<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 3
Performance in Perspective....................... 4
Glossary of Terms................................ 5
Portfolio Management Review...................... 7
Portfolio Highlights............................. 9
Portfolio of Investments......................... 10
Statement of Assets and Liabilities.............. 19
Statement of Operations.......................... 20
Statement of Changes in Net Assets............... 21
Financial Highlights............................. 22
Notes to Financial Statements.................... 25
Independent Accountants' Report.................. 31
</TABLE>
TFIN ANR 2/98
<PAGE> 2
LETTER TO SHAREHOLDERS
February 3, 1998
Dear Shareholder,
The new year ushers in what
promises to be an exciting and
challenging time for investors. The
Taxpayer Relief Act of 1997 signed into
law by President Clinton in August
creates many new opportunities for you
and your family to take a more active
role in achieving your long-term
financial goals.
Most Americans will benefit from
the bill's $95 billion in tax cuts over [Photo]
five years. The so-called Kiddie Credit
gives parents $400 in immediate tax
relief for every child under age 17,
and families will find it easier to DENNIS J. MCDONNELL AND DON G. POWELL
save for their children's college
expenses through the new Education IRA.
The bill also cuts capital gains tax
rates for the first time in over a decade and loosens restrictions on
tax-deductible IRA contributions. Perhaps the most exciting feature of all is
the new Roth IRA, which allows investment earnings to grow tax free, not just
tax deferred.
This year more than ever, it could be important for you to talk with your
financial adviser about how to make the tax code work to your advantage. At Van
Kampen American Capital, we have prepared a variety of publications to help you
understand your choices under the new tax legislation. And with the help of your
adviser, we'll help you locate the many benefits hidden among the changing tax
landscape.
ECONOMIC OVERVIEW
These continue to be the best of times for the U.S. economy. Growth is
strong, consumers are optimistic, unemployment is low, the budget is heading for
surplus, and our nation's currency is rising around the world.
Despite the strength in the economy, there is no indication of
troublesome inflation. In fact, the producer price index fell by 1.2 percent
during the year, the largest annual decline in wholesale prices since 1986.
Inflation at the consumer level was also virtually nonexistent, with the
consumer price index rising by only 1.7 percent during 1997. A strong dollar,
and significant productivity gains helped offset inflationary pressures caused
by rising wages.
After increasing short-term interest rates by 0.25 percent in March, the
Federal Reserve Board left monetary policy unchanged for the remainder of the
year. In addition to signs that the economy was slowing modestly from its
breakneck pace of early 1997, Fed policy-makers were concerned about the impact
that higher U.S. interest rates might have on the struggling economies of
Southeast Asia. Generally, higher U.S. interest rates cause the dollar to rise
relative to other currencies. With nearly all Asian currencies already down
significantly, a hike in U.S. rates would force monetary authorities in Asia to
choose between letting their currencies decline further or matching the rate
increase, thereby slowing their already-sluggish economies.
Continued on page two
1
<PAGE> 3
MARKET OVERVIEW
Low inflation and steady Federal Reserve policy contributed to solid
gains for fixed-income investments over the reporting period. The yield on the
Treasury's benchmark 30-year bond began the year at 6.64 percent and climbed to
7.17 percent in April amid fears that strong economic growth would reignite
inflation. When subsequent data showed the economy to be slowing, bond yields
gradually drifted lower. By the end of the reporting period, long-term
Treasury-bond yields had fallen to 5.92 percent, the lowest level in more than
four years.
During the 12 months through December, long-term general obligation bonds
returned more than 11 percent, compared to just under 9 percent for
intermediate-term bonds. Total volume of municipal debt rose to over $200
billion, the highest level since 1993. Close to 50 percent of issuance was
enhanced by insurance. This increase in AAA-rated volume caused spreads between
high quality and lower-rated paper to compress, making quality offerings
attractive during the period. At the same time, however, it was difficult to
build the income component of the portfolio due to the scarcity of higher
yielding securities.
OUTLOOK
We believe that reduced demand for American exports to Asia will exert a
mild drag on the U.S. economy in coming months. But while corporate profits
could suffer, slower economic growth will help mitigate the inflationary
pressures caused by the tight domestic labor market. That scenario is typically
good for fixed-income investments.
However, if bond yields continue to drift lower, economic growth in the
U.S. could accelerate later in 1998. In recent years, each significant decline
in long-term interest rates has ignited economic growth by making housing,
autos, and other big-ticket consumer goods more affordable. We also expect the
healthy economy to keep credit spreads relatively tight in coming months.
As we noted earlier, the Taxpayer Relief Act of 1997 provides attractive
new vehicles through which investors can save for a variety of goals, including
higher education and retirement. We encourage you to work with your financial
adviser to consider how the tax changes can work to your benefit.
Additional details about your Fund, including a question-and-answer
section with your portfolio management team, are provided in this report. As
always, we are pleased to have the opportunity to serve you through our diverse
menu of quality investments.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
2
<PAGE> 4
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1997
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
TOTAL RETURNS
One-year total return based on NAV(1)....................... 8.19% 7.36% 7.36%
One-year total return(2).................................... 3.05% 3.36% 6.36%
Five-year average annual total return(2).................... 5.72% N/A N/A
Ten-year average annual total return(2)..................... 7.64% N/A N/A
Life-of-Fund average annual total return(2)................. 8.99% 4.95% 4.82%
Commencement Date........................................... 12/14/84 05/01/93 08/13/93
DISTRIBUTION RATES AND YIELD
Distribution Rate(3)........................................ 4.66% 4.14% 4.14%
Taxable Equivalent Distribution Rate(4)..................... 7.28% 6.47% 6.47%
SEC Yield(5)................................................ 4.04% 3.44% 3.38%
</TABLE>
N/A = Not Applicable
(1) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (4.75% for A shares) or contingent
deferred sales charge for early withdrawal (4% for B shares and 1% for C
shares).
(2) Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (A shares) or contingent
deferred sales charge for early withdrawal (B and C shares).
(3) Distribution rate represents the monthly annualized distributions of the
Fund at the end of the period and not the earnings of the Fund.
(4) Taxable equivalent calculations reflect a federal income tax rate of 36%.
(5) SEC Yield is a standardized calculation prescribed by the Securities and
Exchange Commission for determining the amount of net income a portfolio should
theoretically generate for the 30-day period ending December 31, 1997.
The terms of the insurance are more fully described in the Fund's prospectus; no
representation is made as to the insurer's ability to meet its commitments. In
addition, the insurance does not remove market risk, as it does not apply to the
value of the securities in the Fund's portfolio, which may increase or decrease
depending on interest rates and other factors affecting the municipal credit
markets.
See the Fund Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. Fund shares, when redeemed, may be worth more
or less than their original cost.
Market forecasts provided in this report may not necessarily come to pass.
3
<PAGE> 5
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:
- Illustrate the general market environment in which your investments are
being managed
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over the
period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Lehman Brothers Municipal Bond
Index over time. As a broad-based, unmanaged statistical composite, this index
does not reflect any commissions or fees which would be incurred by an investor
purchasing the securities it represents. Similarly, its performance does not
reflect any sales charges or other costs which would be applicable to an
actively managed portfolio, such as that of the Fund.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Insured Tax Free Income Fund vs. Lehman Brothers
Municipal Bond Index
(December 31, 1987 through December 31, 1997)
[GRAPH]
<TABLE>
<CAPTION>
VKAC
American Capital Lehman Brothers
Value at Insured Tax Free Municipal Bond
December 31, Income Fund Index
<S> <C> <C>
1987 9,527.00 10,000.00
1988 10,620.00 11,015.20
1989 11,615.00 12,203.30
1990 12,436.00 13,093.00
1991 13,757.00 14,683.20
1992 15,066.00 15,977.60
1993 16,922.00 17,939.10
1994 15,855.00 17,011.40
1995 18,629.00 19,982.00
1996 19,307.00 20,888.90
1997 20,888.00 22,789.30
- --------------------------------
Fund's Total Return
1 Year Avg. Annual = 3.05%
5 Year Avg. Annual = 5.72%
10 Year Avg. Annual = 7.64%
Inception Avg. Annual = 8.99%
- --------------------------------
</TABLE>
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions and includes payment of the maximum
sales charge (4.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
4
<PAGE> 6
GLOSSARY OF TERMS
BASIS POINT: A measure used in quoting yields on bonds. One hundred basis points
is equal to one percent. For example, if a bond's yield changes from 7.00 to
6.65 percent, it would be considered a 35 basis point move.
CALL FEATURE: Allows the issuer to buy back the bond before the date of
maturity. When the bond is called, the issuer repurchases it at or above its
face value, and stops paying interest on that loan.
CLASS A SHARES: When Class A shares of a fund are purchased, the share price
includes the net asset value plus a one-time sales charge (or "load"). There is
no redemption fee (Contingent Deferred Sales Charge).
COUPON RATE: The stated rate of interest the bond pays until maturity, expressed
as a percentage of the face value.
CREDIT SPREAD: Also called quality spread, the difference in yield between
higher-quality issues (such as AAA-rated municipal bonds) and lower-quality
issues (such as BBB- and non-rated municipal bonds). Under normal circumstances,
lower-quality issues provide higher yields in order to compensate investors for
the additional credit risk.
DURATION: A measure of a bond's sensitivity to changes in interest rates,
expressed in years. The longer a fund's duration, the greater the effect of
interest rate movements on net asset value. Typically, funds with shorter
durations have performed better in rising rate environments, while funds with
longer durations have performed better when rates decline.
FEDERAL FUNDS RATE: The interest rate charged by one institution lending federal
funds to another. This overnight rate is used to meet banks' daily reserve
requirements. The Federal Reserve Board uses the federal funds rate to affect
the direction of interest rates.
FEDERAL RESERVE BOARD (THE FED): A seven-member group that directs the
operations of the Federal Reserve System, the central bank system of the United
States. Currently led by Chairman Alan Greenspan, the Fed meets eight times a
year to establish monetary policy and monitor the country's economic pulse.
GENERAL OBLIGATION BONDS: Bonds backed by the full faith and credit (taxing
authority) of the issuer for timely payment of interest and principal. General
obligation bonds are issued to finance essential government projects, such as
highways and schools.
INFLATION: An economic state in which the amount of money supply and business
activity dramatically increases, accompanied by sharply rising prices. Inflation
is widely measured by the Consumer Price Index, a leading economic indicator
that measures the change in the cost of purchased goods and services.
MUNICIPAL BOND: A debt security issued by a state, municipality or other
governmental entity to finance capital expenditures such as the construction of
highways, public works, or school buildings.
MUNICIPAL REVENUE BONDS: Bonds that are payable only from the revenues the
project will generate and are not backed by any taxing authority of the issuer.
Revenue bonds are issued to finance the building of hospitals, toll bridges,
electric dams, airports, and college dormitories.
MUNICIPAL YIELD CURVE: A representation of the actual or projected yields of
municipal bond securities in relationship to their maturities.
NET ASSET VALUE (NAV): The value of a mutual fund share, calculated by deducting
a fund's liabilities from its total assets and dividing this amount by the
number of shares outstanding. The NAV does not include any initial or contingent
deferred sales charges.
PUT BOND: A long-term bond that the bondholder can "put" back to the issuer for
redemption at a specified price on a specified future date prior to maturity.
PREREFUNDING: A process whereby new bonds are issued to refinance an outstanding
bond issue. This typically occurs when interest rates decline and an issuer
wishes to replace higher-yielding bonds with current lower-yielding issues.
5
<PAGE> 7
GLOSSARY OF TERMS (CONTINUED)
YIELD CURVE: A result of viewing the yields of U.S. Treasury securities maturing
in 1, 5, 10, and 30 years, grouped together, will often reflect a pattern of
increasing yield as maturity extends. This pattern creates an upward sloping
"curve." A "flat" yield curve represents little difference between short- and
long-term interest rates. An "inverted" yield curve indicates that short-term
rates are higher than long-term rates.
ZERO COUPON BONDS: A corporate or municipal debt security traded at a deep
discount from face value that pays no interest and it may be redeemed at
maturity for full face value.
6
<PAGE> 8
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
We recently spoke with the management team of the Van Kampen American Capital
Insured Tax Free Income Fund about the key events and economic forces that
shaped the markets during the Fund's fiscal year. The team includes Joseph A.
Piraro, portfolio manager, and Peter W. Hegel, chief investment officer for
fixed-income investments. The following excerpts reflect their views on the
Fund's performance during the 12-month period ended December 31, 1997.
Q HOW WOULD YOU DESCRIBE THE MARKET ENVIRONMENT IN WHICH THE FUND HAS
OPERATED DURING THE PAST 12 MONTHS?
A The bond market saw healthy price advances during 1997, but this ascension
was not a smooth ride. Early in the year, bond prices began to fall when
economic indicators caused concerns about rising inflation and a potential
interest rate hike by the Federal Reserve Board. When the Fed raised interest
rates by a modest 0.25 percent in late March, bond prices fell even further. By
mid-April, however, the market's mood reversed, giving little indication of
price pressures despite the economy's strength. Bond prices also benefited from
heavy purchases by foreign investors and concerns that the stock market rally
was nearing an end.
While the economy showed few, if any, signs of inflation, bond prices
continued their climb, and long-term interest rates declined further. This
caused credit spreads between investment-grade and lower- or non-rated bonds to
contract significantly. Also, an unprecedented amount of insured bond
issuance--49 percent of total volume--reduced the supply of higher-yielding,
lower- and non-rated bonds available in the market. The increased issuance of
insured bonds provided more choices for the portfolio, which enhanced the Fund's
performance during the year.
Q WHAT CHALLENGES DID YOU ENCOUNTER DURING THE YEAR?
A Since the Fund's inception in 1984, there has been a substantial decrease
in interest rates, and many of the higher-yielding bonds in the Fund have
been prerefunded. Replacing the prerefunded bonds with equally high-
yielding issues was challenging. When higher-yielding bonds are prerefunded or
called before their maturity, it is more difficult for the Fund to meet its
dividend, and it reined in our duration to 7.07 years. However, we were able to
maintain the Fund's dividend and duration by preserving as many of the
prerefunded issues as possible.
Q WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO?
A Turnover in the Fund was somewhat higher during the reporting period than
it was in the early 1990s. In an environment of declining interest rates
and a large number of prerefunded issues, we sold bonds to take advantage
of price appreciation in seeking to enhance the Fund's performance.
At the beginning of the period, approximately 20 percent of the Fund's
portfolio was allocated to California bonds. During the year, a number of
California mutual funds were replacing prerefunded issues, and we recognized
that there was a great demand for California bonds. As a result, California
bonds were trading at high prices--selling above their intrinsic value for most
of the reporting period. We believed that these bonds were trading as high as
they were likely to trade, so we sold a number of these issues, reducing our
holdings in California bonds to 16 percent of the portfolio at year-end. While
our concentration in California decreased during the year, other specialty state
bonds, such as double tax-exempt for residents of those states, were added to
the portfolio.
Q HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A The Fund posted positive results for the fiscal year. Total return for the
12 months ended December 31, 1997 was 8.19 percent(1) (Class A shares at
net asset value). By comparison, the Fund's benchmark, the Lehman Brothers
Municipal Bond Index produced a total return of 9.19 percent for the same
period. Keep in mind that this
7
<PAGE> 9
index is a broad-based, unmanaged index of municipal bonds and does not reflect
any commissions or fees that would be paid by an investor purchasing the
securities it represents. For additional Fund portfolio highlights, please refer
to page nine.
