C Shares
4.65%
-----
1-36% = 7.27%
<PAGE> 4
MUNICIPAL INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Formula P(1+T)(n) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,039.62 = ERV
One year period ended 12/31/97 1 = (n)
TOTAL RETURN FOR THE PERIOD 3.96% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,091.35 = ERV
One year period ended 12/31/97 1 = (n)
TOTAL RETURN FOR THE PERIOD 9.14% = T
</TABLE>
TOTAL RETURN CALCULATION FIVE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Formula P(1+T)(n) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,314.08 = ERV
Five years ended 12/31/97 5 = (n)
TOTAL RETURN FOR THE PERIOD 5.61% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,379.34 = ERV
Five years ended 12/31/97 5 = (n)
TOTAL RETURN FOR THE PERIOD 6.64% = T
</TABLE>
<PAGE> 5
MUNICIPAL INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Formula P(1+T)(n) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,684.95 = ERV
Inception through 12/31/97 7.42 = (n)
TOTAL RETURN FOR THE PERIOD 7.28% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,768.95 = ERV
Inception through 12/31/97 7.42 = (n)
TOTAL RETURN FOR THE PERIOD 7.99% = T
</TABLE>
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
-------
P = T
<TABLE>
<S> <C> <C>
Including Payment of the Sales Charge
Net Asset Value $15.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,684.95 = ERV
TOTAL RETURN FOR THE PERIOD 68.50% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,768.95 = ERV
TOTAL RETURN FOR THE PERIOD 76.90% = T
</TABLE>
<PAGE> 6
MUNICIPAL INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Formula P(1+T)(n) = ERV
Including Payment of the CDSC
Net Asset Value $15.76
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,042.66 = ERV
One year period ended 12/31/97 1 = (n)
TOTAL RETURN FOR THE PERIOD 4.27% = T
Excluding Payment of the CDSC
Net Asset Value $15.76
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,082.66 = ERV
One year period ended 12/31/97 1 = (n)
TOTAL RETURN FOR THE PERIOD 8.27% = T
</TABLE>
TOTAL RETURN CALCULATION FIVE YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Formula P(1+T)(n) = ERV
Including Payment of the CDSC
Net Asset Value $15.76
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,313.95 = ERV
One year period ended 12/31/97 5 = (n)
TOTAL RETURN FOR THE PERIOD 5.61% = T
Excluding Payment of the CDSC
Net Asset Value $15.76
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,328.95 = ERV
One year period ended 12/31/97 5 = (n)
TOTAL RETURN FOR THE PERIOD 5.85% = T
</TABLE>
<PAGE> 7
MUNICIPAL INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Formula P(1+T)(n) = ERV
Including Payment of the CDSC
Net Asset Value $15.76
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,344.23 = ERV
Inception through 12/31/97 5.36 = (n)
TOTAL RETURN FOR THE PERIOD 5.67% = T
Excluding Payment of the CDSC
Net Asset Value $15.76
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,354.23 = ERV
Inception through 12/31/97 5.36 = (n)
TOTAL RETURN FOR THE PERIOD 5.82% = T
</TABLE>
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
-------
P = T
<TABLE>
<S> <C> <C>
Including Payment of the CDSC
Net Asset Value $15.76
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,344.23 = ERV
TOTAL RETURN FOR THE PERIOD 34.42% = T
Excluding Payment of the CDSC
Net Asset Value $15.76
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,354.23 = ERV
TOTAL RETURN FOR THE PERIOD 35.42% = T
</TABLE>
<PAGE> 8
MUNICIPAL INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Formula P(1+T)(n) = ERV
Including Payment of the CDSC
Net Asset Value $15.75
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,073.41 = ERV
One year period ended 12/31/97 1 = (n)
TOTAL RETURN FOR THE PERIOD 7.34% = T
Excluding Payment of the CDSC
Net Asset Value $15.75
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,083.41 = ERV
One year period ended 12/31/97 1 = (n)
TOTAL RETURN FOR THE PERIOD 8.34% = T
</TABLE>
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Formula P(1+T)(n) = ERV
Including Payment of the CDSC
Net Asset Value $15.75
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,228.42 = ERV
Inception through 12/31/97 4.39 = (n)
TOTAL RETURN FOR THE PERIOD 4.80% = T
Excluding Payment of the CDSC
Net Asset Value $15.75
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,228.42 = ERV
Inception through 12/31/97 4.39 = (n)
TOTAL RETURN FOR THE PERIOD 4.80% = T
</TABLE>
<PAGE> 9
MUNICIPAL INCOME FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
-------
P = T
<TABLE>
<S> <C> <C>
Including Payment of the CDSC
Net Asset Value $15.75
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,228.42 = ERV
TOTAL RETURN FOR THE PERIOD 22.84% = T
Excluding Payment of the CDSC
Net Asset Value $15.75
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,228.42 = ERV
TOTAL RETURN FOR THE PERIOD 22.84% = T
</TABLE>
<PAGE> 1
Exhibit 16(a)(v)
INTERMEDIATE TERM MUNICIPAL INCOME FUND
CALCULATION OF YIELD
The Fund calculates its yield quotations based on a 30-day period ended on the
date of the most recent balance sheet included in the registration statement, by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
a-b 6
YIELD (y) = 2[( ---- + 1) - 1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
<TABLE>
<CAPTION>
Class A Class B Class C
----------- ----------- -----------
<S> <C> <C>
a = 58,778 a = 74,972 a = 13,341
without b = 13,138 b = 27,196 b = 4,832
waiver c = 1,222,079 c = 1,558,505 c = 277,301
d = 10.89 d = 10.53 d = 10.53
y = 4.15% y = 3.52% y = 3.52%
<CAPTION>
Class A Class B Class C
----------- ----------- -----------
<S> <C> <C>
a = 58,778 a = 74,972 a = 13,341
with b = 11,441 b = 25,031 b = 4,447
waiver c = 1,222,079 c = 1,558,505 c = 277,301
d = 10.89 d = 10.53 d = 10.53
y = 4.31% y = 3.68% y = 3.68%
</TABLE>
<PAGE> 2
INTERMEDIATE TERM MUNICIPAL INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED DECEMBER 31, 1997
Current Annual Income Per Share
-------------------------------
Current Offering Price
Class A Shares
$.474
------
$10.89 = 4.35%
Class B Shares
$.402
------
$10.53 = 3.82%
Class C Shares
$.402
------
$10.53 = 3.82%
<PAGE> 3
INTERMEDIATE TERM MUNICIPAL INCOME FUND
CALCULATION OF TAXABLE EQUIVALENT SEC YIELD
Formula
SEC Yield
------------
1 - Tax Rate
Class A Shares
4.15%
-------
1-36.0% = 6.48%
Class B Shares
3.52%
-------
1-36.0% = 5.50%
Class C Shares
3.52%
-------
1-36.0% = 5.50%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula
Distribution Rate
-----------------
1 - Tax Rate
Class A Shares
4.35%
-------
1-36.0% = 6.80%
Class B Shares
3.82%
-------
1-36.6% = 5.97%
Class C Shares
3.82%
-------
1-36.0% = 5.97%
<PAGE> 4
INTERMEDIATE TERM MUNICIPAL INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $ 10.54
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,046.00 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 4.60% = T
Excluding Payment of the Sales Charge
Net Asset Value $ 10.54
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,080.77 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 8.08% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1996
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $ 10.54
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,309.42 = ERV
Inception through 12/31/97 4.60 = n
TOTAL RETURN FOR THE PERIOD 6.04% = T
Excluding Payment of the Sales Charge
Net Asset Value $ 10.54
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,353.93 = ERV
Inception through 12/31/97 4.60 = n
TOTAL RETURN FOR THE PERIOD 6.81% = T
<PAGE> 5
INTERMEDIATE TERM MUNICIPAL INCOME FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