The Fund continued to meet its goal of providing a competitive level of
federally tax-exempt current income. At year-end, its tax-exempt distribution
rate (Class A shares) was 4.66 percent(3), based on a monthly dividend of $0.08
per share and a maximum public offering price of $20.61 per share. For investors
in the 36 percent federal income tax bracket, the Fund's taxable-equivalent
distribution rate was 7.28 percent(4). Please refer to the chart on page three
for additional Fund performance results.
Q
WHAT IS YOUR OUTLOOK FOR THE MONTHS AHEAD?
A We expect the U.S. economy to remain strong going into 1998, although the
growth rate could slow from its current level. The expediency with which
the crisis in Southeast Asia is resolved will play a key role in how the
Fed will manage the U.S. interest rate environment in the coming year. We are
cautiously optimistic that interest rates will remain fairly stable, if not move
slightly lower in 1998. In the event that conditions in Southeast Asia stabilize
and the U.S. economy shows increased signs of price appreciation and wage
pressures, the Fed might take preemptive measures to keep inflation in check.
We believe the availability of insured paper will continue to be plentiful
in an environment of stable economic growth, and we anticipate that insured
issuance will remain at or around 50 percent of the new issue market. In this
environment, the Fund will have more opportunities to participate in the market,
enabling us to position the Fund to perform well in the coming year, regardless
of any changes in interest rates.
[SIG]
Peter W. Hegel
Chief Investment Officer
Fixed Income Investments
[SIG]
Joseph A. Piraro
Portfolio Manager
Please see footnotes on page three
8
<PAGE> 10
PORTFOLIO HIGHLIGHTS
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
TOP TEN STATES AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF FUND'S
LONG-TERM INVESTMENTS
<S> <C>
Illinois.................................................... 16.66%
California.................................................. 16.45%
New York.................................................... 7.39%
Pennsylvania................................................ 6.62%
Texas....................................................... 6.44%
Colorado.................................................... 4.92%
Florida..................................................... 3.16%
Kansas...................................................... 3.08%
Michigan.................................................... 2.96%
Georgia..................................................... 2.95%
</TABLE>
CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<S> <C>
AAA................................. 100%
</TABLE>
Based upon the highest credit quality ratings as determined by Standard & Poor's
or Moody's.
TOP FIVE PORTFOLIO SECTORS AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF JUNE 30, 1997(1)
<S> <C> <C> <C>
Health Care......................... 28.5% Health Care......................... 29.7%
Public Education.................... 9.9% Retail Electric / Gas / Telephone... 11.1%
Public Building..................... 8.9% Public Building..................... 8.3%
Retail Electric / Gas / Telephone... 8.8% General Purpose..................... 8.1%
General Purpose..................... 8.5% Higher Education.................... 7.9%
</TABLE>
DURATION
<TABLE>
<CAPTION>
As of December 31, 1997(1) As of June 30, 1997(1)
<S> <C> <C>
Duration 7.07 years 7.78 years
</TABLE>
(1)Unaudited
9
<PAGE> 11
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
10
<PAGE> 12
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
11
<PAGE> 13
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
12
<PAGE> 14
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
13
<PAGE> 15
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
14
<PAGE> 16
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
15
<PAGE> 17
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
16
<PAGE> 18
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
17
<PAGE> 19
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
18
<PAGE> 20
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
19
<PAGE> 21
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
20
<PAGE> 22
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
21
<PAGE> 23
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
22
<PAGE> 24
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
23
<PAGE> 25
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
24
<PAGE> 26
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.
25
<PAGE> 27
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
26
<PAGE> 28
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>
27
<PAGE> 29
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.
28
<PAGE> 30
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>
29
<PAGE> 31
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.
30
<PAGE> 32
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
31
<PAGE> 33
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
EQUITY FUNDS
Domestic
MS Aggressive Equity
VKAC Aggressive Growth
MS American Value
VKAC Comstock
VKAC Emerging Growth
VKAC Enterprise
VKAC Equity Income
VKAC Growth
VKAC Growth and Income
VKAC Harbor
VKAC Pace
VKAC Real Estate Securities
MS U.S. Real Estate
VKAC Utility
MS Value
International/Global
MS Asian Growth
MS Emerging Markets
MS Global Equity
VKAC Global Equity
MS Global Equity Allocation
VKAC Global Managed Assets
MS International Magnum
MS Latin American
FIXED-INCOME FUNDS
Income
VKAC Corporate Bond
MS Global Fixed Income
VKAC Global Government Securities
VKAC Government Securities
VKAC High Income Corporate Bond
MS High Yield
VKAC High Yield
VKAC Short-Term Global Income
VKAC Strategic Income
VKAC U.S. Government
VKAC U.S. Government Trust for Income
MS Worldwide High Income
Tax Exempt Income
VKAC California Insured Tax Free
VKAC Florida Insured Tax Free Income
VKAC High Yield Municipal
VKAC Insured Tax Free Income
VKAC Intermediate Term Municipal Income
VKAC Municipal Income
VKAC New York Tax Free Income
VKAC Pennsylvania Tax Free Income
VKAC Tax Free High Income
Capital Preservation
VKAC Limited Maturity Government
VKAC Prime Rate Income Trust
VKAC Reserve
VKAC Senior Floating Rate
VKAC Tax Free Money
To find out more about any of these funds, ask your financial adviser for a
prospectus, which contains more complete information, including sales
charges, risks, and expenses. Please read it carefully before you invest or
send money.
To view a current Van Kampen American Capital or Morgan Stanley fund
prospectus or to receive additional fund information, choose from one of the
following:
- visit our web site at WWW.VKAC.COM -- to view prospectuses, select
Investors' Place, then Download a Prospectus
- call us at 1-800-341-2911 weekdays from 7:00 a.m. to 7:00 p.m. Central time
(Telecommunications Device for the Deaf users, call 1-800-421-2833)
- e-mail us by visiting WWW.VKAC.COM and selecting Investors' Place
32
<PAGE> 34
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
BOARD OF TRUSTEES
J. MILES BRANAGAN
RICHARD M. DEMARTINI*
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
JACK E. NELSON
DON G. POWELL*
PHILLIP B. ROONEY
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
ALAN T. SACHTLEBEN*
PAUL R. WOLKENBERG*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
DISTRIBUTOR
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
SHAREHOLDER SERVICING AGENT
ACCESS INVESTOR
SERVICES, INC.
P.O. Box 418256
Kansas City, Missouri 64141-9256
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Fund, as defined in the Investment Company Act of
1940.
(C) Van Kampen American Capital Distributors, Inc., 1998 All rights reserved.
(SM) denotes a service mark of Van Kampen American Capital Distributors, Inc.
This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless it
has been preceded or is accompanied by an effective prospectus of the Fund which
contains additional information on how to purchase shares, the sales charge, and
other pertinent data. After June 30, 1998, the report, if used with prospective
investors, must be accompanied by a quarterly performance update.
33
<PAGE> 35
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 3
Performance in Perspective....................... 4
Glossary of Terms................................ 5
Portfolio Management Review...................... 7
Portfolio Highlights............................. 9
Portfolio of Investments......................... 10
Statement of Assets and Liabilities.............. 18
Statement of Operations.......................... 19
Statement of Changes in Net Assets............... 20
Financial Highlights............................. 21
Notes to Financial Statements.................... 24
Report of Independent Accountants................ 30
</TABLE>
TFHI ANR 2/98
<PAGE> 36
LETTER TO SHAREHOLDERS
February 3, 1998
Dear Shareholder,
The new year ushers in what
promises to be an exciting and
challenging time for investors. The
Taxpayer Relief Act of 1997 signed into
law by President Clinton in August
creates many new opportunities for you [PHOTO]
and your family to take a more active
role in achieving your long-term
financial goals.
Most Americans will benefit from
the bill's $95 billion in tax cuts over
five years. The so-called Kiddie Credit
gives parents $400 in immediate tax
relief for every child under age 17,
and families will find it easier to
save for their children's college
expenses through the new Education IRA. DENNIS J. MCDONNELL AND DON G. POWELL
The bill also cuts capital gains tax
rates for the first time in over a decade and loosens restrictions on
tax-deductible IRA contributions. Perhaps the most exciting feature of all is
the new Roth IRA, which allows investment earnings to grow tax free, not just
tax deferred.
This year more than ever, it could be important for you to talk with your
financial adviser about how to make the tax code work to your advantage. At Van
Kampen American Capital, we have prepared a variety of publications to help you
understand your choices under the new tax legislation. And with the help of your
adviser, we'll help you locate the many benefits hidden among the changing tax
landscape.
ECONOMIC OVERVIEW
These continue to be the best of times for the U.S. economy. Growth is
strong, consumers are optimistic, unemployment is low, the budget is heading for
surplus, and our nation's currency is rising around the world.
Despite the strength in the economy, there is no indication of
troublesome inflation. In fact, the producer price index fell by 1.2 percent
during the year, the largest annual decline in wholesale prices since 1986.
Inflation at the consumer level was also virtually nonexistent, with the
consumer price index rising by only 1.7 percent during 1997. A strong dollar,
and significant productivity gains helped offset inflationary pressures caused
by rising wages.
After increasing short-term interest rates by 0.25 percent in March, the
Federal Reserve Board left monetary policy unchanged for the remainder of the
year. In addition to signs that the economy was slowing modestly from its
breakneck pace of early 1997, Fed policy-makers were concerned about the impact
that higher U.S. interest rates might have on the struggling economies of
Southeast Asia. Generally, higher U.S. interest rates cause the dollar to rise
relative to other currencies. With nearly all Asian currencies already down
significantly, a hike in U.S. rates would force monetary authorities in Asia to
choose between letting their currencies decline further or matching the rate
increase, thereby slowing their already-sluggish economies.
Continued on page two
1
<PAGE> 37
MARKET OVERVIEW
Low inflation and steady Federal Reserve policy contributed to solid
gains for fixed-income investments over the reporting period. The yield on the
Treasury's benchmark 30-year bond began the year at 6.64 percent and climbed to
7.17 percent in April amid fears that strong economic growth would reignite
inflation. When subsequent data showed the economy to be slowing, bond yields
gradually drifted lower. By the end of the reporting period, long-term
Treasury-bond yields had fallen to 5.92 percent, the lowest level in more than
four years.
During the 12 months through December, long-term general obligation bonds
returned more than 11 percent, compared to just under 9 percent for
intermediate-term bonds. Total volume of municipal debt rose to over $200
billion, the highest level since 1993. Close to 50 percent of issuance was
enhanced by insurance. This increase in AAA-rated volume caused spreads between
high quality and lower-rated paper to compress, making quality offerings
attractive during the period. At the same time, however, it was difficult to
build the income component of the portfolio due to the scarcity of higher
yielding securities.
OUTLOOK
We believe that reduced demand for American exports to Asia will exert a
mild drag on the U.S. economy in coming months. But while corporate profits
could suffer, slower economic growth will help mitigate the inflationary
pressures caused by the tight domestic labor market. That scenario is typically
good for fixed-income investments.
However, if bond yields continue to drift lower, economic growth in the
U.S. could accelerate later in 1998. In recent years, each significant decline
in long-term interest rates has ignited economic growth by making housing,
autos, and other big-ticket consumer goods more affordable. We also expect the
healthy economy to keep credit spreads relatively tight in coming months.
As we noted earlier, the Taxpayer Relief Act of 1997 provides attractive
new vehicles through which investors can save for a variety of goals, including
higher education and retirement. We encourage you to work with your financial
adviser to consider how the tax changes can work to your benefit.
Additional details about your Fund, including a question-and-answer
section with your portfolio management team, are provided in this report. As
always, we are pleased to have the opportunity to serve you through our diverse
menu of quality investments.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
2
<PAGE> 38
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1997
VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
TOTAL RETURNS
One year total return based on NAV(1).................... 9.05% 8.23% 8.23%
One year total return(2)................................. 3.89% 4.23% 7.23%
Five-year average annual total return(2)................. 6.41% N/A N/A
Ten-year average annual total return(2).................. 6.38% N/A N/A
Life-of-Fund average annual total return(2).............. 7.65% 6.06% 5.69%
Commencement date........................................ 06/28/85 05/01/93 08/13/93
DISTRIBUTION RATES
Distribution rate(3)..................................... 5.62% 5.15% 5.15%
Taxable equivalent distribution rate(4).................. 8.78% 8.05% 8.05%
SEC Yield(5)............................................. 5.11% 4.57% 4.56%
</TABLE>
N/A = Not Applicable
(1) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (4.75% for A shares) or contingent
deferred sales charge for early withdrawal (4% for B shares and 1% for C
shares).
(2) Standardized total return. Assumes reinvestment of all distributions for
the period and includes payment of the maximum sales charge (A shares) or
contingent deferred sales charge for early withdrawal (B and C shares).
(3) Distribution rate represents the monthly annualized distributions of the
Fund at the end of the period and not the earnings of the Fund.
(4) Taxable equivalent calculations reflect a federal income tax rate of 36%.
(5) SEC Yield is a standardized calculation prescribed by the Securities and
Exchange Commission for determining the amount of net income a portfolio should
theoretically generate for the 30-day period ending December 31, 1997.
A portion of the interest income may be subject to the federal alternative
minimum tax (AMT).
See the Fund Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. Fund shares, when redeemed, may be worth more
or less than their original cost.
An investment in medium- and lower-grade securities involves the risk of
potentially greater sensitivity to an economic downturn which would affect the
issuer's ability to make timely payment of principal and interest.
Market forecasts provided in this report may not necessarily come to pass.
3
<PAGE> 39
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:
- Illustrate the general market environment in which your investments are
being managed
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over the
period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Lehman Brothers Municipal Bond
Index over time. As a broad-based, unmanaged statistical composite, this index
does not reflect any commissions or fees which would be incurred by an investor
purchasing the securities it represents. Similarly, its performance does not
reflect any sales charges or other costs which would be applicable to an
actively managed portfolio, such as that of the Fund.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Tax Free High Income Fund vs. Lehman Brothers
Municipal Bond Index
(December 31, 1987 through December 31, 1997)
<TABLE>
<CAPTION>
VKAC VKAC
Value at Tax Free High Lehman Brothers
December 31, Income Fund Municipal Bond Index
<S> <C> <C>
1987 10000.0 9526.00
1988 11015.2 10542.00
1989 12203.3 11565.00
1990 13093.0 11939.00
1991 14683.2 12954.00
1992 15977.3 12965.00
1993 17939.0 15016.00
1994 17011.4 14276.00
1995 19982.0 16492.00
1996 20868.9 17020.00
1997 22789.3 18562.00
- -------------------------------
Fund's Total Return
1 Year Avg. Annual = 3.89%
5 Year Avg. Annual = 6.41%
10 Year Avg. Annual = 6.38%
Inception Avg. Annual = 7.65%
- -------------------------------
</TABLE>
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions and includes payment of the maximum
sales charge (4.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
4
<PAGE> 40
GLOSSARY OF TERMS
BASIS POINT: A measure used in quoting yields on bonds. One hundred basis points
is equal to one percent. For example, if a bond's yield changes from 7.00 to
6.65 percent, it would be considered a 35 basis point move.
CALL FEATURE: Allows the issuer to buy back the bond before the date of
maturity. When the bond is called, the issuer repurchases it at or above its
face value, and stops paying interest on that loan.
CLASS A SHARES: When Class A shares of a fund are purchased, the share price
includes the net asset value plus a one-time sales charge (or "load"). There is
no redemption fee (Contingent Deferred Sales Charge).
COUPON RATE: The stated rate of interest the bond pays until maturity, expressed
as a percentage of the face value.
CREDIT SPREAD: Also called quality spread, the difference in yield between
higher-quality issues (such as AAA-rated municipal bonds) and lower-quality
issues (such as BBB- and non-rated municipal bonds). Under normal circumstances,
lower-quality issues provide higher yields in order to compensate investors for
the additional credit risk.
DURATION: A measure of a bond's sensitivity to changes in interest rates,
expressed in years. The longer a fund's duration, the greater the effect of
interest rate movements on net asset value. Typically, funds with shorter
durations have performed better in rising rate environments, while funds with
longer durations have performed better when rates decline.
FEDERAL FUNDS RATE: The interest rate charged by one institution lending federal
funds to another. This overnight rate is used to meet banks' daily reserve
requirements. The Federal Reserve Board uses the federal funds rate to affect
the direction of interest rates.
FEDERAL RESERVE BOARD (THE FED): A seven-member group that directs the
operations of the Federal Reserve System, the central bank system of the United
States. Currently led by Chairman Alan Greenspan, the Fed meets eight times a
year to establish monetary policy and monitor the country's economic pulse.
GENERAL OBLIGATION BONDS: Bonds backed by the full faith and credit (taxing
authority) of the issuer for timely payment of interest and principal. General
obligation bonds are issued to finance essential government projects, such as
highways and schools.
INFLATION: An economic state in which the amount of money supply and business
activity dramatically increases, accompanied by sharply rising prices. Inflation
is widely measured by the Consumer Price Index, a leading economic indicator
that measures the change in the cost of purchased goods and services.
MUNICIPAL BOND: A debt security issued by a state, municipality or other
governmental entity to finance capital expenditures such as the construction of
highways, public works, or school buildings.
MUNICIPAL REVENUE BONDS: Bonds that are payable only from the revenues the
project will generate and are not backed by any taxing authority of the issuer.
Revenue bonds are issued to finance the building of hospitals, toll bridges,
electric dams, airports, and college dormitories.
MUNICIPAL YIELD CURVE: A representation of the actual or projected yields of
municipal bond securities in relationship to their maturities.
NET ASSET VALUE (NAV): The value of a mutual fund share, calculated by deducting
a fund's liabilities from its total assets and dividing this amount by the
number of shares outstanding. The NAV does not include any initial or contingent
deferred sales charges.
PUT BOND: A long-term bond that the bondholder can "put" back to the issuer for
redemption at a specified price on a specified future date prior to maturity.
PREREFUNDING: A process whereby new bonds are issued to refinance an outstanding
bond issue. This typically occurs when interest rates decline and an issuer
wishes to replace higher-yielding bonds with current lower-yielding issues.
5
<PAGE> 41
GLOSSARY OF TERMS (CONTINUED)
YIELD CURVE: A result of viewing the yields of U.S. Treasury securities maturing
in 1, 5, 10, and 30 years, grouped together, will often reflect a pattern of
increasing yield as maturity extends. This pattern creates an upward sloping
"curve." A "flat" yield curve represents little difference between short- and
long-term interest rates. An "inverted" yield curve indicates that short-term
rates are higher than long-term rates.
ZERO COUPON BONDS: A corporate or municipal debt security traded at a deep
discount from face value that pays no interest and it may be redeemed at
maturity for full face value.
6
<PAGE> 42
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND
We recently spoke with the management team of the Van Kampen American Capital
Tax Free High Income Fund about the key events and economic forces that shaped
the markets during the Fund's fiscal year. The team includes David C. Johnson,
portfolio manager, and Peter W. Hegel, chief investment officer for fixed-income
investments. The following excerpts reflect their views on the Fund's
performance during the 12-month period ended December 31, 1997.
Q HOW WOULD YOU DESCRIBE THE MARKET ENVIRONMENT IN WHICH THE FUND HAS
OPERATED DURING THE PAST 12 MONTHS?
A The bond market saw healthy price advances during 1997, but this ascension
was not a smooth ride. Early in the year, bond prices began to fall when
economic indicators caused concerns about rising inflation and a potential
interest rate hike by the Federal Reserve Board. When the Fed raised interest
rates by a modest 0.25 percent in late March, bond prices fell even further. By
mid-April, however, the market's mood reversed, giving little indication of
price pressures despite the economy's strength. Bond prices also benefited from
heavy purchases by foreign investors and concerns that the stock market rally
was nearing an end.
While the economy showed few, if any, signs of inflation, bond prices
continued their climb, and long-term interest rates declined further. This
caused credit spreads between investment-grade and lower- or non-rated bonds to
contract significantly. Also, an unprecedented amount of insured bond
issuance--49 percent of total volume--reduced the supply of higher-yielding,
lower- and non-rated bonds available in the market.
Q HAVE THESE CONDITIONS AFFECTED THE MANAGEMENT OF THE FUND?
A Our overall strategy did not change based on market conditions, although
lower yields made it more difficult to add significant value over our
existing holdings. We evaluated bond issues on an individual basis and
made purchases where we found the most appropriate opportunities.
The narrowing of credit spreads, while limiting the attractiveness of the
high-yielding, high-risk securities offered at the current market levels,
actually increased the value of the lower- and non-rated bonds held in the
Fund's portfolio, as prices appreciated considerably. By relying heavily on our
research and analysis to find attractive issues, we have been able to
consistently provide shareholders with a higher level of income potential.
Q WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO?
A The declining market yields caused turnover in the portfolio to remain
relatively low during the reporting period, because new bonds would have
had lower yields than most of the bonds already in the portfolio. In terms
of market sectors, our weightings were a reflection of where we found
opportunities on a bond-by-bond basis. No one sector dominated the portfolio
during the period, but health care and industrial revenue bonds each represented
approximately 17 percent of the portfolio at year-end. In an effort to remain
diversified, the portfolio is comprised of municipal bonds from 18 different
sectors, including multi-family housing and tax districts.
In terms of credit quality, approximately 29 percent of the Fund's assets
were AAA-rated, 41 percent were non-rated, and 21 percent were BBB-rated. The
high percentage of lower-rated and non-rated bonds, which are typically less
sensitive to day-to-day interest rate movements, helped lower the Fund's
volatility. We sold a number of our A-and AA-rated bonds in exchange for the
added liquidity and safety of AAA-rated bonds.
The duration of the Fund remained neutral to the Lehman Brothers Municipal
Bond Index benchmark, which had a duration of 7.60 years. In seeking to reduce
volatility, we typically maintain the Fund's duration near this level. Rather
than trying to time the market, we concentrated on maintaining a balanced
portfolio that we felt would perform well during both upward and downward swings
in interest rates. For additional Fund portfolio highlights, please refer to
page nine.
7
<PAGE> 43
Q HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A The Fund posted positive results for the fiscal year. Total return for the
12 months ended December 31, 1997 was 9.05 percent(1) (Class A shares at
net asset value). By comparison, the Fund's benchmark, the Lehman Brothers
Municipal Bond Index produced a total return of 9.19 percent during the same
period. Keep in mind that this index is a broad-based, unmanaged index of
municipal bonds and does not reflect any commissions or fees that would be paid
by an investor purchasing the securities it represents.
The Fund also continued to meet its goal of providing a competitive level of
tax-exempt current income. The Fund's tax-exempt distribution rate was 5.62
percent(3) as of December 31, 1997, based upon a monthly dividend of $0.0730 per
Class A share and a maximum public offering price of $15.59. For investors in
the 36 percent federal income tax bracket, the Fund's taxable-equivalent
distribution rate was 8.78 percent(4). Please refer to the chart on page three
for additional Fund performance results.
Q WHAT IS YOUR OUTLOOK FOR THE MONTHS AHEAD?
A We expect the U.S. economy to remain strong going into 1998, although the
growth rate could slow from its current level. The expediency with which
the crisis in Southeast Asia is resolved will play a key role in how the
Fed will manage the U.S. interest rate environment in the coming year. We are
cautiously optimistic that interest rates will remain fairly stable, if not move
slightly lower in 1998. In the event that conditions in Southeast Asia stabilize
and the U.S. economy shows increased signs of price appreciation and wage
pressures, the Fed might take preemptive measures to keep inflation in check.
We anticipate that long-term municipal bond yields will remain stable and
that the tax-exempt bond market will continue to track Treasuries. Insured bond
issuance is likely to decrease slightly as more investors will be willing to
accept additional risk in exchange for the added yield of uninsured bonds. We
believe general bond issuance across the board will remain at or slightly above
1997 levels. Although we would like to see credit spreads widen in the new year,
all indicators lead us to believe that spreads will remain tight for the
foreseeable future.
We believe the Fund is well positioned to weather changes in interest
rates in the coming year. Regardless of market conditions, we believe the Fund's
duration and diversity will help the portfolio be less volatile to interest rate
changes.
[SIG]
Peter W. Hegel
Chief Investment Officer
Fixed Income Investments
[SIG]
David C. Johnson
Portfolio Manager
Please see footnotes on page three
8
<PAGE> 44
PORTFOLIO HIGHLIGHTS
VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND
TOP TEN STATES AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF FUND'S
LONG-TERM INVESTMENTS
<S> <C>
Illinois ................................................... 10.2%
Texas ...................................................... 9.6%
Colorado ................................................... 8.2%
Pennsylvania ............................................... 7.3%
Florida .................................................... 7.1%
New York ................................................... 7.0%
Massachusetts .............................................. 6.0%
California ................................................. 5.9%
Utah ....................................................... 4.6%
Michigan ................................................... 3.0%
</TABLE>
CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF JUNE 30, 1997 (1)
<S> <C> <S> <C>
AAA........................ 28.9% AAA........................ 20.6%
AA......................... 3.8% AA......................... 6.3%
A.......................... 2.9% [PIE CHART] A.......................... 3.6% [PIE CHART]
BBB........................ 21.3% BBB........................ 21.1%
BB......................... 2.6% BB......................... 3.9%
Non-Rated.................. 40.5% B.......................... 0.4%
Non-Rated.................. 44.1%
</TABLE>
Based upon the highest credit quality ratings as determined by Standard & Poor's
or Moody's.
TOP FIVE PORTFOLIO SECTORS AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF JUNE 30, 1997 (1)
<S> <C> <C> <C>
Industrial Revenue ........ 17.5% Industrial Revenue ........ 16.9%
Health Care ............... 16.5% Health Care ............... 15.2%
Other Care ................ 9.5% Other Care ................ 12.0%
Multi-Family Housing ...... 9.0% Multi-Family Housing ...... 9.4%
General Purpose ........... 7.5% Public Building ........... 7.1%
</TABLE>
DURATION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 (1) AS OF JUNE 30, 1997 (1)
<S> <C> <C>
Duration 7.47 years 6.85 years
</TABLE>
(1) Unaudited
9
<PAGE> 45
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
10
<PAGE> 46
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
11
<PAGE> 47
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
12
<PAGE> 48
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
13
<PAGE> 49
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
14
<PAGE> 50
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
15
<PAGE> 51
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
16
<PAGE> 52
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
17
<PAGE> 53
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
18
<PAGE> 54
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
19
<PAGE> 55
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
20
<PAGE> 56
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
21
<PAGE> 57
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
22
<PAGE> 58
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
23
<PAGE> 59
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
24
<PAGE> 60
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.
25
<PAGE> 61
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>
26
<PAGE> 62
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.
27
<PAGE> 63
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>
28
<PAGE> 64
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.
29
<PAGE> 65
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
30
<PAGE> 66
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
EQUITY FUNDS
Domestic
MS Aggressive Equity
VKAC Aggressive Growth
MS American Value
VKAC Comstock
VKAC Emerging Growth
VKAC Enterprise
VKAC Equity Income
VKAC Growth
VKAC Growth and Income
VKAC Harbor
VKAC Pace
VKAC Real Estate Securities
MS U.S. Real Estate
VKAC Utility
MS Value
International/Global
MS Asian Growth
MS Emerging Markets
MS Global Equity
VKAC Global Equity
MS Global Equity Allocation
VKAC Global Managed Assets
MS International Magnum
MS Latin American
FIXED-INCOME FUNDS
Income
VKAC Corporate Bond
MS Global Fixed Income
VKAC Global Government Securities
VKAC Government Securities
VKAC High Income Corporate Bond
MS High Yield
VKAC High Yield
VKAC Short-Term Global Income
VKAC Strategic Income
VKAC U.S. Government
VKAC U.S. Government Trust for Income
MS Worldwide High Income
Tax Exempt Income
VKAC California Insured Tax Free
VKAC Florida Insured Tax Free Income
VKAC High Yield Municipal
VKAC Insured Tax Free Income
VKAC Intermediate Term Municipal Income
VKAC Municipal Income
VKAC New York Tax Free Income
VKAC Pennsylvania Tax Free Income
VKAC Tax Free High Income
Capital Preservation
VKAC Limited Maturity Government
VKAC Prime Rate Income Trust
VKAC Reserve
VKAC Senior Floating Rate
VKAC Tax Free Money
To find out more about any of these funds, ask your financial adviser for a
prospectus, which contains more complete information, including sales
charges, risks, and expenses. Please read it carefully before you invest or
send money.
To view a current Van Kampen American Capital or Morgan Stanley fund
prospectus or to receive additional fund information, choose from one of the
following:
- visit our web site at WWW.VKAC.COM -- to view prospectuses, select
Investors' Place, then Download a Prospectus
- call us at 1-800-341-2911 weekdays from 7:00 a.m. to 7:00 p.m. Central time
(Telecommunications Device for the Deaf users, call 1-800-421-2833)
- e-mail us by visiting WWW.VKAC.COM and selecting Investors' Place
31
<PAGE> 67
VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND
BOARD OF TRUSTEES
J. MILES BRANAGAN
RICHARD M. DEMARTINI*
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
JACK E. NELSON
DON G. POWELL*
PHILLIP G. ROONEY
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
ALAN T. SACHTLEBEN*
PAUL R. WOLKENBERG*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
DISTRIBUTOR
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
SHAREHOLDER SERVICING AGENT
ACCESS INVESTOR
SERVICES, INC.
P.O. Box 418256
Kansas City, Missouri 64141-9256
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Fund, as defined in the Investment Company Act of
1940.
(C) Van Kampen American Capital Distributors, Inc., 1998 All rights reserved.
(SM) denotes a service mark of Van Kampen American Capital Distributors, Inc.
This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless it
has been preceded or is accompanied by an effective prospectus of the Fund which
contains additional information on how to purchase shares, the sales charge, and
other pertinent data. After June 30, 1998, the report, if used with prospective
investors, must be accompanied by a quarterly performance update.
32
<PAGE> 68
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 4
Performance in Perspective....................... 5
Glossary of Terms................................ 6
Portfolio Management Review...................... 8
Portfolio Highlights............................. 11
Portfolio of Investments......................... 12
Statement of Assets and Liabilities.............. 17
Statement of Operations.......................... 18
Statement of Changes in Net Assets............... 19
Financial Highlights............................. 20
Notes to Financial Statements.................... 23
Report of Independent Accountants................ 30
</TABLE>
CAI ANR 2/98
<PAGE> 69
LETTER TO SHAREHOLDERS
February 3, 1998
Dear Shareholder,
The new year ushers in what
promises to be an exciting and
challenging time for investors. The
Taxpayer Relief Act of 1997 signed
into law by President Clinton in [PHOTO]
August creates many new opportunities
for you and your family to take a
more active role in achieving your
long-term financial goals. DENNIS J. MCDONNELL AND DON G. POWELL
Most Americans will benefit from
the bill's $95 billion in tax cuts
over five years. The so-called Kiddie Credit gives parents $400 in immediate tax
relief for every child under age 17, and families will find it easier to save
for their children's college expenses through the new Education IRA. The bill
also cuts capital gains tax rates for the first time in over a decade and
loosens restrictions on tax-deductible IRA contributions. Perhaps the most
exciting feature of all is the new Roth IRA, which allows investment earnings to
grow tax free, not just tax deferred.