-------
P = T
Including Payment of the Sales Charge
Net Asset Value $ 10.54
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,309.42 = ERV
TOTAL RETURN FOR THE PERIOD 30.94% = T
Excluding Payment of the Sales Charge
Net Asset Value $ 10.54
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,353.93 = ERV
TOTAL RETURN FOR THE PERIOD 35.39% = T
<PAGE> 6
INTERMEDIATE TERM MUNICIPAL INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 10.53
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,042.32 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 4.23% = T
Excluding Payment of the CDSC
Net Asset Value $ 10.53
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,072.32 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 7.23% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 10.53
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,309.51 = ERV
Inception through 12/31/97 4.60 = n
TOTAL RETURN FOR THE PERIOD 6.04% = T
Excluding Payment of the CDSC
Net Asset Value $ 10.53
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,309.51 = ERV
Inception through 12/31/97 4.60 = n
TOTAL RETURN FOR THE PERIOD 6.04% = T
<PAGE> 7
INTERMEDIATE TERM MUNICIPAL INCOME FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $ 10.53
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,309.51 = ERV
TOTAL RETURN FOR THE PERIOD 30.95% = T
Excluding Payment of the CDSC
Net Asset Value $ 10.53
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,309.51 = ERV
TOTAL RETURN FOR THE PERIOD 30.95% = T
<PAGE> 8
INTERMEDIATE TERM MUNICIPAL INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 10.53
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,062.32 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 6.23% = T
Excluding Payment of the CDSC
Net Asset Value $ 10.53
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,072.32 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 7.23% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 10.53
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,221.24 = ERV
Inception through 12/31/97 4.20 = n
TOTAL RETURN FOR THE PERIOD 4.87% = T
Excluding Payment of the CDSC
Net Asset Value $ 10.53
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,221.24 = ERV
Inception through 12/31/97 4.20 = n
TOTAL RETURN FOR THE PERIOD 4.87% = T
<PAGE> 9
INTERMEDIATE TERM MUNICIPAL INCOME FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $ 10.53
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,221.24 = ERV
TOTAL RETURN FOR THE PERIOD 22.12% = T
Excluding Payment of the CDSC
Net Asset Value $ 10.53
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,221.24 ERV
TOTAL RETURN FOR THE PERIOD 22.12% = T
<PAGE> 1
Exhibit (16)(a)(vi)
FLORIDA INSURED TAX FREE INCOME FUND
CALCULATION OF YIELD
The Fund calculates is yield quotations based on a 30-day period ended
on the date of the most recent balance sheet included in the registration
statement, by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
a-b 6
YIELD (y) = 2 [( --------- + 1) - 1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Class A Class B Class C
-------------- -------------- -----------
a = 117,457 a = 93,183 a = 3,229
b = 26,617 b = 35,145 b = 1,196
c = 1,780,383 c = 1,412,635 c = 49,038
d = 16.33 d = 15.55 d = 15.58
y = 3.78 y = 3.19 y = 3.21
<PAGE> 2
FLORIDA INSURED TAX FREE INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED DECEMBER 31, 1997
Current Annual Income Per Share
-------------------------------
Current Offering Price
<TABLE>
<S> <S> <C>
Class A Shares
$ .774
------
$16.33 = 4.74%
Class B Shares
$ .660
------
$15.55 = 4.24%
Class C Shares
$ .660
------
$15.58 = 4.24%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula
Distribution Rate
-----------------
1 - Tax Rate
Class A Shares
4.74%
------
1-36% = 7.41%
Class B Shares
4.24%
------
1-36% = 6.63%
Class C Shares
4.24%
------
1-36% = 6.63%
</TABLE>
<PAGE> 3
FLORIDA INSURED TAX FREE INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <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 $1,035.68 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 3.57% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,087.22 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 8.72% = T
</TABLE>
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<S> <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 $1,238.71 = ERV
Inception through 12/31/97 3.43 = n
TOTAL RETURN FOR THE PERIOD 6.44% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,300.24 = ERV
Inception through 12/31/97 3.43 = n
TOTAL RETURN FOR THE PERIOD 7.96% = T
</TABLE>
<PAGE> 4
FLORIDA INSURED TAX FREE INCOME FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
<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 $1,238.71 = ERV
TOTAL RETURN FOR THE PERIOD 23.87% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,300.24 = ERV
TOTAL RETURN FOR THE PERIOD 30.02% = T
</TABLE>
<PAGE> 5
FLORIDA INSURED TAX FREE INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <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 $1,039.12 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 3.91% = T
Excluding Payment of the CDSC
Net Asset Value $15.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,079.12 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 7.91% = T
</TABLE>
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<S> <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 $1,242.98 = ERV
Inception through 12/31/97 3.43 = n
TOTAL RETURN FOR THE PERIOD 6.55% = T
Excluding Payment of the CDSC
Net Asset Value $15.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,267.98 = ERV
Inception through 12/31/97 3.43 = n
TOTAL RETURN FOR THE PERIOD 7.17% = T
</TABLE>
<PAGE> 6
FLORIDA INSURED TAX FREE INCOME FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
<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 $1,242.98 = ERV
TOTAL RETURN FOR THE PERIOD 24.30% = T
Excluding Payment of the CDSC
Net Asset Value $15.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,267.98 = ERV
TOTAL RETURN FOR THE PERIOD 26.80% = T
</TABLE>
<PAGE> 7
FLORIDA INSURED TAX FREE INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.58
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,069.68 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 6.97% = T
Excluding Payment of the CDSC
Net Asset Value $15.58
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,079.68 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 7.97% = T
</TABLE>
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.58
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,270.36 = ERV
Inception through 12/31/97 3.43 = n
TOTAL RETURN FOR THE PERIOD 7.23% = T
Excluding Payment of the CDSC
Net Asset Value $15.58
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,270.36 = ERV
Inception through 12/31/97 3.43 = n
TOTAL RETURN FOR THE PERIOD 7.23% = T
</TABLE>
<PAGE> 8
FLORIDA INSURED TAX FREE INCOME FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Formula ERV - P
--------
P = T
Including Payment of the CDSC
Net Asset Value $15.58
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,270.36 = ERV
TOTAL RETURN FOR THE PERIOD 27.04% = T
Excluding Payment of the CDSC
Net Asset Value $15.58
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,270.36 = ERV
TOTAL RETURN FOR THE PERIOD 27.04% = T
</TABLE>
<PAGE> 1
Exhibit (16)(a)(vii)
NEW YORK TAX FREE INCOME FUND
CALCULATION OF YIELD - WITHOUT EXPENSE WAIVER
The Fund calculates its yield quotations based on a 30-day period ended
on the date of the most recent balance sheet included in the registration