This year more than ever, it could be important for you to talk with your
financial adviser about how to make the tax code work to your advantage. At Van
Kampen American Capital, we have prepared a variety of publications to help you
understand your choices under the new tax legislation. And with the help of your
adviser, we'll help you locate the many benefits hidden among the changing tax
landscape.
ECONOMIC OVERVIEW
These continue to be the best of times for the U.S. economy. Growth is
strong, consumers are optimistic, unemployment is low, the budget is heading for
surplus, and our nation's currency is rising around the world.
Despite the strength in the economy, there is no indication of troublesome
inflation. In fact, the producer price index fell by 1.2 percent during the
year, the largest annual decline in wholesale prices since 1986. Inflation at
the consumer level was also virtually nonexistent, with the consumer price index
rising by only 1.7 percent during 1997. A strong dollar, and significant
productivity gains helped offset inflationary pressures caused by rising wages.
After increasing short-term interest rates by 0.25 percent in March, the
Federal Reserve Board left monetary policy unchanged for the remainder of the
year. In addition to signs that the economy was slowing modestly from its
breakneck pace of early 1997, Fed policy-makers were concerned about the impact
that higher U.S. interest rates might have on the struggling economies of
Southeast Asia. Generally, higher U.S. interest rates cause the dollar to rise
relative to other currencies. With nearly all Asian currencies already down
Continued on page two
1
<PAGE> 70
significantly, a hike in U.S. rates would force monetary authorities in Asia to
choose between letting their currencies decline further or matching the rate
increase, thereby slowing their already-sluggish economies.
MARKET OVERVIEW
Low inflation and steady Federal Reserve policy contributed to solid gains
for fixed-income investments over the reporting period. The yield on the
Treasury's benchmark 30-year bond began the year at 6.64 percent and climbed to
7.17 percent in April amid fears that strong economic growth would reignite
inflation. When subsequent data showed the economy to be slowing, bond yields
gradually drifted lower. By the end of the reporting period, long-term
Treasury-bond yields had fallen to 5.92 percent, the lowest level in more than
four years.
During the 12 months through December, long-term general obligation bonds
returned more than 11 percent, compared to just under 9 percent for
intermediate-term bonds. Total volume of municipal debt rose to over $200
billion, the highest level since 1993. Close to 50 percent of issuance was
enhanced by insurance. This increase in AAA-rated volume caused spreads between
high quality and lower-rated paper to compress, making quality offerings
attractive during the period. At the same time, however, it was difficult to
build the income component of the portfolio due to the scarcity of higher
yielding securities.
OUTLOOK
We believe that reduced demand for American exports to Asia will exert a
mild drag on the U.S. economy in coming months. But while corporate profits
could suffer, slower economic growth will help mitigate the inflationary
pressures caused by the tight domestic labor market. That scenario is typically
good for fixed-income investments.
However, if bond yields continue to drift lower, economic growth in the U.S.
could accelerate later in 1998. In recent years, each significant decline in
long-term interest rates has ignited economic growth by making housing, autos,
and other big-ticket consumer goods more affordable. We also expect the healthy
economy to keep credit spreads relatively tight in coming months.
As we noted earlier, the Taxpayer Relief Act of 1997 provides attractive new
vehicles through which investors can save for a variety of goals, including
higher education and retirement. We encourage you to work with your financial
adviser to consider how the tax changes can work to your benefit.
Continued on page three
2
<PAGE> 71
Additional details about your Fund, including a question-and-answer section
with your portfolio management team, are provided in this report. As always, we
are pleased to have the opportunity to serve you through our diverse menu of
quality investments.
Sincerely,
[sig] [sig]
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Investment Advisory Corp. Investment Advisory Corp.
3
<PAGE> 72
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1997
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
TOTAL RETURNS
<S> <C> <C> <C>
One-year total return based on NAV1..... 8.93% 8.19% 8.19%
One-year total return2.................. 5.40% 5.19% 7.19%
Five-year average annual total
return2............................... 6.31% N/A N/A
Ten-year average annual total return2... 7.87% N/A N/A
Life-of-Fund average annual total
return2............................... 7.97% 5.34% 4.77%
Commencement date....................... 12/13/85 05/01/93 08/13/93
DISTRIBUTION RATES AND YIELD
Distribution rate3...................... 4.67% 4.10% 4.10%
Taxable equivalent distribution rate4... 8.05% 7.07% 7.07%
SEC Yield5.............................. 4.26% 3.61% 3.57%
N/A = Not Applicable
</TABLE>
(1) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (3.25% for A shares) or
contingent deferred sales charge for early withdrawal (3% for B shares and 1%
for C shares).
(2) Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (A shares) or contingent
deferred sales charge for early withdrawal (B and C shares).
(3) Distribution rate represents the monthly annualized distributions of the
Fund at the end of the period and not the earnings of the Fund.
(4) Taxable equivalent calculations reflect a combined federal and state income
tax rate of 42%, which takes into consideration the deductibility of individual
state taxes paid.
(5) SEC Yield is a standardized calculation prescribed by the Securities and
Exchange Commission for determining the amount of net income a portfolio should
theoretically generate for the 30-day period ending December 31, 1997.
See the Fund Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. Fund shares, when redeemed, may be worth more
or less than their original cost.
No representation is made as to any insurer's ability to meet its commitments.
The insurance does not remove market risk since it does not apply to the value
of the securities in the Fund's portfolio, and the Fund's net asset value may
fluctuate depending on changes in interest rates and other factors affecting the
municipal credit market.
Market forecasts provided in this report may not necessarily come to pass.
4
<PAGE> 73
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:
- Illustrate the general market environment in which your investments are
being managed
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over the
period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Lehman Brothers Municipal Bond
Index over time. As a broad-based, unmanaged statistical composite, this index
does not reflect any commissions or fees which would be incurred by an investor
purchasing the securities it represents. Similarly, its performance does not
reflect any sales charges or other costs which would be applicable to an
actively managed portfolio, such as that of the Fund.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital California Insured Tax Free Fund vs. Lehman
Brothers Municipal Bond Index
(December 31, 1987 through December 31, 1997)
[GRAPH]
<TABLE>
<CAPTION>
Value at VKAC
December 31, California Lehman Brothers
Insured Tax Municipal Bond
Free Fund Index
<S> <C> <C>
1987 9678 10000
10099 10356
10179 10465.8
9842 10344.4
9957 10423
9884 10392.8
10048 10544.5
10111 10613
10146 10622.6
10333 10814.9
10694 11005.2
10480 10904
1988 10695 11015.2
10876 11243.2
10750 11115
10688 11088.3
11010 11351.1
11306 11587.2
11401 11744.8
11504 11904.5
11375 11787.9
11295 11752.5
11392 11895.9
11579 12104.1
1989 11681 12203.3
11548 12146
11730 12254.1
11732 12257.8
11575 12169.5
11844 12434.8
11915 12544.2
12103 12728.6
11903 12544
11881 12551.6
12103 12778.8
12405 13035.6
1990 12550 13093
12600 13268.4
12730 13383.9
12700 13389.2
12888 13567.3
13012 13688
12916 13674.3
13107 13841.2
13341 14023.9
13485 14206.2
13570 14344
13606 14374.2
1991 13802 14683.2
13881 14717
13883 14721.4
13945 14727.3
14077 14858.4
14235 15033.7
14429 15286.3
14947 15744.9
14844 15590.5
14864 15691.9
14608 15538.1
14985 15816.2
1992 15194 15977.6
15385 16162.9
16203 16748
15941 16570.5
16135 16737.8
16220 16831.6
16573 17112.7
16501 17134.9
17044 17491.3
17287 17690.7
17240 17724.3
16910 17568.3
1993 17412 17939
17646 18143.5
17021 17673.6
16086 16954.3
16073 17098.4
16243 17247.2
16152 17142
16451 17455.7
16486 17516.8
16176 17259.3
15835 16952
15513 16645.2
1994 15889 17011.4
16456 17497.9
16975 18007.1
17101 18214.2
17105 18236.1
17693 18817.8
17399 18654.1
17527 18831.3
17738 19070.5
17836 19190.6
18165 19468.9
18558 19792
1995 18794 19982
18975 20133.9
18827 19997
18412 19741
18349 19685.8
18371 19677.9
18535 19892.4
18784 20073.4
18772 20069.4
19045 20350.4
19298 20580.3
1996 19694 20956.9
19583 20868.9
19527 20908.6
19683 21100.9
19413 20820.3
19592 20995.2
19921 21310.1
20149 21538.1
20800 22134.7
20446 21926.7
20712 22187.6
20839 22329.6
20968 22461.3
1997 21332 22789.3
- --------------------------------
Fund's Total Return
1 Year Avg. Annual = 5.40%
5 Year Avg. Annual = 6.31%
10 Year Avg. Annual = 7.87%
Inception Avg. Annual = 7.97%
- --------------------------------
</TABLE>
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions, and includes payment of the maximum
sales charge (3.25% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
5
<PAGE> 74
GLOSSARY OF TERMS
BASIS POINT: A measure used in quoting yields on bonds. One hundred basis points
is equal to one percent. For example, if a bond's yield changes from 7.00 to
6.65 percent, it would be considered a 35 basis point move.
CALL FEATURE: Allows the issuer to buy back the bond before the date of
maturity. When the bond is called, the issuer repurchases it at or above its
face value, and stops paying interest on that loan.
CLASS A SHARES: When Class A shares of a fund are purchased, the share price
includes the net asset value plus a one-time sales charge (or "load"). There is
no redemption fee (Contingent Deferred Sales Charge).
COUPON RATE: The stated rate of interest the bond pays until maturity, expressed
as a percentage of the face value.
CREDIT SPREAD: Also called quality spread, the difference in yield between
higher-quality issues (such as AAA-rated municipal bonds) and lower-quality
issues (such as BBB- and non-rated municipal bonds). Under normal circumstances,
lower-quality issues provide higher yields in order to compensate investors for
the additional credit risk.
DURATION: A measure of a bond's sensitivity to changes in interest rates,
expressed in years. The longer a fund's duration, the greater the effect of
interest rate movements on net asset value. Typically, funds with shorter
durations have performed better in rising rate environments, while funds with
longer durations have performed better when rates decline.
FEDERAL FUNDS RATE: The interest rate charged by one institution lending federal
funds to another. This overnight rate is used to meet banks' daily reserve
requirements. The Federal Reserve Board uses the federal funds rate to affect
the direction of interest rates.
FEDERAL RESERVE BOARD (THE FED): A seven-member group that directs the
operations of the Federal Reserve System, the central bank system of the United
States. Currently led by Chairman Alan Greenspan, the Fed meets eight times a
year to establish monetary policy and monitor the country's economic pulse.
GENERAL OBLIGATION BONDS: Bonds backed by the full faith and credit (taxing
authority) of the issuer for timely payment of interest and principal. General
obligation bonds are issued to finance essential government projects, such as
highways and schools.
6
<PAGE> 75
GLOSSARY OF TERMS (CONTINUED)
INFLATION: An economic state in which the amount of money supply and business
activity dramatically increases, accompanied by sharply rising prices. Inflation
is widely measured by the Consumer Price Index, a leading economic indicator
that measures the change in the cost of purchased goods and services.
MUNICIPAL BOND: A debt security issued by a state, municipality or other
governmental entity to finance capital expenditures such as the construction of
highways, public works, or school buildings.
MUNICIPAL REVENUE BONDS: Bonds that are payable only from the revenues the
project will generate and are not backed by any taxing authority of the issuer.
Revenue bonds are issued to finance the building of hospitals, toll bridges,
electric dams, airports, and college dormitories.
MUNICIPAL YIELD CURVE: A representation of the actual or projected yields of
municipal bond securities in relationship to their maturities.
NET ASSET VALUE (NAV): The value of a mutual fund share, calculated by deducting
a fund's liabilities from its total assets and dividing this amount by the
number of shares outstanding. The NAV does not include any initial or contingent
deferred sales charges.
PUT BOND: A long-term bond that the bondholder can "put" back to the issuer for
redemption at a specified price on a specified future date prior to maturity.
PREREFUNDING: A process whereby new bonds are issued to refinance an outstanding
bond issue. This typically occurs when interest rates decline and an issuer
wishes to replace higher-yielding bonds with current lower-yielding issues.
YIELD CURVE: A result of viewing the yields of U.S. Treasury securities maturing
in 1, 5, 10, and 30 years, grouped together, will often reflect a pattern of
increasing yield as maturity extends. This pattern creates an upward sloping
"curve." A "flat" yield curve represents little difference between short- and
long-term interest rates. An "inverted" yield curve indicates that short-term
rates are higher than long-term rates.
ZERO COUPON BONDS: A corporate or municipal debt security traded at a deep
discount from face value that pays no interest and it may be redeemed at
maturity for full face value.
7
<PAGE> 76
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
We recently spoke with the management team of the Van Kampen American Capital
California Insured Tax Free Fund about the key events and economic forces that
shaped the markets during the Fund's fiscal year. The team includes Joseph A.
Piraro, portfolio manager, and Peter W. Hegel, chief investment officer for
fixed-income investments. The following excerpts reflect their views on the
Fund's performance during the 12-month period ended December 31, 1997.
Q HOW WOULD YOU DESCRIBE THE MARKET ENVIRONMENT IN WHICH THE FUND HAS
OPERATED DURING THE PAST 12 MONTHS?
A The bond market saw healthy price advances during 1997, but this ascension
was not a smooth ride. Early in the year, bond prices began to fall when
economic indicators caused concerns about rising inflation and a potential
interest rate hike by the Federal Reserve Board. When the Fed raised interest
rates by a modest 0.25 percent in late March, bond prices fell even further. By
mid-April, however, the market's mood reversed, giving little indication of
price pressures despite the economy's strength. Bond prices also benefited from
heavy purchases by foreign investors and concerns that the stock market rally
was nearing an end.
While the economy showed few, if any, signs of inflation, bond prices
continued their climb, and long-term interest rates declined further. This
caused credit spreads between investment-grade and lower- or non-rated bonds to
contract significantly. Also, an unprecedented amount of insured bond
issuance--49 percent of total volume--reduced the supply of higher-yielding,
lower- and non-rated bonds available in the market. The increased issuance of
insured bonds provided more choices for the Fund's portfolio.
California, while responsible for 15 percent of the nations gross domestic
product, is the world's seventh largest economy. The state rebounded
considerably from a serious recession in 1993, which was caused by the decline
in the defense industry. Evidence of the rebound can be found in the resurgence
of real estate prices as well as the fact that the state is now leading the
nation in job creation.
In November 1996, California voters approved Proposition 218, which enacted
strict limitations on the issuance of new bonds. While issuance was down in the
first half of the year due to expected complications of Proposition 218, the
second half of 1997 saw a considerable increase of issuance as issuers realized
the implications of the proposition were not as severe as anticipated.
Insured bonds made up approximately 60 percent of all bonds issued in
California considerably higher than the national average of 49 percent. The high
volume of insured issuance is a response to Proposition 218's strict guidelines,
as well as the greater ease with which the issuers can secure insurance and gain
market acceptance for their bonds.
Q HOW HAVE THESE CONDITIONS AFFECTED THE MANAGEMENT OF THE FUND?
A Limited issuance in the first half of 1997 curbed our investment activity
during that time, but we found more opportunities later in the year when
issuance
8
<PAGE> 77
increased. The increased issuance of insured bonds provided more choices for the
portfolio, and as a result our turnover was more pronounced in the second half
of the year. Our ability to be more selective among insured bonds enhanced the
Fund's performance this year.
Q WHAT CHALLENGES DID YOU ENCOUNTER DURING THE FISCAL YEAR?
A The demand for California bonds has been increasing steadily in the past
several years, which has allowed California bonds to trade at overvalued
prices. Additionally, a number of California bonds have been prerefunded
by their issuers who wish to take advantage of declining interest rates. In most
circumstances, this would have hurt the Fund's dividend-paying ability. However,
the price appreciation of the Fund's prerefunded, higher-yielding issues made up
for any losses that resulted from replacing them with the lower-yielding bonds.
Q WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO DURING THE PERIOD?
A We increased our weightings in public building bond issues, lease rentals,
and certificates of participation. In addition, we participated in a large
toll road issue, the San Joaquin Tollway. Currently under construction,
the San Joaquin Tollway is anticipated to have a high usage rate as more people
move to that area of the state. This position served the portfolio well during
the period. As California's population increases and federal money to support
state roadways continues to decrease, more state-supported roads will need to be
funded and built. The introduction of toll roads into California has been met
with some resistance, but residents should eventually weigh the convenience over
the added expense. For additional Fund portfolio highlights, please refer to
page eleven.
Q HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A The Fund posted positive results for the fiscal year. Total return for the
12 months ended December 31, 1997 was 8.93 percent(1) (Class A shares at
net asset value). By comparison, the Fund's benchmark, the Lehman Brothers
Municipal Bond Index produced a total return of 9.19 percent for the same
period. Please keep in mind that this index is a broad-based, unmanaged index of
municipal bonds and does not reflect any commissions or fees that would be paid
by an investor purchasing the securities it represents.
The Fund continued to meet its goal of providing a competitive level of
federally tax-exempt current income for California investors. At year-end, its
tax-exempt distribution rate (Class A shares) was 4.67 percent(3), based on a
monthly dividend of $.0735 per share and a maximum public offering price of
$18.90 per share. For investors in the 42 percent combined federal and
California state income tax bracket, the Fund's taxable-equivalent distribution
rate was 8.05 percent(4). Please refer to the chart on page four for additional
Fund performance results.
9
<PAGE> 78
Q WHAT IS YOUR OUTLOOK FOR THE MONTHS AHEAD?
A Several factors will play major roles in how the economy will perform in
the coming year. The expediency with which the crisis in Southeast Asia is
resolved will play a key role in how the Fed will manage the U.S. interest
rate environment in the coming year. We are cautiously optimistic that interest
rates will remain fairly stable, if not move slightly lower in 1998. In the
event that conditions in Southeast Asia stabilize and the U.S. economy shows
increased signs of price appreciation and wage pressures, the Fed might take
preemptive measures to keep inflation in check.
We believe the availability of insured paper will continue to be plentiful
in an environment of stable economic growth, and we anticipate that insured
issuance will remain at or around 50 percent of the new issue market. In this
environment, the Fund will have more opportunities to participate in the market,
enabling us to position the Fund to perform well in the coming year.
On a state level, California has a considerable stake in how the Asian
crisis will play out, because a large number of Asian companies have satellite
offices in the state. In addition to concerns about office closings or corporate
downsizing, the California economy relies heavily on manufacturing, auto, and
electronic goods imported from Asian-Pacific countries. Also, we will continue
to monitor the potential effects of El Nino in the new year--environmental
implications, such as heavy rains and flooding, could present problems for
California's economy. In general, we believe the Fund is positioned to perform
well in a variety of economic climates, and we will continually make adjustments
as needed.
[SIG] [SIG]
Peter W. Hegel Joseph A. Piraro
Chief Investment Officer Portfolio Manager
Fixed Income Investments
Please see footnotes on page four
10
<PAGE> 79
PORTFOLIO HIGHLIGHTS
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
TOP TEN HOLDINGS AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF FUND'S
LONG-TERM INVESTMENTS
<S> <C>
San Joaquin Hills, CA Transportation Corridor
Agency Toll Road Revenue ...................... 4.1%
San Jose, CA Finance Authority Revenue Convention
Project ....................................... 3.6%
Corona, CA Redevelopment Agency Tax Allocation
Redevelopment Project Area A .................. 3.3%
California St Various Purpose ................... 2.8%
South Orange County, CA Public Finance Authority
Special Tax Revenue Senior Lien ............... 2.6%
Hayward, CA Certificates of Participation Civic
Center Project ................................ 2.6%
Grossmont, CA Union High School District
Certificates of Participation ................. 2.5%
California Housing Finance Agency Revenue Home
Mortgage ...................................... 2.4%
Bakersfield, CA Certificates of Participation
Convention Center Expansion Project ........... 2.3%
South Orange County, CA Public Finance Authority
Special Tax Revenue Senior Lien ............... 2.1%
</TABLE>
CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<S> <C>
AAA ...................... 100%
</TABLE>
Based upon the highest credit quality ratings as determined by Standard & Poor's
or Moody's.
TOP FIVE PORTFOLIO SECTORS AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF JUNE 30, 1997(1)
<S> <C> <S> <C>
Tax District ......... 20.5% Tax District ......... 23.0%
Public Education ..... 17.0% Public Education ..... 19.6%
General Purpose ...... 15.0% General Purpose ...... 15.4%
Public Building ...... 14.6% Public Building ...... 13.8%
Health Care .......... 7.5% Water & Sewer ........ 7.7%
</TABLE>
DURATION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997(1) AS OF JUNE 30, 1997(1)
<S> <C> <C>
Duration 8.08 years 7.84 years
</TABLE>
(1)Unaudited
11
<PAGE> 80
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
12
<PAGE> 81
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
13
<PAGE> 82
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
14
<PAGE> 83
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
15
<PAGE> 84
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
16
<PAGE> 85
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
17
<PAGE> 86
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
18
<PAGE> 87
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
20
<PAGE> 88
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
21
<PAGE> 89
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
22
<PAGE> 90
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
23
<PAGE> 91
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
24
<PAGE> 92
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.
25
<PAGE> 93
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.
26
<PAGE> 94
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>
27
<PAGE> 95
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>
28
<PAGE> 96
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).
29
<PAGE> 97
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.
30
<PAGE> 98
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
31
<PAGE> 99
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
EQUITY FUNDS
Domestic
MS Aggressive Equity
VKAC Aggressive Growth
MS American Value
VKAC Comstock
VKAC Emerging Growth
VKAC Enterprise
VKAC Equity Income
VKAC Growth
VKAC Growth and Income
VKAC Harbor
VKAC Pace
VKAC Real Estate Securities
MS U.S. Real Estate
VKAC Utility
MS Value
International/Global
MS Asian Growth
MS Emerging Markets
MS Global Equity
VKAC Global Equity
MS Global Equity Allocation
VKAC Global Managed Assets
MS International Magnum
MS Latin American
FIXED-INCOME FUNDS
Income
VKAC Corporate Bond
MS Global Fixed Income
VKAC Global Government Securities
VKAC Government Securities
VKAC High Income Corporate Bond
MS High Yield
VKAC High Yield
VKAC Short-Term Global Income
VKAC Strategic Income
VKAC U.S. Government
VKAC U.S. Government Trust for Income
MS Worldwide High Income
Tax Exempt Income
VKAC California Insured Tax Free
VKAC Florida Insured Tax Free Income
VKAC High Yield Municipal
VKAC Insured Tax Free Income
VKAC Intermediate Term Municipal Income
VKAC Municipal Income
VKAC New York Tax Free Income
VKAC Pennsylvania Tax Free Income
VKAC Tax Free High Income
Capital Preservation
VKAC Limited Maturity Government
VKAC Prime Rate Income Trust
VKAC Reserve
VKAC Senior Floating Rate
VKAC Tax Free Money
To find out more about any of these funds, ask your financial adviser for a
prospectus, which contains more complete information, including sales
charges, risks, and expenses. Please read it carefully before you invest or
send money.
To view a current Van Kampen American Capital or Morgan Stanley fund
prospectus or to receive additional fund information, choose from one of the
following:
- visit our web site at WWW.VKAC.COM -- to view prospectuses, select
Investors' Place, then Download a Prospectus
- call us at 1-800-341-2911 weekdays from 7:00 a.m. to 7:00 p.m. Central time
(Telecommunications Device for the Deaf users, call 1-800-421-2833)
- e-mail us by visiting WWW.VKAC.COM and selecting Investors' Place
31
<PAGE> 100
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
BOARD OF TRUSTEES
J. MILES BRANAGAN
RICHARD M. DEMARTINI*
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
JACK E. NELSON
DON G. POWELL*
PHILLIP B. ROONEY
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
ALAN T. SACHTLEBEN*
PAUL R. WOLKENBERG*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
DISTRIBUTOR
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
SHAREHOLDER SERVICING AGENT
ACCESS INVESTOR
SERVICES, INC.
P.O. Box 418256
Kansas City, Missouri 64141-9256
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Fund, as defined in the Investment Company Act of
1940.
(C) Van Kampen American Capital Distributors, Inc., 1998 All rights reserved.
SM denotes a service mark of Van Kampen American Capital Distributors, Inc.
This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless it
has been preceded or is accompanied by an effective prospectus of the Fund which
contains additional information on how to purchase shares, the sales charge, and
other pertinent data. After June 30, 1998, the report, if used with prospective
investors, must be accompanied by a quarterly performance update.
31
<PAGE> 101
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 3
Performance in Perspective....................... 4
Glossary of Terms................................ 5
Portfolio Management Review...................... 7
Portfolio Highlights............................. 9
Portfolio of Investments......................... 10
Statement of Assets and Liabilities.............. 22
Statement of Operations.......................... 23
Statement of Changes in Net Assets............... 24
Financial Highlights............................. 25
Notes to Financial Statements.................... 28
Report of Independent Accountants................ 35
</TABLE>
MIF ANR 2/98
<PAGE> 102
LETTER TO SHAREHOLDERS
February 3, 1998
Dear Shareholder,
The new year ushers in what
promises to be an exciting and
challenging time for investors. The
Taxpayer Relief Act of 1997 signed into [PHOTO]
law by President Clinton in August
creates many new opportunities for you
and your family to take a more active
role in achieving your long-term
financial goals.
Most Americans will benefit from
the bill's $95 billion in tax cuts over
five years. The so-called Kiddie Credit
gives parents $400 in immediate tax
relief for every child under age 17,
and families will find it easier to DENNIS J. MCDONNELL AND DON G. POWELL
save for their children's college
expenses through the new Education IRA.
The bill also cuts capital gains tax
rates for the first time in over a decade and loosens restrictions on
tax-deductible IRA contributions. Perhaps the most exciting feature of all is
the new Roth IRA, which allows investment earnings to grow tax free, not just
tax deferred.
This year more than ever, it could be important for you to talk with your
financial adviser about how to make the tax code work to your advantage. At Van
Kampen American Capital, we have prepared a variety of publications to help you
understand your choices under the new tax legislation. And with the help of your
adviser, we'll help you locate the many benefits hidden among the changing tax
landscape.
ECONOMIC OVERVIEW
These continue to be the best of times for the U.S. economy. Growth is
strong, consumers are optimistic, unemployment is low, the budget is heading for
surplus, and our nation's currency is rising around the world.
Despite the strength in the economy, there is no indication of
troublesome inflation. In fact, the producer price index fell by 1.2 percent
during the year, the largest annual decline in wholesale prices since 1986.
Inflation at the consumer level was also virtually nonexistent, with the
consumer price index rising by only 1.7 percent during 1997. A strong dollar,
and significant productivity gains helped offset inflationary pressures caused
by rising wages.
After increasing short-term interest rates by 0.25 percent in March, the
Federal Reserve Board left monetary policy unchanged for the remainder of the
year. In addition to signs that the economy was slowing modestly from its
breakneck pace of early 1997, Fed policy-makers were concerned about the impact
that higher U.S. interest rates might have on the struggling economies of
Southeast Asia. Generally, higher U.S. interest rates cause the dollar to rise
relative to other currencies. With nearly all Asian currencies already down
significantly, a hike in U.S. rates would force monetary authorities in Asia to
choose between letting their currencies decline further or matching the rate
increase, thereby slowing their already-sluggish economies.
Continued on page two
1
<PAGE> 103
MARKET OVERVIEW
Low inflation and steady Federal Reserve policy contributed to solid
gains for fixed-income investments over the reporting period. The yield on the
Treasury's benchmark 30-year bond began the year at 6.64 percent and climbed to
7.17 percent in April amid fears that strong economic growth would reignite
inflation. When subsequent data showed the economy to be slowing, bond yields
gradually drifted lower. By the end of the reporting period, long-term
Treasury-bond yields had fallen to 5.92 percent, the lowest level in more than
four years.
During the 12 months through December, long-term general obligation bonds
returned more than 11 percent, compared to just under 9 percent for
intermediate-term bonds. Total volume of municipal debt rose to over $200
billion, the highest level since 1993. Close to 50 percent of issuance was
enhanced by insurance. This increase in AAA-rated volume caused spreads between
high quality and lower-rated paper to compress, making quality offerings
attractive during the period. At the same time, however, it was difficult to
build the income component of the portfolio due to the scarcity of higher
yielding securities.
OUTLOOK
We believe that reduced demand for American exports to Asia will exert a
mild drag on the U.S. economy in coming months. But while corporate profits
could suffer, slower economic growth will help mitigate the inflationary
pressures caused by the tight domestic labor market. That scenario is typically
good for fixed-income investments.
However, if bond yields continue to drift lower, economic growth in the
U.S. could accelerate later in 1998. In recent years, each significant decline
in long-term interest rates has ignited economic growth by making housing,
autos, and other big-ticket consumer goods more affordable. We also expect the
healthy economy to keep credit spreads relatively tight in coming months.
As we noted earlier, the Taxpayer Relief Act of 1997 provides attractive
new vehicles through which investors can save for a variety of goals, including
higher education and retirement. We encourage you to work with your financial
adviser to consider how the tax changes can work to your benefit.
Additional details about your Fund, including a question-and-answer
section with your portfolio management team, are provided in this report. As
always, we are pleased to have the opportunity to serve you through our diverse
menu of quality investments.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
2
<PAGE> 104
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1997
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
TOTAL RETURNS
One-year total return based on NAV(1).................... 9.14% 8.27% 8.34%
One-year total return(2)................................. 3.96% 4.27% 7.34%
Five-year average annual total return(2)................. 5.61% 5.61% N/A
Life-of-Fund average annual total return(2).............. 7.28% 5.67% 4.80%
Commencement date........................................ 08/01/90 08/24/92 08/13/93
DISTRIBUTION RATES AND YIELD
Distribution rate(3)..................................... 5.11% 4.64% 4.65%
Taxable-equivalent distribution rate(4).................. 7.98% 7.25% 7.27%
SEC Yield(5)............................................. 4.45% 3.87% 3.86%
</TABLE>
N/A Not Applicable
(1) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (4.75% for A shares) or contingent
deferred sales charge for early withdrawal (4% for B shares and 1% for C
shares).
(2) Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (A shares) or contingent
deferred sales charge for early withdrawal (B and C shares).
(3) Distribution rate represents the monthly annualized distributions of the
Fund at the end of the period and not the earnings of the Fund.
(4) Taxable-equivalent calculations reflect a federal income tax rate of 36%.
(5) SEC Yield is a standardized calculation prescribed by the Securities and
Exchange Commission for determining the amount of net income a portfolio should
theoretically generate for the 30-day period ending December 31, 1997.
A portion of the interest income may be subject to the federal alternative
minimum tax (AMT).
See the Fund Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. Fund shares, when redeemed, may be worth more
or less than their original cost.