statement, by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
a - b 6
YIELD (y) = 2[(------- + 1) - 1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
<TABLE>
<CAPTION>
Class A Class B Class C
------------- ----------- -----------
<S> <C> <C>
a = 77,149 a = 56,623 a = 4,265
b = 21,246 b = 23,632 b = 1,794
c = 1,102,799 c = 809,422 c = 61,027
d = 16.51 d = 15.73 d = 15.73
y = 3.71% y = 3.13% y = 3.11%
</TABLE>
<PAGE> 2
NEW YORK TAX FREE INCOME FUND
CALCULATION OF YIELD - WITH EXPENSE WAIVER
The Fund calculates its yield quotations based on a 30-day period ended
on the date of the most recent balance sheet included in the registration
statement, by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
a - b 6
YIELD (y) = 2[(------- + 1) - 1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
<TABLE>
<CAPTION>
Class A Class B Class C
------------- ----------- -----------
<S> <C> <C>
a = 77,149 a = 56,623 a = 4,265
b = 7,925 b = 13,904 b = 1,058
c = 1,102,799 c = 809,422 c = 61,027
d = 16.51 d = 15.73 d = 15.73
y = 4.60% y = 4.06% y = 4.04%
</TABLE>
<PAGE> 3
NEW YORK TAX FREE INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED DECEMBER 31, 1997
Current Annual Income Per Share
-------------------------------
Current Offering Price
Class A Shares
$.798
-----
$16.51 = 4.83%
Class B Shares
$ .690
------
$15.73 = 4.39%
Class C Shares
$ .690
------
$15.73 = 4.39%
<PAGE> 4
NEW YORK TAX FREE INCOME FUND
CALCULATION OF TAXABLE EQUIVALENT SEC YIELD
Formula
SEC Yield
------------
1 - Tax Rate
Class A Shares
4.60%
-------
1-40.4% = 7.72%
Class B Shares
4.06%
-------
1-40.4% = 6.81%
Class C Shares
4.04%
-------
1-40.4% = 6.78%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula
Distribution Rate
-----------------
1 - Tax Rate
Class A Shares
4.83%
-------
1-40.4% = 8.10%
Class B Shares
4.39%
-------
1-40.4% = 7.37%
Class C Shares
4.39%
-------
1-40.4% =7.37%
<PAGE> 5
NEW YORK TAX FREE INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $ 15.74
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,056.33 = ERV
One year period ended 12/31/97 1 =
TOTAL RETURN FOR THE PERIOD 5.63% = T
Excluding Payment of the Sales Charge
Net Asset Value $ 15.74
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,109.25 = ERV
One year period ended 12/31/97 1 =
TOTAL RETURN FOR THE PERIOD 10.92% = T
</TABLE>
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.74
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,265.31 = ERV
Inception through 12/31/97 3.43 =
TOTAL RETURN FOR THE PERIOD 7.10% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.74
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,328.25 = ERV
Inception through 12/31/97 3.43 =
TOTAL RETURN FOR THE PERIOD 8.63% = T
</TABLE>
<PAGE> 6
NEW YORK TAX FREE INCOME FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C> <C>
Formula ERV - P
-------
P = T
Including Payment of the Sales Charge
Net Asset Value $15.74
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,265.31 = ERV
TOTAL RETURN FOR THE PERIOD 26.53% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.74
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,328.25 = ERV
TOTAL RETURN FOR THE PERIOD 32.82% = T
</TABLE>
<PAGE> 7
NEW YORK TAX FREE INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,060.74 = ERV
One year period ended 12/31/97 1 =
TOTAL RETURN FOR THE PERIOD 6.07% = T
Excluding Payment of the CDSC
Net Asset Value $15.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,100.74 = ERV
One year period ended 12/31/97 1 =
TOTAL RETURN FOR THE PERIOD 10.07% = T
</TABLE>
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,270.24 = ERV
Inception through 12/31/97 3.43 =
TOTAL RETURN FOR THE PERIOD 7.22% = T
Excluding Payment of the CDSC
Net Asset Value $15.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,295.24 = ERV
Inception through 12/31/97 3.43 =
TOTAL RETURN FOR THE PERIOD 7.83% = T
</TABLE>
<PAGE> 8
NEW YORK TAX FREE INCOME FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $15.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,270.24 = ERV
TOTAL RETURN FOR THE PERIOD 27.02% = T
Excluding Payment of the CDSC
Net Asset Value $15.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,295.24 = ERV
TOTAL RETURN FOR THE PERIOD 29.52% = T
</TABLE>
<PAGE> 9
NEW YORK TAX FREE INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,090.74 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 9.07% = T
Excluding Payment of the CDSC
Net Asset Value $15.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,100.74 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 10.07% = T
</TABLE>
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,295.26 = ERV
Inception through 12/31/97 3.43 = n
TOTAL RETURN FOR THE PERIOD 7.83% = T
Excluding Payment of the CDSC
Net Asset Value $15.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,295.26 = ERV
Inception through 12/31/97 3.43 = n
TOTAL RETURN FOR THE PERIOD 7.83% = T
</TABLE>
<PAGE> 10
NEW YORK TAX FREE INCOME FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $15.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,295.26 = ERV
TOTAL RETURN FOR THE PERIOD 23.53% = T
Excluding Payment of the CDSC
Net Asset Value $15.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,295.26 = ERV
TOTAL RETURN FOR THE PERIOD 29.53% = T
</TABLE>
<PAGE> 1
EXHIBIT (24)
POWER OF ATTORNEY
The undersigned, being officers and trustees of each of the Van Kampen
American Capital Open End Trusts (individually, a "Trust") as indicated on
Schedule 1 attached hereto and incorporated by reference, each a Delaware
business trust except for the Van Kampen American Capital Pennsylvania Tax Free
Income Fund being a Pennsylvania business trust, and being officers and
directors of the Morgan Stanley Fund, Inc. (the "Corporation"), a Maryland
corporation, do hereby, in the capacities shown below, individually appoint
Dennis J. McDonnell and Ronald A. Nyberg, each of Oakbrook Terrace, Illinois,
and each of them, as the agents and attorneys-in-fact with full power of
substitution and resubstitution, for each of the undersigned, to execute and
deliver, for and on behalf of the undersigned, any and all amendments to the
Registration Statement filed by each Trust or the Corporation with the
Securities and Exchange Commission pursuant to the provisions of the Securities
Act of 1933 and the Investment Company Act of 1940.
This Power of Attorney may be executed in multiple counterparts, each
of which shall be deemed an original, but which taken together shall constitute
one instrument.
Dated: April 24, 1998
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ DENNIS J. MCDONNELL President and Trustee/Director
----------------------------------
Dennis J. McDonnell
/s/ EDWARD C. WOOD III Vice President and Chief Financial Officer
----------------------------------
Edward C. Wood III
/s/ J. MILES BRANAGAN Trustee/Director
----------------------------------
J. Miles Branagan
/s/ RICHARD M. DEMARTINI Trustee/Director
----------------------------------
Richard M. DeMartini
/s/ LINDA HUTTON HEAGY Trustee/Director
----------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY Trustee/Director
----------------------------------
R. Craig Kennedy
/s/ JACK E. NELSON Trustee/Director
----------------------------------
Jack E. Nelson
/s/ DON G. POWELL Trustee/Director
----------------------------------
Don G. Powell
/s/ PHILLIP B. ROONEY Trustee/Director
----------------------------------
Phillip B. Rooney
/s/ FERNANDO SISTO, SC.D. Trustee/Director
----------------------------------
Fernando Sisto, Sc. D.