Investments in lower-rated, higher-yielding municipal securities involve a
higher degree of risk. Investments in derivative securities will subject the
Fund to greater risk.
Market forecasts provided in this report may not necessarily come to pass.
3
<PAGE> 105
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:
- Illustrate the general market environment in which your investments are
being managed
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over the
period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Lehman Brothers Municipal Bond
Index over time. As a broad-based, unmanaged statistical composite, this index
does not reflect any commissions or fees which would be incurred by an investor
purchasing the securities it represents. Similarly, its performance does not
reflect any sales charges or other costs which would be applicable to an
actively managed portfolio, such as that of the Fund.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Municipal Income Fund vs. Lehman Brothers
Municipal Bond Index
(August 1, 1990 through December 31, 1997)
[GRAPH]
<TABLE>
<CAPTION>
VKAC Lehman Brothers
Municipal Municipal Bond
Date Income Fund Index
<S> <C> <C>
Aug 1990 9,446.00 10,000.00
Dec 1990 9,771.00 10,437.60
Dec 1991 11,137.00 11,705.30
Dec 1992 12,215.00 12,737.20
Dec 1993 13,706.00 14,300.80
Dec 1994 12,833.00 13,561.30
Dec 1995 14,836.00 15,929.50
Dec 1996 15,439.00 16,636.50
Dec 1997 16,849.00 18,167.40
- -------------------------------
Fund's Total Return
1 Year Avg. Annual = 3.96%
5 Year Avg. Annual = 5.61%
Inception Avg. Annual = 7.28%
- -------------------------------
</TABLE>
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions and includes payment of the maximum
sales charge (4.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
4
<PAGE> 106
GLOSSARY OF TERMS
BASIS POINT: A measure used in quoting yields on bonds. One hundred basis points
is equal to one percent. For example, if a bond's yield changes from 7.00 to
6.65 percent, it would be considered a 35 basis point move.
CALL FEATURE: Allows the issuer to buy back the bond before the date of
maturity. When the bond is called, the issuer repurchases it at or above its
face value, and stops paying interest on that loan.
CLASS A SHARES: When Class A shares of a fund are purchased, the share price
includes the net asset value plus a one-time sales charge (or "load"). There is
no redemption fee (Contingent Deferred Sales Charge).
COUPON RATE: The stated rate of interest the bond pays until maturity, expressed
as a percentage of the face value.
CREDIT SPREAD: Also called quality spread, the difference in yield between
higher-quality issues (such as AAA-rated municipal bonds) and lower-quality
issues (such as BBB- and non-rated municipal bonds). Under normal circumstances,
lower-quality issues provide higher yields in order to compensate investors for
the additional credit risk.
DURATION: A measure of a bond's sensitivity to changes in interest rates,
expressed in years. The longer a fund's duration, the greater the effect of
interest rate movements on net asset value. Typically, funds with shorter
durations have performed better in rising rate environments, while funds with
longer durations have performed better when rates decline.
FEDERAL FUNDS RATE: The interest rate charged by one institution lending federal
funds to another. This overnight rate is used to meet banks' daily reserve
requirements. The Federal Reserve Board uses the federal funds rate to affect
the direction of interest rates.
FEDERAL RESERVE BOARD (THE FED): A seven-member group that directs the
operations of the Federal Reserve System, the central bank system of the United
States. Currently led by Chairman Alan Greenspan, the Fed meets eight times a
year to establish monetary policy and monitor the country's economic pulse.
GENERAL OBLIGATION BONDS: Bonds backed by the full faith and credit (taxing
authority) of the issuer for timely payment of interest and principal. General
obligation bonds are issued to finance essential government projects, such as
highways and schools.
INFLATION: An economic state in which the amount of money supply and business
activity dramatically increases, accompanied by sharply rising prices. Inflation
is widely measured by the Consumer Price Index, a leading economic indicator
that measures the change in the cost of purchased goods and services.
MUNICIPAL BOND: A debt security issued by a state, municipality or other
governmental entity to finance capital expenditures such as the construction of
highways, public works, or school buildings.
MUNICIPAL REVENUE BONDS: Bonds that are payable only from the revenues the
project will generate and are not backed by any taxing authority of the issuer.
Revenue bonds are issued to finance the building of hospitals, toll bridges,
electric dams, airports, and college dormitories.
MUNICIPAL YIELD CURVE: A representation of the actual or projected yields of
municipal bond securities in relationship to their maturities.
NET ASSET VALUE (NAV): The value of a mutual fund share, calculated by deducting
a fund's liabilities from its total assets and dividing this amount by the
number of shares outstanding. The NAV does not include any initial or contingent
deferred sales charges.
PUT BOND: A long-term bond that the bondholder can "put" back to the issuer for
redemption at a specified price on a specified future date prior to maturity.
PREREFUNDING: A process whereby new bonds are issued to refinance an outstanding
bond issue. This typically occurs when interest rates decline and an issuer
wishes to replace higher-yielding bonds with current lower-yielding issues.
5
<PAGE> 107
GLOSSARY OF TERMS (CONTINUED)
YIELD CURVE: A result of viewing the yields of U.S. Treasury securities maturing
in 1, 5, 10, and 30 years, grouped together, will often reflect a pattern of
increasing yield as maturity extends. This pattern creates an upward sloping
"curve." A "flat" yield curve represents little difference between short- and
long-term interest rates. An "inverted" yield curve indicates that short-term
rates are higher than long-term rates.
ZERO COUPON BONDS: A corporate or municipal debt security traded at a deep
discount from face value that pays no interest and it may be redeemed at
maturity for full face value.
6
<PAGE> 108
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
We recently spoke with the management team of the Van Kampen American Capital
Municipal Income Fund about the key events and economic forces that shaped the
markets during the Fund's fiscal year. The team includes David C. Johnson,
portfolio manager, and Peter W. Hegel, chief investment officer for fixed-income
investments. The following excerpts reflect their views on the Fund's
performance during the 12-month period ended December 31, 1997.
Q HOW WOULD YOU DESCRIBE THE MARKET ENVIRONMENT IN WHICH THE FUND HAS
OPERATED DURING THE PAST 12 MONTHS?
A The bond market saw healthy price advances during 1997, but this ascension
was not a smooth ride. Early in the year, bond prices began to fall when
economic indicators caused concerns about rising inflation and a potential
interest rate hike by the Federal Reserve Board. When the Fed raised interest
rates by a modest 0.25 percent in late March, bond prices fell even further. By
mid-April, however, the market's mood reversed, giving little indication of
price pressures despite the economy's strength. Bond prices also benefited from
heavy purchases by foreign investors and concerns that the stock market rally
was nearing an end.
While the economy showed few, if any, signs of inflation, bond prices
continued their climb, and long-term interest rates declined further. This
caused credit spreads between investment-grade and lower- or non-rated bonds to
contract significantly. Also, an unprecedented amount of insured bond
issuance--49 percent of total volume--reduced the supply of higher-yielding,
lower- and non-rated bonds available in the market.
Q HAVE THESE CONDITIONS AFFECTED THE MANAGEMENT OF THE FUND?
A Our overall strategy did not change based on market conditions, although
lower yields made it more difficult to add significant value over our
existing holdings. We evaluated bond issues on an individual basis and
made purchases where we found the most appropriate opportunities.
The narrowing of credit spreads, while limiting the attractiveness of the
high-yielding, high-risk securities offered at the current market levels,
actually increased the value of the lower- and non-rated bonds held in the
Fund's portfolio, as prices appreciated considerably. By relying heavily on our
research and analysis to find attractive issues, we have been able to
consistently provide shareholders with a higher level of potential income.
Q WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO?
A The declining market yields caused turnover in the portfolio to remain
relatively low during the reporting period, because new bonds would have
had lower yields than most of the bonds already in the portfolio. We
continued to allocate the Fund's assets according to our stringent credit
standards. Our sector weightings were a reflection of where we found
opportunities on a bond-by-bond basis. No one sector dominated the portfolio
during the period, but health care and industrial revenue bonds represented the
largest sector concentrations in the Fund. Health-care holdings comprise 16.2
percent of the portfolio and the industrial revenue sector comprise 14.0
percent. In addition to these holdings, the Fund is diversified across a number
of sectors including, general purpose, single family housing, and tax districts.
In terms of credit quality, the Fund maintained a barbell structure, with
concentrations in AAA- and BBB-rated securities. Approximately 41 percent of the
Fund's long-term investments were non-rated or BBB-rated or below, while 42
percent of long-term investments were AAA-rated. Because the credit spreads were
tight, we sold a number of the Fund's A- and AA-rated bonds in exchange for the
added liquidity and safety of the AAA-rated bonds.
In seeking to reduce volatility, we maintained the Fund's duration close
to its benchmark, the Lehman Brothers Municipal Bond Index, which had a
duration of 7.60 years. We concentrated on maintaining a balanced portfolio
that we
7
<PAGE> 109
feel will perform well during both upward and downward swings in interest rates.
For additional Fund portfolio highlights, please refer to page nine.
Q HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A The Fund posted positive results for the fiscal year. Total return for the
12 months ended December 31, 1997 was 9.14 percent(1) (Class A shares at
net asset value). By comparison, the Fund's benchmark, the Lehman Brothers
Municipal Bond Index produced a total return of 9.19 percent for the same
period. Please keep in mind that this index is a broad-based, unmanaged index of
municipal bonds and does not reflect any commissions or fees that would be paid
by an investor purchasing the securities it represents.
The Fund continued to meet its goal of providing a competitive level of
tax-exempt current income. At year-end, the Fund's tax-exempt distribution rate
(Class A shares) was 5.11 percent(3), based upon a monthly dividend of $0.0705
per Class A share and a maximum public offering price of $16.56. For investors
in the 36 percent federal income tax bracket, the Fund's taxable-equivalent
distribution rate was 7.98 percent(4). Please refer to the chart on page three
for additional Fund performance results.
Q WHAT IS YOUR OUTLOOK FOR THE MONTHS AHEAD?
A We expect the U.S. economy to remain strong going into 1998, although the
growth rate could slow from its current level. The expediency with which
the crisis in Southeast Asia is resolved will play a key role in how the
Fed will manage the U.S. interest rate environment in the coming year. We are
cautiously optimistic that interest rates will remain fairly stable, if not move
slightly lower in 1998. In the event that conditions in Southeast Asia stabilize
and the U.S. economy shows increased signs of price appreciation and wage
pressures, the Fed might take preemptive measures to keep inflation in check.
We anticipate that long-term municipal bond yields will remain stable and
that the tax-exempt bond market will continue to track Treasuries. Insured bond
issuance is likely to decrease slightly as more investors will be willing to
accept additional risk in exchange for the added yield of uninsured bonds. We
believe general bond issuance across the board will remain at or slightly above
1997 levels. Although we would like to see credit spreads widen in the new year,
all indicators lead us to believe that spreads will remain tight for the
foreseeable future.
We believe the Fund is well positioned to weather changes in interest
rates in the coming year. Regardless of market conditions, we believe both the
duration and sector diversity will enable the Fund to be less volatile to
interest rate changes.
[SIG]
Peter W. Hegel
Chief Investment Officer
Fixed Income Investments
[SIG]
David C. Johnson
Portfolio Manager
Please see footnotes on page three
8
<PAGE> 110
PORTFOLIO HIGHLIGHTS
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
TOP TEN STATES AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF FUND'S
LONG-TERM INVESTMENTS
<S> <C>
New York.................................................... 12.7%
Illinois.................................................... 11.2%
California.................................................. 6.6%
Colorado.................................................... 5.5%
Pennsylvania................................................ 5.2%
Florida..................................................... 4.9%
New Jersey.................................................. 4.9%
Texas....................................................... 4.7%
Massachusetts............................................... 3.4%
Washington.................................................. 3.3%
</TABLE>
CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF JUNE 30, 1997(1)
<S> <C> <S> <C>
AAA............... 42.1% AAA............... 39.6%
AA................ 7.0% AA................ 10.3%
A................. 10.3% [PIE CHART] A................. 11.8% [PIE CHART]
BBB............... 18.0% BBB............... 15.3%
BB................ 1.1% BB................ 1.3%
Non-Rated......... 21.5% Non-Rated......... 21.7%
</TABLE>
Based upon the highest credit quality ratings as determined by Standard & Poor's
or Moody's.
TOP FIVE PORTFOLIO SECTORS AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF JUNE 30, 1997(1)
<S> <C> <C> <C>
Health Care........................ 16.2% Health Care........................ 16.3%
Industrial Revenue................. 14.0% Industrial Revenue................. 11.0%
General Purpose.................... 7.7% Transportation..................... 8.4%
Public Building.................... 7.6% Public Building.................... 8.4%
Tax District....................... 6.9% General Purpose.................... 8.1%
</TABLE>
DURATION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997(1) AS OF JUNE 30, 1997(1)
<S> <C> <C>
Duration 7.51 years 7.44 years
</TABLE>
(1) Unaudited
9
<PAGE> 111
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
10
<PAGE> 112
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
11
<PAGE> 113
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
12
<PAGE> 114
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
13
<PAGE> 115
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
14
<PAGE> 116
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
15
<PAGE> 117
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
16
<PAGE> 118
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
17
<PAGE> 119
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
18
<PAGE> 120
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
19
<PAGE> 121
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
20
<PAGE> 122
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
21
<PAGE> 123
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
22
<PAGE> 124
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
23
<PAGE> 125
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
24
<PAGE> 126
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
25
<PAGE> 127
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
26
<PAGE> 128
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
27
<PAGE> 129
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.
28
<PAGE> 130
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.
29
<PAGE> 131
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>
30
<PAGE> 132
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
31
<PAGE> 133
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>
32
<PAGE> 134
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.
33
<PAGE> 135
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.
34
<PAGE> 136
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
35
<PAGE> 137
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
EQUITY FUNDS
Domestic
MS Aggressive Equity
VKAC Aggressive Growth
MS American Value
VKAC Comstock
VKAC Emerging Growth
VKAC Enterprise
VKAC Equity Income
VKAC Growth
VKAC Growth and Income
VKAC Harbor
VKAC Pace
VKAC Real Estate Securities
MS U.S. Real Estate
VKAC Utility
MS Value
International/Global
MS Asian Growth
MS Emerging Markets
MS Global Equity
VKAC Global Equity
MS Global Equity Allocation
VKAC Global Managed Assets
MS International Magnum
MS Latin American
FIXED-INCOME FUNDS
Income
VKAC Corporate Bond
MS Global Fixed Income
VKAC Global Government Securities
VKAC Government Securities
VKAC High Income Corporate Bond
MS High Yield
VKAC High Yield
VKAC Short-Term Global Income
VKAC Strategic Income
VKAC U.S. Government
VKAC U.S. Government Trust for Income
MS Worldwide High Income
Tax Exempt Income
VKAC California Insured Tax Free
VKAC Florida Insured Tax Free Income
VKAC High Yield Municipal
VKAC Insured Tax Free Income
VKAC Intermediate Term Municipal Income
VKAC Municipal Income
VKAC New York Tax Free Income
VKAC Pennsylvania Tax Free Income
VKAC Tax Free High Income
Capital Preservation
VKAC Limited Maturity Government
VKAC Prime Rate Income Trust
VKAC Reserve
VKAC Senior Floating Rate
VKAC Tax Free Money
To find out more about any of these funds, ask your financial adviser for a
prospectus, which contains more complete information, including sales
charges, risks, and expenses. Please read it carefully before you invest or
send money.
To view a current Van Kampen American Capital or Morgan Stanley fund
prospectus or to receive additional fund information, choose from one of the
following:
- visit our web site at WWW.VKAC.COM -- to view prospectuses, select
Investors' Place, then Download a Prospectus
- call us at 1-800-341-2911 weekdays from 7:00 a.m. to 7:00 p.m. Central time
(Telecommunications Device for the Deaf users, call 1-800-421-2833)
- e-mail us by visiting WWW.VKAC.COM and selecting Investors' Place
36
<PAGE> 138
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
BOARD OF TRUSTEES
J. MILES BRANAGAN
RICHARD M. DEMARTINI*
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
JACK E. NELSON
DON G. POWELL*
PHILLIP B. ROONEY
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
ALAN T. SACHTLEBEN*
PAUL R. WOLKENBERG*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
DISTRIBUTOR
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
SHAREHOLDER SERVICING AGENT
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, Missouri 64141-9256
CUSTODIAN
STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Fund, as defined in
the Investment Company Act of 1940.
(C) Van Kampen American Capital Distributors, Inc., 1998
All rights reserved.
(SM) denotes a service mark of
Van Kampen American Capital Distributors, Inc.
This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless it
has been preceded or is accompanied by an effective prospectus of the Fund which
contains additional information on how to purchase shares, the sales charge, and
other pertinent data. After June 30, 1998, the report, if used by prospective
investors, must be accompanied by a quarterly performance update.
37
<PAGE> 139
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 4
Performance in Perspective....................... 5
Glossary of Terms................................ 6
Portfolio Management Review...................... 8
Portfolio Highlights............................. 11
Portfolio of Investments......................... 12
Statement of Assets and Liabilities.............. 15
Statement of Operations.......................... 16
Statement of Changes in Net Assets............... 17
Financial Highlights............................. 18
Notes to Financial Statements.................... 21
Report of Independent Accountants................ 28
</TABLE>
INF ANR 2/98
<PAGE> 140
LETTER TO SHAREHOLDERS
February 3, 1998
Dear Shareholder,
The new year ushers in what
promises to be an exciting and
challenging time for investors. The
Taxpayer Relief Act of 1997 signed
into law by President Clinton in [PHOTO]
August creates many new opportunities
for you and your family to take a
more active role in achieving your
long-term financial goals. DENNIS J. MCDONNELL AND DON G. POWELL
Most Americans will benefit from
the bill's $95 billion in tax cuts
over five years. The so-called Kiddie Credit gives parents $400 in immediate tax
relief for every child under age 17, and families will find it easier to save
for their children's college expenses through the new Education IRA. The bill
also cuts capital gains tax rates for the first time in over a decade and
loosens restrictions on tax-deductible IRA contributions. Perhaps the most
exciting feature of all is the new Roth IRA, which allows investment earnings to
grow tax free, not just tax deferred.
This year more than ever, it could be important for you to talk with your
financial adviser about how to make the tax code work to your advantage. At Van
Kampen American Capital, we have prepared a variety of publications to help you
understand your choices under the new tax legislation. And with the help of your
adviser, we'll help you locate the many benefits hidden among the changing tax
landscape.
ECONOMIC OVERVIEW
These continue to be the best of times for the U.S. economy. Growth is
strong, consumers are optimistic, unemployment is low, the budget is heading for
surplus, and our nation's currency is rising around the world.
Despite the strength in the economy, there is no indication of troublesome
inflation. In fact, the producer price index fell by 1.2 percent during the
year, the largest annual decline in wholesale prices since 1986. Inflation at
the consumer level was also virtually nonexistent, with the consumer price index
rising by only 1.7 percent during 1997. A strong dollar, and significant
productivity gains helped offset inflationary pressures caused by rising wages.
After increasing short-term interest rates by 0.25 percent in March, the
Federal Reserve Board left monetary policy unchanged for the remainder of the
year. In addition to signs that the economy was slowing modestly from its
breakneck pace of early 1997, Fed policy-makers were concerned about the impact
that higher U.S. interest rates might have on the struggling economies of
Southeast Asia. Generally, higher U.S. interest rates cause the dollar to rise
relative to other currencies. With nearly all Asian currencies already down
Continued on page two
1
<PAGE> 141
significantly, a hike in U.S. rates would force monetary authorities in Asia to
choose between letting their currencies decline further or matching the rate
increase, thereby slowing their already-sluggish economies.
MARKET OVERVIEW
Low inflation and steady Federal Reserve policy contributed to solid gains
for fixed-income investments over the reporting period. The yield on the
Treasury's benchmark 30-year bond began the year at 6.64 percent and climbed to
7.17 percent in April amid fears that strong economic growth would reignite
inflation. When subsequent data showed the economy to be slowing, bond yields
gradually drifted lower. By the end of the reporting period, long-term
Treasury-bond yields had fallen to 5.92 percent, the lowest level in more than
four years.
During the 12 months through December, long-term general obligation bonds
returned more than 11 percent, compared to just under 9 percent for
intermediate-term bonds. Total volume of municipal debt rose to over $200
billion, the highest level since 1993. Close to 50 percent of issuance was
enhanced by insurance. This increase in AAA-rated volume caused spreads between
high quality and lower-rated paper to compress, making quality offerings
attractive during the period. At the same time, however, it was difficult to
build the income component of the portfolio due to the scarcity of higher
yielding securities.
OUTLOOK
We believe that reduced demand for American exports to Asia will exert a
mild drag on the U.S. economy in coming months. But while corporate profits
could suffer, slower economic growth will help mitigate the inflationary
pressures caused by the tight domestic labor market. That scenario is typically
good for fixed-income investments.
However, if bond yields continue to drift lower, economic growth in the U.S.
could accelerate later in 1998. In recent years, each significant decline in
long-term interest rates has ignited economic growth by making housing, autos,
and other big-ticket consumer goods more affordable. We also expect the healthy
economy to keep credit spreads relatively tight in coming months.
As we noted earlier, the Taxpayer Relief Act of 1997 provides attractive new
vehicles through which investors can save for a variety of goals, including
higher education and retirement. We encourage you to work with your financial
adviser to consider how the tax changes can work to your benefit.
Continued on page three
2
<PAGE> 142
Additional details about your Fund, including a question-and-answer section
with your portfolio management team, are provided in this report. As always, we
are pleased to have the opportunity to serve you through our diverse menu of
quality investments.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
3
<PAGE> 143
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1997
VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
TOTAL RETURNS
<S> <C> <C> <C>
One-year total return based on NAV(1).... 8.08% 7.23% 7.23%
One-year total return(2)................. 4.60% 4.23% 6.23%
Life-of-Fund average annual total
return(2)............................... 6.04% 6.04% 4.87%
Commencement date........................ 05/28/93 05/28/93 10/19/93
DISTRIBUTION RATES AND YIELD
Distribution rate(3)..................... 4.35% 3.82% 3.82%
Taxable equivalent distribution
rate(4)................................. 6.80% 5.97% 5.97%
SEC Yield(5)............................. 4.15% 3.52% 3.52%
</TABLE>
(1) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (3.25% for A shares) or contingent
deferred sales charge for early withdrawal (3% for B shares and 1% for C
shares).
(2) Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (A shares) or contingent
deferred sales charge for early withdrawal (B and C shares).
(3) Distribution rate represents the monthly annualized distributions of the
Fund at the end of the period and not the earnings of the Fund.
(4) Taxable equivalent calculations reflect a federal income tax rate of 36%.
(5) SEC Yield is a standardized calculation prescribed by the Securities and
Exchange Commission for determining the amount of net income a portfolio should
theoretically generate for the 30-day period ending December 30, 1997. Had
certain expenses of the Fund not been assumed by VKAC, total returns would have
been lower and the SEC Yield would have been 4.31%, 3.68% and 3.68% for Classes
A, B and C, respectively.
A portion of the interest income may be taxable for investors subject to the
federal alternative minimum tax (AMT).
See the Fund Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. This performance was achieved during generally
rising stock prices. Fund shares, when redeemed, may be worth more or less than
their original cost.
The share value of the Fund will generally fluctuate more than the value of
short-term investments particularly if there is a rise in short-term rates.
Market forecasts provided in this report may not necessarily come to pass.
4
<PAGE> 144
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:
- Illustrate the general market environment in which your investments are
being managed
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over the
period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Lehman Brothers Municipal Bond
Index over time. As a broad-based, unmanaged statistical composite, this index
does not reflect any commissions or fees which would be incurred by an investor
purchasing the securities it represents. Similarly, its performance does not
reflect any sales charges or other costs which would be applicable to an
actively managed portfolio, such as that of the Fund.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Intermediate Term Municipal Income Fund vs.
Lehman Brothers Municipal Bond Index
(May 28, 1993 through December 31, 1997)
[GRAPH]
<TABLE>
<CAPTION>
VKAC Municipal Lehman Brothers
Intermediate Income Municipal
Term Fund Bond Index
<S> <C> <C>
May 1993 9671.00 10,000.00
Dec. 1993 10,421.00 10,658.00
Dec. 1994 10,075.00 10,106.90
Dec. 1995 11,618.00 11,871.80
Dec. 1996 12,115.00 12,398.70
Dec. 1997 13,094.00 13,539.60
- -----------------------------
Fund's Total Return
1 Year Avg. Annual = 4.60%
3 Year Avg. Annual = 7.95%
Inception Avg. Annual = 6.04%
- -----------------------------
</TABLE>
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions and includes payment of the maximum
sales charge (3.25% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
5
<PAGE> 145
GLOSSARY OF TERMS
BASIS POINT: A measure used in quoting yields on bonds. One hundred basis points
is equal to one percent. For example, if a bond's yield changes from 7.00 to
6.65 percent, it would be considered a 35 basis point move.
CALL FEATURE: Allows the issuer to buy back the bond before the date of
maturity. When the bond is called, the issuer repurchases it at or above its
face value, and stops paying interest on that loan.
CLASS A SHARES: When Class A shares of a fund are purchased, the share price
includes the net asset value plus a one-time sales charge (or "load"). There is
no redemption fee (Contingent Deferred Sales Charge).
COUPON RATE: The stated rate of interest the bond pays until maturity, expressed
as a percentage of the face value.
CREDIT SPREAD: Also called quality spread, the difference in yield between
higher-quality issues (such as AAA-rated municipal bonds) and lower-quality
issues (such as BBB- and non-rated municipal bonds). Under normal circumstances,
lower-quality issues provide higher yields in order to compensate investors for
the additional credit risk.
DURATION: A measure of a bond's sensitivity to changes in interest rates,
expressed in years. The longer a fund's duration, the greater the effect of
interest rate movements on net asset value. Typically, funds with shorter
durations have performed better in rising rate environments, while funds with
longer durations have performed better when rates decline.
FEDERAL FUNDS RATE: The interest rate charged by one institution lending federal
funds to another. This overnight rate is used to meet banks' daily reserve
requirements. The Federal Reserve Board uses the federal funds rate to affect
the direction of interest rates.
FEDERAL RESERVE BOARD (THE FED): A seven-member group that directs the
operations of the Federal Reserve System, the central bank system of the United
States. Currently led by Chairman Alan Greenspan, the Fed meets eight times a
year to establish monetary policy and monitor the country's economic pulse.
GENERAL OBLIGATION BONDS: Bonds backed by the full faith and credit (taxing
authority) of the issuer for timely payment of interest and principal. General
obligation bonds are issued to finance essential government projects, such as
highways and schools.
6
<PAGE> 146
GLOSSARY OF TERMS (CONTINUED)
INFLATION: An economic state in which the amount of money supply and business
activity dramatically increases, accompanied by sharply rising prices. Inflation
is widely measured by the Consumer Price Index, a leading economic indicator
that measures the change in the cost of purchased goods and services.
MUNICIPAL BOND: A debt security issued by a state, municipality or other
governmental entity to finance capital expenditures such as the construction of
highways, public works, or school buildings.
MUNICIPAL REVENUE BONDS: Bonds that are payable only from the revenues the
project will generate and are not backed by any taxing authority of the issuer.
Revenue bonds are issued to finance the building of hospitals, toll bridges,
electric dams, airports, and college dormitories.
MUNICIPAL YIELD CURVE: A representation of the actual or projected yields of
municipal bond securities in relationship to their maturities.
NET ASSET VALUE (NAV): The value of a mutual fund share, calculated by deducting
a fund's liabilities from its total assets and dividing this amount by the
number of shares outstanding. The NAV does not include any initial or contingent
deferred sales charges.
PUT BOND: A long-term bond that the bondholder can "put" back to the issuer for
redemption at a specified price on a specified future date prior to maturity.
PREREFUNDING: A process whereby new bonds are issued to refinance an outstanding
bond issue. This typically occurs when interest rates decline and an issuer
wishes to replace higher-yielding bonds with current lower-yielding issues.
YIELD CURVE: A result of viewing the yields of U.S. Treasury securities maturing
in 1, 5, 10, and 30 years, grouped together, will often reflect a pattern of
increasing yield as maturity extends. This pattern creates an upward sloping
"curve." A "flat" yield curve represents little difference between short- and
long-term interest rates. An "inverted" yield curve indicates that short-term
rates are higher than long-term rates.
ZERO COUPON BONDS: A corporate or municipal debt security traded at a deep
discount from face value that pays no interest and it may be redeemed at
maturity for full face value.
7
<PAGE> 147
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND
We recently spoke with the management team of the Van Kampen American Capital
Intermediate Term Municipal Income Fund about the key events and economic forces
that shaped the markets during the Fund's fiscal year. The team includes Timothy
D. Haney, portfolio manager, and Peter W. Hegel, chief investment officer for
fixed-income investments. The following excerpts reflect their views on the
Fund's performance during the 12-month period ended December 31, 1997.
Q HOW WOULD YOU DESCRIBE THE MARKET ENVIRONMENT IN WHICH THE FUND HAS
OPERATED DURING THE PAST 12 MONTHS?
A The bond market saw healthy price advances during 1997, but this ascension
was not a smooth ride. Early in the year, bond prices began to fall when
economic indicators caused concerns about rising inflation and a potential
interest rate hike by the Federal Reserve Board. When the Fed raised interest
rates by a modest 0.25 percent in late March, bond prices fell even further. By
mid-April, however, the market's mood reversed, giving little indication of
price pressures despite the economy's strength. Bond prices also benefited from
heavy purchases by foreign investors and concerns that the stock market rally
was nearing an end.
While the economy showed few, if any, signs of inflation, bond prices
continued their climb, and long-term interest rates declined further. This
caused credit spreads between investment-grade and lower- or non-rated bonds to
contract significantly. Also, an unprecedented amount of insured bond
issuance--49 percent of total volume--reduced the supply of higher-yielding,
lower- and non-rated bonds available in the market.
Q HOW HAVE THESE CONDITIONS AFFECTED THE FUND?
A Our overall strategy did not change based on market conditions, although
lower yields made it more difficult to add significant value over our
existing holdings. We evaluated bond issues on an individual basis and
made purchases where we found the most appropriate opportunities.
The narrowing of credit spreads, while limiting the attractiveness of the
high-yielding, high-risk securities offered at the current market levels,
actually increased the value of the lower- and non-rated bonds held in the
Fund's portfolio. According to the Fund's investment objective, we may invest up
to 35 percent of the portfolio in high-yielding, non-rated bonds. During the
reporting period, we increased non-rated holdings to the maximum level
allowable, which enabled the Fund to perform well during the period of spread
compression.
Q WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO?
A We sought to increase the dividend potential of the Fund by moving from
lower-rated bonds into non-rated issues. By mid-year we had reached our
limit on the
8
<PAGE> 148
percentage of non-rated bonds in the Fund. Issues that were added to the
portfolio during second half of the year included zero coupon bonds issued by
the Shaler Pennsylvania School District and the Crow Indian Nation. These issues
performed well during the reporting period.