/s/ WAYNE W. WHALEN Trustee/Director and Chairman
----------------------------------
Wayne W. Whalen
</TABLE>
<PAGE> 2
SCHEDULE 1
VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
VAN KAMPEN AMERICAN CAPITAL TRUST
VAN KAMPEN AMERICAN CAPITAL EQUITY TRUST
VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUND
VAN KAMPEN AMERICAN CAPITAL TAX FREE MONEY FUND
VAN KAMPEN AMERICAN CAPITAL COMSTOCK FUND
VAN KAMPEN AMERICAN CAPITAL CORPORATE BOND FUND
VAN KAMPEN AMERICAN CAPITAL EMREGING 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 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 PACE FUND
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
VAN KAMPEN AMERICAN CAPITAL RESERVE FUND
VAN KAMPEN AMERICAN CAPITAL SMALL CAPITALIZATION FUND
VAN KAMPEN AMERICAN CAPITAL TAX-EXEMPT TRUST
VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST FOR INCOME
VAN KAMPEN AMERICAN CAPITAL WORLD PORTFOLIO SERIES TRUST
VAN KAMPEN AMERICAN CAPITAL FOREIGN SECURITIES FUND
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> Ins TF Class A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 1,242,260,995<F1>
<INVESTMENTS-AT-VALUE> 1,373,468,284<F1>
<RECEIVABLES> 31,606,148<F1>
<ASSETS-OTHER> 41,587<F1>
<OTHER-ITEMS-ASSETS> 0<F1>
<TOTAL-ASSETS> 1,405,116,019<F1>
<PAYABLE-FOR-SECURITIES> 27,963,944<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 17,932,802<F1>
<TOTAL-LIABILITIES> 45,896,746<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,152,273,936
<SHARES-COMMON-STOCK> 65,380,120
<SHARES-COMMON-PRIOR> 66,727,067
<ACCUMULATED-NII-CURRENT> 164,030<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 2,556,582<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 131,036,118<F1>
<NET-ASSETS> 1,283,505,387
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 81,024,876<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (12,987,269)<F1>
<NET-INVESTMENT-INCOME> 68,037,607<F1>
<REALIZED-GAINS-CURRENT> 8,525,006<F1>
<APPREC-INCREASE-CURRENT> 31,101,903<F1>
<NET-CHANGE-FROM-OPS> 107,664,516<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (64,607,170)
<DISTRIBUTIONS-OF-GAINS> (10,489,973)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 32,247,420
<NUMBER-OF-SHARES-REDEEMED> (36,316,268)
<SHARES-REINVESTED> 2,721,901
<NET-CHANGE-IN-ASSETS> (163,111)
<ACCUMULATED-NII-PRIOR> (88,510)<F1>
<ACCUMULATED-GAINS-PRIOR> 5,143,184<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 6,799,897<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 12,987,269<F1>
<AVERAGE-NET-ASSETS> 1,278,992,005
<PER-SHARE-NAV-BEGIN> 19.238
<PER-SHARE-NII> 0.974
<PER-SHARE-GAIN-APPREC> 0.551
<PER-SHARE-DIVIDEND> (0.971)
<PER-SHARE-DISTRIBUTIONS> (0.161)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 19.631
<EXPENSE-RATIO> 0.92
<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> Ins TF Class B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 1,242,260,995<F1>
<INVESTMENTS-AT-VALUE> 1,373,468,284<F1>
<RECEIVABLES> 31,606,148<F1>
<ASSETS-OTHER> 41,587<F1>
<OTHER-ITEMS-ASSETS> 0<F1>
<TOTAL-ASSETS> 1,405,116,019<F1>
<PAYABLE-FOR-SECURITIES> 27,963,944<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 17,932,802<F1>
<TOTAL-LIABILITIES> 45,896,746<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 67,523,705
<SHARES-COMMON-STOCK> 3,572,287
<SHARES-COMMON-PRIOR> 3,723,056
<ACCUMULATED-NII-CURRENT> 164,030<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 2,556,582<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 131,036,118<F1>
<NET-ASSETS> 70,136,534
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 81,024,876<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (12,987,269)<F1>
<NET-INVESTMENT-INCOME> 68,037,607<F1>
<REALIZED-GAINS-CURRENT> 8,525,006<F1>
<APPREC-INCREASE-CURRENT> 31,101,903<F1>
<NET-CHANGE-FROM-OPS> 107,664,516<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (2,965,479)
<DISTRIBUTIONS-OF-GAINS> (580,452)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 410,394
<NUMBER-OF-SHARES-REDEEMED> (660,311)
<SHARES-REINVESTED> 99,148
<NET-CHANGE-IN-ASSETS> (1,494,085)
<ACCUMULATED-NII-PRIOR> (88,510)<F1>
<ACCUMULATED-GAINS-PRIOR> 5,143,184<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 6,799,897<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 12,987,269<F1>
<AVERAGE-NET-ASSETS> 69,384,471
<PER-SHARE-NAV-BEGIN> 19.240
<PER-SHARE-NII> 0.826
<PER-SHARE-GAIN-APPREC> 0.551
<PER-SHARE-DIVIDEND> (0.822)
<PER-SHARE-DISTRIBUTIONS> (0.161)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 19.634
<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> 013
<NAME> Ins TF Class C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 1,242,260,995<F1>
<INVESTMENTS-AT-VALUE> 1,373,468,284<F1>
<RECEIVABLES> 31,606,148<F1>
<ASSETS-OTHER> 41,587<F1>
<OTHER-ITEMS-ASSETS> 0<F1>
<TOTAL-ASSETS> 1,405,116,019<F1>
<PAYABLE-FOR-SECURITIES> 27,963,944<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 17,932,802<F1>
<TOTAL-LIABILITIES> 45,896,746<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,664,902
<SHARES-COMMON-STOCK> 284,125
<SHARES-COMMON-PRIOR> 256,937
<ACCUMULATED-NII-CURRENT> 164,030<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 2,556,582<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 131,036,118<F1>
<NET-ASSETS> 5,577,352
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 81,024,876<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (12,987,269)<F1>
<NET-INVESTMENT-INCOME> 68,037,607<F1>
<REALIZED-GAINS-CURRENT> 8,525,006<F1>
<APPREC-INCREASE-CURRENT> 31,101,903<F1>
<NET-CHANGE-FROM-OPS> 107,664,516<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (212,418)
<DISTRIBUTIONS-OF-GAINS> (41,183)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 324,754
<NUMBER-OF-SHARES-REDEEMED> (306,866)
<SHARES-REINVESTED> 9,300
<NET-CHANGE-IN-ASSETS> (634,127)
<ACCUMULATED-NII-PRIOR> (88,510)<F1>
<ACCUMULATED-GAINS-PRIOR> 5,143,184<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 6,799,897<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 12,987,269<F1>
<AVERAGE-NET-ASSETS> 4,967,337
<PER-SHARE-NAV-BEGIN> 19.239
<PER-SHARE-NII> 0.822
<PER-SHARE-GAIN-APPREC> 0.552
<PER-SHARE-DIVIDEND> (0.822)
<PER-SHARE-DISTRIBUTIONS> (0.161)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 19.630
<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> 021
<NAME> T.F.H.I. CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 907,885,021<F1>
<INVESTMENTS-AT-VALUE> 958,761,165<F1>
<RECEIVABLES> 22,127,146<F1>
<ASSETS-OTHER> 196,512<F1>
<OTHER-ITEMS-ASSETS> 10,496,263<F1>
<TOTAL-ASSETS> 991,581,086<F1>
<PAYABLE-FOR-SECURITIES> 11,331,827<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 5,777,253<F1>
<TOTAL-LIABILITIES> 17,109,080<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 761,338,901
<SHARES-COMMON-STOCK> 47,576,526
<SHARES-COMMON-PRIOR> 46,419,769
<ACCUMULATED-NII-CURRENT> (9,046,242)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (94,737,108)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 50,697,747<F1>
<NET-ASSETS> 706,274,738
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 63,584,303<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (10,248,000)<F1>
<NET-INVESTMENT-INCOME> 53,336,303<F1>
<REALIZED-GAINS-CURRENT> 391,354<F1>
<APPREC-INCREASE-CURRENT> 24,022,309<F1>
<NET-CHANGE-FROM-OPS> 77,749,966<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (41,926,549)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,584,725
<NUMBER-OF-SHARES-REDEEMED> (6,688,927)
<SHARES-REINVESTED> 1,260,959
<NET-CHANGE-IN-ASSETS> 34,417,881
<ACCUMULATED-NII-PRIOR> (8,821,755)<F1>
<ACCUMULATED-GAINS-PRIOR> (95,128,462)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 4,318,581<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 10,248,000<F1>
<AVERAGE-NET-ASSETS> 680,255,458
<PER-SHARE-NAV-BEGIN> 14.474
<PER-SHARE-NII> 0.895
<PER-SHARE-GAIN-APPREC> 0.376
<PER-SHARE-DIVIDEND> (0.900)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 14.845
<EXPENSE-RATIO> 0.94
<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> T.F.H.I. CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 907,885,021<F1>
<INVESTMENTS-AT-VALUE> 958,761,165<F1>
<RECEIVABLES> 22,127,146<F1>
<ASSETS-OTHER> 196,512<F1>
<OTHER-ITEMS-ASSETS> 10,496,263<F1>
<TOTAL-ASSETS> 991,581,086<F1>
<PAYABLE-FOR-SECURITIES> 11,331,827<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 5,777,253<F1>
<TOTAL-LIABILITIES> 17,109,080<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 227,916,630
<SHARES-COMMON-STOCK> 15,466,416
<SHARES-COMMON-PRIOR> 12,010,543
<ACCUMULATED-NII-CURRENT> (9,046,242)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (94,737,108)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 50,697,747<F1>
<NET-ASSETS> 229,575,988
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 63,584,303<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (10,248,000)<F1>
<NET-INVESTMENT-INCOME> 53,336,303<F1>
<REALIZED-GAINS-CURRENT> 391,354<F1>
<APPREC-INCREASE-CURRENT> 24,022,309<F1>
<NET-CHANGE-FROM-OPS> 77,749,966<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (10,667,625)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,414,821
<NUMBER-OF-SHARES-REDEEMED> (2,235,801)
<SHARES-REINVESTED> 276,853
<NET-CHANGE-IN-ASSETS> 55,731,951
<ACCUMULATED-NII-PRIOR> (8,821,755)<F1>
<ACCUMULATED-GAINS-PRIOR> (95,128,462)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 4,318,581<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 10,248,000<F1>
<AVERAGE-NET-ASSETS> 198,288,450
<PER-SHARE-NAV-BEGIN> 14.474
<PER-SHARE-NII> 0.774
<PER-SHARE-GAIN-APPREC> 0.384
<PER-SHARE-DIVIDEND> (0.788)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 14.844
<EXPENSE-RATIO> 1.71
<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> T.F.H.I. CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 907,885,021<F1>
<INVESTMENTS-AT-VALUE> 958,761,165<F1>
<RECEIVABLES> 22,127,146<F1>
<ASSETS-OTHER> 196,512<F1>
<OTHER-ITEMS-ASSETS> 10,496,263<F1>
<TOTAL-ASSETS> 991,581,086<F1>
<PAYABLE-FOR-SECURITIES> 11,331,827<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 5,777,253<F1>
<TOTAL-LIABILITIES> 17,109,080<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 38,302,078
<SHARES-COMMON-STOCK> 2,602,078
<SHARES-COMMON-PRIOR> 1,302,119
<ACCUMULATED-NII-CURRENT> (9,046,242)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (94,737,108)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 50,697,747<F1>
<NET-ASSETS> 38,621,280
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 63,584,303<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (10,248,000)<F1>
<NET-INVESTMENT-INCOME> 53,336,303<F1>
<REALIZED-GAINS-CURRENT> 391,354<F1>
<APPREC-INCREASE-CURRENT> 24,022,309<F1>
<NET-CHANGE-FROM-OPS> 77,749,966<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (1,407,089)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,645,028
<NUMBER-OF-SHARES-REDEEMED> (397,427)
<SHARES-REINVESTED> 52,358
<NET-CHANGE-IN-ASSETS> 19,774,293
<ACCUMULATED-NII-PRIOR> (8,821,755)<F1>
<ACCUMULATED-GAINS-PRIOR> (95,128,462)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 4,318,581<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 10,248,000<F1>
<AVERAGE-NET-ASSETS> 26,355,080
<PER-SHARE-NAV-BEGIN> 14.474
<PER-SHARE-NII> 0.778
<PER-SHARE-GAIN-APPREC> 0.378
<PER-SHARE-DIVIDEND> (0.788)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 14.842
<EXPENSE-RATIO> 1.71
<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> CAL INS CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 159,457,106<F1>
<INVESTMENTS-AT-VALUE> 175,086,931<F1>
<RECEIVABLES> 3,493,675<F1>
<ASSETS-OTHER> 17,732<F1>
<OTHER-ITEMS-ASSETS> 22,784<F1>
<TOTAL-ASSETS> 178,621,122<F1>
<PAYABLE-FOR-SECURITIES> 2,392,479<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 764,295<F1>
<TOTAL-LIABILITIES> 3,156,774<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 129,035,302
<SHARES-COMMON-STOCK> 7,688,471
<SHARES-COMMON-PRIOR> 8,091,788
<ACCUMULATED-NII-CURRENT> 486,148<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (3,883,482)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 15,629,825<F1>
<NET-ASSETS> 140,654,610
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 10,042,391<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (1,870,764)<F1>
<NET-INVESTMENT-INCOME> 8,171,627<F1>
<REALIZED-GAINS-CURRENT> 1,186,738<F1>
<APPREC-INCREASE-CURRENT> 4,996,359<F1>
<NET-CHANGE-FROM-OPS> 14,354,724<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (6,593,552)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 692,287
<NUMBER-OF-SHARES-REDEEMED> (1,319,813)
<SHARES-REINVESTED> 224,209
<NET-CHANGE-IN-ASSETS> (1,803,110)
<ACCUMULATED-NII-PRIOR> 209,340<F1>
<ACCUMULATED-GAINS-PRIOR> (5,070,220)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 814,437<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 1,870,764<F1>
<AVERAGE-NET-ASSETS> 137,701,464
<PER-SHARE-NAV-BEGIN> 17.605
<PER-SHARE-NII> 0.880
<PER-SHARE-GAIN-APPREC> 0.658
<PER-SHARE-DIVIDEND> (0.849)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 18.294
<EXPENSE-RATIO> 0.96
<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> CAL INS CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 159,457,106<F1>
<INVESTMENTS-AT-VALUE> 175,086,931<F1>
<RECEIVABLES> 3,493,675<F1>
<ASSETS-OTHER> 17,732<F1>
<OTHER-ITEMS-ASSETS> 22,784<F1>
<TOTAL-ASSETS> 178,621,122<F1>
<PAYABLE-FOR-SECURITIES> 2,392,479<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 764,295<F1>
<TOTAL-LIABILITIES> 3,156,774<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 30,132,501
<SHARES-COMMON-STOCK> 1,696,407
<SHARES-COMMON-PRIOR> 1,625,341
<ACCUMULATED-NII-CURRENT> 486,148<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (3,883,482)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 15,629,825<F1>
<NET-ASSETS> 31,026,175
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 10,042,391<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (1,870,764)<F1>
<NET-INVESTMENT-INCOME> 8,171,627<F1>
<REALIZED-GAINS-CURRENT> 1,186,738<F1>
<APPREC-INCREASE-CURRENT> 4,996,359<F1>
<NET-CHANGE-FROM-OPS> 14,354,724<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (1,190,355)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 403,552
<NUMBER-OF-SHARES-REDEEMED> (375,548)
<SHARES-REINVESTED> 43,062
<NET-CHANGE-IN-ASSETS> 2,414,632
<ACCUMULATED-NII-PRIOR> 209,340<F1>
<ACCUMULATED-GAINS-PRIOR> (5,070,220)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 814,437<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 1,870,764<F1>
<AVERAGE-NET-ASSETS> 29,486,835
<PER-SHARE-NAV-BEGIN> 17.603
<PER-SHARE-NII> 0.741
<PER-SHARE-GAIN-APPREC> 0.662
<PER-SHARE-DIVIDEND> (0.717)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 18.289
<EXPENSE-RATIO> 1.72
<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> CAL INS CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 159,457,106<F1>
<INVESTMENTS-AT-VALUE> 175,086,931<F1>
<RECEIVABLES> 3,493,675<F1>
<ASSETS-OTHER> 17,732<F1>
<OTHER-ITEMS-ASSETS> 22,784<F1>
<TOTAL-ASSETS> 178,621,122<F1>
<PAYABLE-FOR-SECURITIES> 2,392,479<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 764,295<F1>
<TOTAL-LIABILITIES> 3,156,774<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,064,054
<SHARES-COMMON-STOCK> 206,908
<SHARES-COMMON-PRIOR> 126,025
<ACCUMULATED-NII-CURRENT> 486,148<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (3,883,482)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 15,629,825<F1>
<NET-ASSETS> 3,783,563
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 10,042,391<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (1,870,764)<F1>
<NET-INVESTMENT-INCOME> 8,171,627<F1>
<REALIZED-GAINS-CURRENT> 1,186,738<F1>
<APPREC-INCREASE-CURRENT> 4,996,359<F1>
<NET-CHANGE-FROM-OPS> 14,354,724<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (110,912)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 97,375
<NUMBER-OF-SHARES-REDEEMED> (20,021)
<SHARES-REINVESTED> 3,529
<NET-CHANGE-IN-ASSETS> 1,565,210
<ACCUMULATED-NII-PRIOR> 209,340<F1>
<ACCUMULATED-GAINS-PRIOR> (5,070,220)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 814,437<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 1,870,764<F1>
<AVERAGE-NET-ASSETS> 2,752,338
<PER-SHARE-NAV-BEGIN> 17.602
<PER-SHARE-NII> 0.727
<PER-SHARE-GAIN-APPREC> 0.674
<PER-SHARE-DIVIDEND> (0.717)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 18.286
<EXPENSE-RATIO> 1.71
<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> MUNI INC CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 943,198,738<F1>
<INVESTMENTS-AT-VALUE> 1,027,887,582<F1>
<RECEIVABLES> 22,431,707<F1>
<ASSETS-OTHER> 892<F1>
<OTHER-ITEMS-ASSETS> 22,912<F1>
<TOTAL-ASSETS> 1,050,343,093<F1>
<PAYABLE-FOR-SECURITIES> 39,387,246<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 18,345,592<F1>
<TOTAL-LIABILITIES> 57,732,838<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 708,060,131
<SHARES-COMMON-STOCK> 48,593,827
<SHARES-COMMON-PRIOR> 51,899,523
<ACCUMULATED-NII-CURRENT> 535,106<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (17,801,038)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 84,570,511<F1>
<NET-ASSETS> 766,164,906
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 63,871,998<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (10,458,603)<F1>
<NET-INVESTMENT-INCOME> 53,413,395<F1>
<REALIZED-GAINS-CURRENT> 10,327,114<F1>
<APPREC-INCREASE-CURRENT> 23,723,238<F1>
<NET-CHANGE-FROM-OPS> 87,463,747<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (43,085,857)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 33,152,701
<NUMBER-OF-SHARES-REDEEMED> (37,868,614)
<SHARES-REINVESTED> 1,410,217
<NET-CHANGE-IN-ASSETS> (26,176,023)
<ACCUMULATED-NII-PRIOR> 662,245<F1>
<ACCUMULATED-GAINS-PRIOR> (27,924,222)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 4,721,648<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 10,458,603<F1>
<AVERAGE-NET-ASSETS> 777,071,315
<PER-SHARE-NAV-BEGIN> 15.267
<PER-SHARE-NII> 0.852
<PER-SHARE-GAIN-APPREC> 0.500
<PER-SHARE-DIVIDEND> (0.852)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 15.767
<EXPENSE-RATIO> 0.89
<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> 042
<NAME> MUNI INC CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 943,198,738<F1>
<INVESTMENTS-AT-VALUE> 1,027,887,582<F1>
<RECEIVABLES> 22,431,707<F1>
<ASSETS-OTHER> 892<F1>
<OTHER-ITEMS-ASSETS> 22,912<F1>
<TOTAL-ASSETS> 1,050,343,093<F1>
<PAYABLE-FOR-SECURITIES> 39,387,246<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 18,345,592<F1>
<TOTAL-LIABILITIES> 57,732,838<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 202,573,952
<SHARES-COMMON-STOCK> 13,395,856
<SHARES-COMMON-PRIOR> 13,819,776
<ACCUMULATED-NII-CURRENT> 535,106<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (17,801,038)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 84,570,511<F1>
<NET-ASSETS> 211,166,349
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 63,871,998<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (10,458,603)<F1>
<NET-INVESTMENT-INCOME> 53,413,395<F1>
<REALIZED-GAINS-CURRENT> 10,327,114<F1>
<APPREC-INCREASE-CURRENT> 23,723,238<F1>
<NET-CHANGE-FROM-OPS> 87,463,747<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (9,834,294)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,551,226
<NUMBER-OF-SHARES-REDEEMED> (2,313,649)
<SHARES-REINVESTED> 338,503
<NET-CHANGE-IN-ASSETS> 183,531
<ACCUMULATED-NII-PRIOR> 662,245<F1>
<ACCUMULATED-GAINS-PRIOR> (27,924,222)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 4,721,648<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 10,458,603<F1>
<AVERAGE-NET-ASSETS> 204,687,948
<PER-SHARE-NAV-BEGIN> 15.267
<PER-SHARE-NII> 0.734
<PER-SHARE-GAIN-APPREC> 0.501
<PER-SHARE-DIVIDEND> (0.738)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 15.764
<EXPENSE-RATIO> 1.65
<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> 043
<NAME> MUNI INC CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 943,198,738<F1>
<INVESTMENTS-AT-VALUE> 1,027,887,582<F1>
<RECEIVABLES> 22,431,707<F1>
<ASSETS-OTHER> 892<F1>
<OTHER-ITEMS-ASSETS> 22,912<F1>
<TOTAL-ASSETS> 1,050,343,093<F1>
<PAYABLE-FOR-SECURITIES> 39,387,246<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 18,345,592<F1>
<TOTAL-LIABILITIES> 57,732,838<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 14,671,593
<SHARES-COMMON-STOCK> 970,252
<SHARES-COMMON-PRIOR> 846,831
<ACCUMULATED-NII-CURRENT> 535,106<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (17,801,038)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 84,570,511<F1>
<NET-ASSETS> 15,279,000
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 63,871,998<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (10,458,603)<F1>
<NET-INVESTMENT-INCOME> 53,413,395<F1>
<REALIZED-GAINS-CURRENT> 10,327,114<F1>
<APPREC-INCREASE-CURRENT> 23,723,238<F1>
<NET-CHANGE-FROM-OPS> 87,463,747<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (604,662)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 328,583
<NUMBER-OF-SHARES-REDEEMED> (225,699)
<SHARES-REINVESTED> 20,537
<NET-CHANGE-IN-ASSETS> 2,360,795
<ACCUMULATED-NII-PRIOR> 662,245<F1>
<ACCUMULATED-GAINS-PRIOR> (27,924,222)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 4,721,648<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 10,458,603<F1>
<AVERAGE-NET-ASSETS> 12,589,255
<PER-SHARE-NAV-BEGIN> 15.254
<PER-SHARE-NII> 0.730
<PER-SHARE-GAIN-APPREC> 0.501
<PER-SHARE-DIVIDEND> (0.738)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 15.747
<EXPENSE-RATIO> 1.66
<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> 051
<NAME> INTER TERM MUNI A
<MULTIPLIER> 1 <F1>
<S> <C>
<PERIOD-TYPE> YEAR <F1>
<FISCAL-YEAR-END> DEC-31-1997<F1>
<PERIOD-START> JAN-01-1997<F1>
<PERIOD-END> DEC-31-1997<F1>
<INVESTMENTS-AT-COST> 30,737,398<F1>
<INVESTMENTS-AT-VALUE> 33,171,131<F1>
<RECEIVABLES> 1,032,916<F1>
<ASSETS-OTHER> 4,828<F1>
<OTHER-ITEMS-ASSETS> 44,461<F1>
<TOTAL-ASSETS> 34,253,336<F1>
<PAYABLE-FOR-SECURITIES> 1,531,286<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 327,582<F1>
<TOTAL-LIABILITIES> 1,858,868<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,105,732
<SHARES-COMMON-STOCK> 1,226,471
<SHARES-COMMON-PRIOR> 1,220,664
<ACCUMULATED-NII-CURRENT> 33,324<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (338,406)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 2,433,733<F1>
<NET-ASSETS> 12,922,442
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 2,041,580<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (660,644)<F1>
<NET-INVESTMENT-INCOME> 1,380,936<F1>
<REALIZED-GAINS-CURRENT> 347,481<F1>
<APPREC-INCREASE-CURRENT> 651,462<F1>
<NET-CHANGE-FROM-OPS> 2,379,879<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (560,309)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 224,786
<NUMBER-OF-SHARES-REDEEMED> (255,254)
<SHARES-REINVESTED> 36,275
<NET-CHANGE-IN-ASSETS> 445,997
<ACCUMULATED-NII-PRIOR> 27,942<F1>
<ACCUMULATED-GAINS-PRIOR> (685,887)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 164,970<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 707,875<F1>
<AVERAGE-NET-ASSETS> 12,159,356
<PER-SHARE-NAV-BEGIN> 10.213
<PER-SHARE-NII> 0.480
<PER-SHARE-GAIN-APPREC> 0.317
<PER-SHARE-DIVIDEND> (0.474)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.536
<EXPENSE-RATIO> 1.52
<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> INTER TERM MUNI B
<MULTIPLIER> 1 <F1>
<S> <C>
<PERIOD-TYPE> YEAR <F1>
<FISCAL-YEAR-END> DEC-31-1997<F1>
<PERIOD-START> JAN-01-1997<F1>
<PERIOD-END> DEC-31-1997<F1>
<INVESTMENTS-AT-COST> 30,737,398<F1>
<INVESTMENTS-AT-VALUE> 33,171,131<F1>
<RECEIVABLES> 1,032,916<F1>
<ASSETS-OTHER> 4,828<F1>
<OTHER-ITEMS-ASSETS> 44,461<F1>
<TOTAL-ASSETS> 34,253,336<F1>
<PAYABLE-FOR-SECURITIES> 1,531,286<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 327,582<F1>
<TOTAL-LIABILITIES> 1,858,868<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 15,529,684
<SHARES-COMMON-STOCK> 1,559,757
<SHARES-COMMON-PRIOR> 1,604,956
<ACCUMULATED-NII-CURRENT> 33,324<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (338,406)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 2,433,733<F1>
<NET-ASSETS> 16,418,482
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 2,041,580<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (660,644)<F1>
<NET-INVESTMENT-INCOME> 1,380,936<F1>
<REALIZED-GAINS-CURRENT> 347,481<F1>
<APPREC-INCREASE-CURRENT> 651,462<F1>
<NET-CHANGE-FROM-OPS> 2,379,879<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (628,468)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 176,313
<NUMBER-OF-SHARES-REDEEMED> (255,930)
<SHARES-REINVESTED> 34,418
<NET-CHANGE-IN-ASSETS> 34,221
<ACCUMULATED-NII-PRIOR> 27,942<F1>
<ACCUMULATED-GAINS-PRIOR> (685,887)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 164,970<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 707,875<F1>
<AVERAGE-NET-ASSETS> 16,072,263
<PER-SHARE-NAV-BEGIN> 10.209
<PER-SHARE-NII> 0.402
<PER-SHARE-GAIN-APPREC> 0.317
<PER-SHARE-DIVIDEND> (0.402)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.526
<EXPENSE-RATIO> 2.28
<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> INTER TERM MUNI C
<MULTIPLIER> 1 <F1>
<S> <C>
<PERIOD-TYPE> YEAR <F1>
<FISCAL-YEAR-END> DEC-31-1997<F1>
<PERIOD-START> JAN-01-1997<F1>
<PERIOD-END> DEC-31-1997<F1>
<INVESTMENTS-AT-COST> 30,737,398<F1>
<INVESTMENTS-AT-VALUE> 33,171,131<F1>
<RECEIVABLES> 1,032,916<F1>
<ASSETS-OTHER> 4,828<F1>
<OTHER-ITEMS-ASSETS> 44,461<F1>
<TOTAL-ASSETS> 34,253,336<F1>
<PAYABLE-FOR-SECURITIES> 1,531,286<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 327,582<F1>
<TOTAL-LIABILITIES> 1,858,868<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,630,401
<SHARES-COMMON-STOCK> 290,114
<SHARES-COMMON-PRIOR> 571,218
<ACCUMULATED-NII-CURRENT> 33,324<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (338,406)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 2,433,733<F1>
<NET-ASSETS> 3,053,544
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 2,041,580<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (660,644)<F1>
<NET-INVESTMENT-INCOME> 1,380,936<F1>
<REALIZED-GAINS-CURRENT> 347,481<F1>
<APPREC-INCREASE-CURRENT> 651,462<F1>
<NET-CHANGE-FROM-OPS> 2,379,879<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (186,777)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 141,162
<NUMBER-OF-SHARES-REDEEMED> (437,360)
<SHARES-REINVESTED> 15,094
<NET-CHANGE-IN-ASSETS> (2,776,439)
<ACCUMULATED-NII-PRIOR> 27,942<F1>
<ACCUMULATED-GAINS-PRIOR> (685,887)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 164,970<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 707,875<F1>
<AVERAGE-NET-ASSETS> 4,765,833
<PER-SHARE-NAV-BEGIN> 10.206
<PER-SHARE-NII> 0.402
<PER-SHARE-GAIN-APPREC> 0.319
<PER-SHARE-DIVIDEND> (0.402)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.525
<EXPENSE-RATIO> 2.29
<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> FL INSD A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 51,234,398<F1>
<INVESTMENTS-AT-VALUE> 54,882,340<F1>
<RECEIVABLES> 1,928,317<F1>
<ASSETS-OTHER> 25,219<F1>
<OTHER-ITEMS-ASSETS> 999,140<F1>
<TOTAL-ASSETS> 57,835,016<F1>
<PAYABLE-FOR-SECURITIES> 4,430,808<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 360,165<F1>
<TOTAL-LIABILITIES> 4,790,973<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 27,794,429
<SHARES-COMMON-STOCK> 1,887,297
<SHARES-COMMON-PRIOR> 1,471,084
<ACCUMULATED-NII-CURRENT> (4,556)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (593,398)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 3,637,769<F1>
<NET-ASSETS> 29,347,021
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 2,523,156<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (419,151)<F1>
<NET-INVESTMENT-INCOME> 2,104,005<F1>
<REALIZED-GAINS-CURRENT> (593,398)<F1>
<APPREC-INCREASE-CURRENT> 2,178,761<F1>
<NET-CHANGE-FROM-OPS> 3,689,368<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (1,223,114)
<DISTRIBUTIONS-OF-GAINS> (14,898)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 609,339
<NUMBER-OF-SHARES-REDEEMED> (232,349)
<SHARES-REINVESTED> 39,223
<NET-CHANGE-IN-ASSETS> 7,191,818
<ACCUMULATED-NII-PRIOR> 20,971<F1>
<ACCUMULATED-GAINS-PRIOR> 27,558<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 223,516<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 731,603<F1>
<AVERAGE-NET-ASSETS> 23,931,600
<PER-SHARE-NAV-BEGIN> 15.060
<PER-SHARE-NII> 0.766
<PER-SHARE-GAIN-APPREC> 0.508
<PER-SHARE-DIVIDEND> (0.774)
<PER-SHARE-DISTRIBUTIONS> (0.010)
<RETURNS-OF-CAPITAL> 0.010
<PER-SHARE-NAV-END> 15.550
<EXPENSE-RATIO> 0.59
<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> FL INSD B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 51,234,398<F1>
<INVESTMENTS-AT-VALUE> 54,882,340<F1>
<RECEIVABLES> 1,928,317<F1>
<ASSETS-OTHER> 25,219<F1>
<OTHER-ITEMS-ASSETS> 999,140<F1>
<TOTAL-ASSETS> 57,835,016<F1>
<PAYABLE-FOR-SECURITIES> 4,430,808<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 360,165<F1>
<TOTAL-LIABILITIES> 4,790,973<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21,042,117
<SHARES-COMMON-STOCK> 1,446,624
<SHARES-COMMON-PRIOR> 1,252,795
<ACCUMULATED-NII-CURRENT> (4,556)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (593,398)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 3,637,769<F1>
<NET-ASSETS> 22,501,937
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 2,523,156<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (419,151)<F1>
<NET-INVESTMENT-INCOME> 2,104,005<F1>
<REALIZED-GAINS-CURRENT> (593,398)<F1>
<APPREC-INCREASE-CURRENT> 2,178,761<F1>
<NET-CHANGE-FROM-OPS> 3,689,368<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (878,013)
<DISTRIBUTIONS-OF-GAINS> (12,813)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 384,943
<NUMBER-OF-SHARES-REDEEMED> (216,650)
<SHARES-REINVESTED> 25,536
<NET-CHANGE-IN-ASSETS> 3,629,211
<ACCUMULATED-NII-PRIOR> 20,971<F1>
<ACCUMULATED-GAINS-PRIOR> 27,558<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 223,516<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 731,603<F1>
<AVERAGE-NET-ASSETS> 20,147,289
<PER-SHARE-NAV-BEGIN> 15.064
<PER-SHARE-NII> 0.650
<PER-SHARE-GAIN-APPREC> 0.510
<PER-SHARE-DIVIDEND> (0.660)
<PER-SHARE-DISTRIBUTIONS> (0.010)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 15.554
<EXPENSE-RATIO> 1.33
<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> FL INSD C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 51,234,398<F1>
<INVESTMENTS-AT-VALUE> 54,882,340<F1>
<RECEIVABLES> 1,928,317<F1>
<ASSETS-OTHER> 25,219<F1>
<OTHER-ITEMS-ASSETS> 999,140<F1>
<TOTAL-ASSETS> 57,835,016<F1>
<PAYABLE-FOR-SECURITIES> 4,430,808<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 360,165<F1>
<TOTAL-LIABILITIES> 4,790,973<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,167,682
<SHARES-COMMON-STOCK> 76,703
<SHARES-COMMON-PRIOR> 56,311
<ACCUMULATED-NII-CURRENT> (4,556)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (593,398)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 3,637,769<F1>
<NET-ASSETS> 1,195,085
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 2,523,156<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (419,151)<F1>
<NET-INVESTMENT-INCOME> 2,104,005<F1>
<REALIZED-GAINS-CURRENT> (593,398)<F1>
<APPREC-INCREASE-CURRENT> 2,178,761<F1>
<NET-CHANGE-FROM-OPS> 3,689,368<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (27,855)
<DISTRIBUTIONS-OF-GAINS> (397)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 52,399
<NUMBER-OF-SHARES-REDEEMED> (33,195)
<SHARES-REINVESTED> 1,188
<NET-CHANGE-IN-ASSETS> 345,875
<ACCUMULATED-NII-PRIOR> 20,971<F1>
<ACCUMULATED-GAINS-PRIOR> 27,558<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 223,516<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 731,603<F1>
<AVERAGE-NET-ASSETS> 643,054
<PER-SHARE-NAV-BEGIN> 15.081
<PER-SHARE-NII> 0.666
<PER-SHARE-GAIN-APPREC> 0.504
<PER-SHARE-DIVIDEND> (0.660)
<PER-SHARE-DISTRIBUTIONS> (0.010)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 15.581
<EXPENSE-RATIO> 1.37
<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> N.Y.T.F CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 34,396,039<F1>
<INVESTMENTS-AT-VALUE> 36,481,179<F1>
<RECEIVABLES> 571,819<F1>
<ASSETS-OTHER> 23,801<F1>
<OTHER-ITEMS-ASSETS> 8,775<F1>
<TOTAL-ASSETS> 37,085,574<F1>
<PAYABLE-FOR-SECURITIES> 4,766,150<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 202,836<F1>
<TOTAL-LIABILITIES> 4,968,986<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,012,428
<SHARES-COMMON-STOCK> 1,142,337
<SHARES-COMMON-PRIOR> 513,625
<ACCUMULATED-NII-CURRENT> 28<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 40,951<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 2,085,140<F1>
<NET-ASSETS> 17,974,339
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 1,350,276<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (234,551)<F1>
<NET-INVESTMENT-INCOME> 1,115,725<F1>
<REALIZED-GAINS-CURRENT> 255,029<F1>
<APPREC-INCREASE-CURRENT> 1,117,382<F1>
<NET-CHANGE-FROM-OPS> 2,488,136<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (584,822)
<DISTRIBUTIONS-OF-GAINS> (46,829)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 704,992
<NUMBER-OF-SHARES-REDEEMED> (103,563)
<SHARES-REINVESTED> 27,283
<NET-CHANGE-IN-ASSETS> 10,274,245
<ACCUMULATED-NII-PRIOR> 10,427<F1>
<ACCUMULATED-GAINS-PRIOR> (130,324)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 139,021<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 426,380<F1>
<AVERAGE-NET-ASSETS> 11,228,775
<PER-SHARE-NAV-BEGIN> 14.992
<PER-SHARE-NII> 0.786
<PER-SHARE-GAIN-APPREC> 0.795
<PER-SHARE-DIVIDEND> (.798)
<PER-SHARE-DISTRIBUTIONS> (0.041)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 15.734
<EXPENSE-RATIO> 0.64
<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> N.Y.T.F. CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 34,396,039<F1>
<INVESTMENTS-AT-VALUE> 36,481,179<F1>
<RECEIVABLES> 571,819<F1>
<ASSETS-OTHER> 23,801<F1>
<OTHER-ITEMS-ASSETS> 8,775<F1>
<TOTAL-ASSETS> 37,085,574<F1>
<PAYABLE-FOR-SECURITIES> 4,766,150<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 202,836<F1>
<TOTAL-LIABILITIES> 4,968,986<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,991,922
<SHARES-COMMON-STOCK> 833,648
<SHARES-COMMON-PRIOR> 675,612
<ACCUMULATED-NII-CURRENT> 28<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 40,951<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 2,085,140<F1>
<NET-ASSETS> 13,110,477
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 1,350,276<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (234,551)<F1>
<NET-INVESTMENT-INCOME> 1,115,725<F1>
<REALIZED-GAINS-CURRENT> 255,029<F1>
<APPREC-INCREASE-CURRENT> 1,117,382<F1>
<NET-CHANGE-FROM-OPS> 2,488,136<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (515,371)
<DISTRIBUTIONS-OF-GAINS> (34,234)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 335,132
<NUMBER-OF-SHARES-REDEEMED> (193,090)
<SHARES-REINVESTED> 15,994
<NET-CHANGE-IN-ASSETS> 2,981,890
<ACCUMULATED-NII-PRIOR> 10,427<F1>
<ACCUMULATED-GAINS-PRIOR> (130,324)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 139,021<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 426,380<F1>
<AVERAGE-NET-ASSETS> 11,380,491
<PER-SHARE-NAV-BEGIN> 14.992
<PER-SHARE-NII> 0.684
<PER-SHARE-GAIN-APPREC> 0.782
<PER-SHARE-DIVIDEND> (.690)
<PER-SHARE-DISTRIBUTIONS> (0.041)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 15.727
<EXPENSE-RATIO> 1.36
<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> N.Y.T.F. CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 34,396,039<F1>
<INVESTMENTS-AT-VALUE> 36,481,179<F1>
<RECEIVABLES> 571,819<F1>
<ASSETS-OTHER> 23,801<F1>
<OTHER-ITEMS-ASSETS> 8,775<F1>
<TOTAL-ASSETS> 37,085,574<F1>
<PAYABLE-FOR-SECURITIES> 4,766,150<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 202,836<F1>
<TOTAL-LIABILITIES> 4,968,986<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 986,119
<SHARES-COMMON-STOCK> 65,610
<SHARES-COMMON-PRIOR> 23,541
<ACCUMULATED-NII-CURRENT> 28<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 40,951<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 2,085,140<F1>
<NET-ASSETS> 1,031,772
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 1,350,276<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (234,551)<F1>
<NET-INVESTMENT-INCOME> 1,115,725<F1>
<REALIZED-GAINS-CURRENT> 255,029<F1>
<APPREC-INCREASE-CURRENT> 1,117,382<F1>
<NET-CHANGE-FROM-OPS> 2,488,136<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (25,931)
<DISTRIBUTIONS-OF-GAINS> (2,691)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 48,608
<NUMBER-OF-SHARES-REDEEMED> (7,857)
<SHARES-REINVESTED> 1,318
<NET-CHANGE-IN-ASSETS> 678,847
<ACCUMULATED-NII-PRIOR> 10,427<F1>
<ACCUMULATED-GAINS-PRIOR> (130,324)<F1>
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 139,021<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 426,380<F1>
<AVERAGE-NET-ASSETS> 577,131
<PER-SHARE-NAV-BEGIN> 14.992
<PER-SHARE-NII> 0.676
<PER-SHARE-GAIN-APPREC> 0.789
<PER-SHARE-DIVIDEND> (.690)
<PER-SHARE-DISTRIBUTIONS> (0.041)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 15.726
<EXPENSE-RATIO> 1.41
<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>