The duration of the Fund at the end of the period was 5.81 years, slightly
longer than that of its benchmark, the Lehman Brothers Intermediate Municipal
Bond Index, which had a duration of 4.98 years. This longer duration and its
associated risk are somewhat deceiving as a measure of interest rate risk due to
the fact that the higher-yielding, non-rated bonds held in the Fund are
typically less responsive to changes in interest rates than bonds rated BBB or
higher.
Q HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A The Fund posted positive results for the fiscal year. Total return for the
12 months ended December 31, 1997 was 8.08 percent(1) (Class A shares at
net asset value). By comparison, the Fund's benchmark, the Lehman Brothers
Municipal Bond Index produced a total return of 9.19 percent for the same
period. Please keep in mind that this index is a broad-based, unmanaged index of
municipal bonds and does not reflect any commissions or fees that would be paid
by an investor purchasing the securities it represents.
The Fund continued to meet its goal of providing a competitive level of
tax-exempt income in 1997. At year-end, the Fund's tax-exempt distribution rate
(Class A shares) was 4.35 percent(3), based on a monthly dividend of $0.03950
and a maximum public offering price of $10.89. For investors in the 36 percent
federal income tax bracket, the Fund's taxable-equivalent distribution rate was
equivalent 6.80 percent(4). Please refer to the chart on page four for
additional Fund performance results.
Q WHAT IS YOUR OUTLOOK FOR THE MONTHS AHEAD?
A We expect the U.S. economy to remain strong going into 1998, although the
growth rate could slow from its current level. The expediency with which
the crisis in Southeast Asia is resolved will play a key role in how the
Fed will manage the U.S. interest rate environment in the coming year. We are
cautiously optimistic that interest rates will remain fairly stable, if not move
slightly lower in 1998. In the event that conditions in Southeast Asia stabilize
and the U.S. economy shows increased signs of price appreciation and wage
pressures, the Fed might take preemptive measures to keep inflation in check.
We anticipate that long-term municipal bond yields will remain stable and
that the tax-exempt bond market will continue to track Treasuries. Insured bond
issuance is likely to decrease slightly as more investors will be willing to
accept additional risk in exchange for the added yield of uninsured bonds. We
believe general bond issuance across the board will remain at or slightly above
1997 levels. Although we would like to see credit spreads widen in the new year,
all indicators lead us to believe that spreads will remain tight for the
foreseeable future.
9
<PAGE> 149
We believe the Fund is well positioned to weather changes in interest rates
in the coming year. We anticipate that the Fund's long nominal duration and
significant non-rated bond position should allow it to fare well under a variety
of market conditions.
[SIG]
Peter W. Hegel
Chief Investment Officer
Fixed Income Investments
[SIG]
Timothy D. Haney
Portfolio Manager
Please see footnotes on page four
10
<PAGE> 150
PORTFOLIO HIGHLIGHTS
VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND
TOP TEN STATES AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF FUND'S
LONG-TERM INVESTMENTS
<S> <C>
Illinois............... 13.3%
New York............... 9.0%
Florida................ 8.2%
New Jersey............. 7.5%
Ohio................... 5.9%
Arizona................ 5.7%
California............. 5.7%
Colorado............... 5.6%
Utah................... 5.3%
Missouri............... 5.3%
</TABLE>
CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF JUNE 30, 1997(1)
<S> <C> <S> <C>
AAA............ 34.9% AAA............ 20.1%
AA............. 5.9% AA............. 2.0%
A.............. 8.1% [PIE CHART] A.............. 2.4% [PIE CHART]
BBB............ 17.9% BBB............ 27.6%
BB............. 4.2% BB............. 9.7%
Non-Rated...... 29.0% Non-Rated...... 38.2%
</TABLE>
Based upon the highest credtings as determined by Standard & Poor's or Moody's.
TOP FIVE PORTFOLIO SECTORS AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF JUNE 30, 1997(1)
<S> <C> <C> <C>
Health Care........... 18.5% Health Care........... 21.3%
Multi-Family Multi-Family
Housing............. 16.4% Housing............. 16.0%
Industrial Revenue.... 15.0% Industrial Revenue.... 14.7%
General Purpose....... 13.0% General Purpose....... 13.1%
Airport............... 10.7% Airport............... 9.9%
</TABLE>
DURATION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 (1) AS OF JUNE 30, 1997 (1)
<S> <C> <C>
Duration 5.81 years 6.26 years
</TABLE>
(1) Unaudited
11
<PAGE> 151
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
12
<PAGE> 152
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
13
<PAGE> 153
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
14
<PAGE> 154
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
15
<PAGE> 155
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
16
<PAGE> 156
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
17
<PAGE> 157
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
18
<PAGE> 158
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
19
<PAGE> 159
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
20
<PAGE> 160
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.
21
<PAGE> 161
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.
22
<PAGE> 162
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.
23
<PAGE> 163
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>
24
<PAGE> 164
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>
25
<PAGE> 165
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).
26
<PAGE> 166
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.
27
<PAGE> 167
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
28
<PAGE> 168
VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND
BOARD OF TRUSTEES
J. MILES BRANAGAN
RICHARD M. DEMARTINI*
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
JACK E. NELSON
DON G. POWELL*
PHILLIP B. ROONEY
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
ALAN T. SACHTLEBEN*
PAUL R. WOLKENBERG*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
DISTRIBUTOR
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
SHAREHOLDER SERVICING AGENT
ACCESS INVESTOR
SERVICES, INC.
P.O. Box 418256
Kansas City, Missouri 64141-9256
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Fund, as defined in
the Investment Company Act of 1940.
(C) Van Kampen American Capital Distributors, Inc., 1998
All rights reserved.
(SM) denotes a service mark of
Van Kampen American Capital Distributors, Inc.
This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless it
has been preceded or is accompanied by an effective prospectus of the Fund which
contains additional information on how to purchase shares, the sales charge, and
other pertinent data. After June 30, 1998, this report, if used with prospective
investors, must be accompanied by a quarterly performance update.
29
<PAGE> 169
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 4
Performance in Perspective....................... 5
Glossary of Terms................................ 6
Portfolio Management Review...................... 8
Portfolio Highlights............................. 11
Portfolio of Investments......................... 12
Statement of Assets and Liabilities.............. 15
Statement of Operations.......................... 16
Statement of Changes in Net Assets............... 17
Financial Highlights............................. 18
Notes to Financial Statements.................... 21
Report of Independent Accountants................ 28
</TABLE>
<PAGE> 170
LETTER TO SHAREHOLDERS
February 3, 1998
Dear Shareholder,
The new year ushers in what
promises to be an exciting and
challenging time for investors. The
Taxpayer Relief Act of 1997 signed
into law by President Clinton in
August creates many new opportunities [PHOTO]
for you and your family to take a
more active role in achieving your
long-term financial goals. DENNIS J. MCDONNELL AND DON G. POWELL
Most Americans will benefit from
the bill's $95 billion in tax cuts
over five years. The so-called Kiddie Credit gives parents $400 in immediate tax
relief for every child under age 17, and families will find it easier to save
for their children's college expenses through the new Education IRA. The bill
also cuts capital gains tax rates for the first time in over a decade and
loosens restrictions on tax-deductible IRA contributions. Perhaps the most
exciting feature of all is the new Roth IRA, which allows investment earnings to
grow tax free, not just tax deferred.
This year more than ever, it could be important for you to talk with your
financial adviser about how to make the tax code work to your advantage. At Van
Kampen American Capital, we have prepared a variety of publications to help you
understand your choices under the new tax legislation. And with the help of your
adviser, we'll help you locate the many benefits hidden among the changing tax
landscape.
ECONOMIC OVERVIEW
These continue to be the best of times for the U.S. economy. Growth is
strong, consumers are optimistic, unemployment is low, the budget is heading for
surplus, and our nation's currency is rising around the world.
Despite the strength in the economy, there is no indication of troublesome
inflation. In fact, the producer price index fell by 1.2 percent during the
year, the largest annual decline in wholesale prices since 1986. Inflation at
the consumer level was also virtually nonexistent, with the consumer price index
rising by only 1.7 percent during 1997. A strong dollar, and significant
productivity gains helped offset inflationary pressures caused by rising wages.
After increasing short-term interest rates by 0.25 percent in March, the
Federal Reserve Board left monetary policy unchanged for the remainder of the
year. In addition to signs that the economy was slowing modestly from its
breakneck pace of early 1997, Fed policy-makers were concerned about the impact
that higher U.S. interest rates might have on the struggling economies of
Southeast Asia. Generally, higher U.S. interest rates cause the dollar to rise
relative to other currencies. With nearly all Asian currencies already down
Continued on page two
1
<PAGE> 171
significantly, a hike in U.S. rates would force monetary authorities in Asia to
choose between letting their currencies decline further or matching the rate
increase, thereby slowing their already-sluggish economies.
MARKET OVERVIEW
Low inflation and steady Federal Reserve policy contributed to solid gains
for fixed-income investments over the reporting period. The yield on the
Treasury's benchmark 30-year bond began the year at 6.64 percent and climbed to
7.17 percent in April amid fears that strong economic growth would reignite
inflation. When subsequent data showed the economy to be slowing, bond yields
gradually drifted lower. By the end of the reporting period, long-term
Treasury-bond yields had fallen to 5.92 percent, the lowest level in more than
four years.
During the 12 months through December, long-term general obligation bonds
returned more than 11 percent, compared to just under 9 percent for
intermediate-term bonds. Total volume of municipal debt rose to over $200
billion, the highest level since 1993. Close to 50 percent of issuance was
enhanced by insurance. This increase in AAA-rated volume caused spreads between
high quality and lower-rated paper to compress, making quality offerings
attractive during the period. At the same time, however, it was difficult to
build the income component of the portfolio due to the scarcity of higher
yielding securities.
OUTLOOK
We believe that reduced demand for American exports to Asia will exert a
mild drag on the U.S. economy in coming months. But while corporate profits
could suffer, slower economic growth will help mitigate the inflationary
pressures caused by the tight domestic labor market. That scenario is typically
good for fixed-income investments.
However, if bond yields continue to drift lower, economic growth in the U.S.
could accelerate later in 1998. In recent years, each significant decline in
long-term interest rates has ignited economic growth by making housing, autos,
and other big-ticket consumer goods more affordable. We also expect the healthy
economy to keep credit spreads relatively tight in coming months.
As we noted earlier, the Taxpayer Relief Act of 1997 provides attractive new
vehicles through which investors can save for a variety of goals, including
higher education and retirement. We encourage you to work with your financial
adviser to consider how the tax changes can work to your benefit.
Continued on page three
2
<PAGE> 172
Additional details about your Fund, including a question-and-answer section
with your portfolio management team, are provided in this report. As always, we
are pleased to have the opportunity to serve you through our diverse menu of
quality investments.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
3
<PAGE> 173
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1997
VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
TOTAL RETURNS
One-year total return based on NAV(1)... 8.72% 7.91% 7.97%
One-year total return(2)................ 3.57% 3.91% 6.97%
Life-of-Fund average annual total
return(2)............................. 6.44% 6.55% 7.23%
Commencement date....................... 07/29/94 07/29/94 07/29/94
DISTRIBUTION RATES AND YIELD
Distribution rate(3).................... 4.74% 4.24% 4.24%
Taxable equivalent distribution
rate(4)............................... 7.41% 6.63% 6.63%
SEC Yield(5)............................ 3.78% 3.19% 3.21%
</TABLE>
(1)Assumes reinvestment of all distributions for the period and does not include
payment of the maximum sales charge (4.75% for A shares) or contingent deferred
sales charge for early withdrawal (4% for B shares and 1% for C shares).
(2)Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (A shares) or contingent
deferred sales charge for early withdrawal (B and C shares).
(3)Distribution rate represents the monthly annualized distributions of the Fund
at the end of the period and not the earnings of the Fund.
(4)Taxable equivalent calculations reflect a federal income tax rate of 36%.
(5)SEC Yield is a standardized calculation prescribed by the Securities and
Exchange Commission for determining the amount of net income a portfolio should
theoretically generate for the 30-day period ending December 30, 1997. Had
certain expenses of the Fund not been assumed by VKAC, the SEC Yield would have
been 3.70%, 3.11% and 3.13% for Classes A, B and C, respectively, and total
returns would have been lower.
A portion of the interest income may be taxable for those investors subject to
the federal alternative minimum tax (AMT).
See the Fund Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. Fund shares, when redeemed, may be worth more
or less than their original cost.
Market forecasts provided in this report may not necessarily come to pass.
4
<PAGE> 174
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:
- Illustrate the general market environment in which your investments are
being managed
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over the
period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Lehman Brothers Municipal Bond
Index over time. As a broad-based, unmanaged statistical composite, this index
does not reflect any commissions or fees which would be incurred by an investor
purchasing the securities it represents. Similarly, its performance does not
reflect any sales charges or other costs which would be applicable to an
actively managed portfolio, such as that of the Fund.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Florida Insured Tax Free Income Fund vs. Lehman
Brothers Municipal Bond Index (July 29, 1994 through December 31, 1997)
[INVESTMENT PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
VKAC
Florida Insured Lehman Brothers
Value at Tax Free Income Municipal Bond
Fund Index
<S> <C> <C>
Jul 94 10,000.00 9,527.00
Dec 94 9,745.50 9,387.00
Jun 95 10,686.50 10,145.00
Dec 95 11,447.30 10,916.00
Jun 96 11,395.90 10,749.00
Dec 96 11,955.40 11,394.00
Jun 97 12,338.80 11,715.00
Dec 97 13,056.00 12,388.00
- ------------------------------
Fund's Total Return
1 Year Avg. Annual = 3.57%
3 Year Avg. Annual = 7.92%
Inception Avg. Annual = 6.44%
- ------------------------------
</TABLE>
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions and includes payment of the maximum
sales charge (4.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
5
<PAGE> 175
GLOSSARY OF TERMS
BASIS POINT: A measure used in quoting yields on bonds. One hundred basis points
is equal to one percent. For example, if a bond's yield changes from 7.00 to
6.65 percent, it would be considered a 35 basis point move.
CALL FEATURE: Allows the issuer to buy back the bond before the date of
maturity. When the bond is called, the issuer repurchases it at or above its
face value, and stops paying interest on that loan.
CLASS A SHARES: When Class A shares of a fund are purchased, the share price
includes the net asset value plus a one-time sales charge (or "load"). There is
no redemption fee (Contingent Deferred Sales Charge).
COUPON RATE: The stated rate of interest the bond pays until maturity, expressed
as a percentage of the face value.
CREDIT SPREAD: Also called quality spread, the difference in yield between
higher-quality issues (such as AAA-rated municipal bonds) and lower-quality
issues (such as BBB- and non-rated municipal bonds). Under normal circumstances,
lower-quality issues provide higher yields in order to compensate investors for
the additional credit risk.
DURATION: A measure of a bond's sensitivity to changes in interest rates,
expressed in years. The longer a fund's duration, the greater the effect of
interest rate movements on net asset value. Typically, funds with shorter
durations have performed better in rising rate environments, while funds with
longer durations have performed better when rates decline.
FEDERAL FUNDS RATE: The interest rate charged by one institution lending federal
funds to another. This overnight rate is used to meet banks' daily reserve
requirements. The Federal Reserve Board uses the federal funds rate to affect
the direction of interest rates.
FEDERAL RESERVE BOARD (THE FED): A seven-member group that directs the
operations of the Federal Reserve System, the central bank system of the United
States. Currently led by Chairman Alan Greenspan, the Fed meets eight times a
year to establish monetary policy and monitor the country's economic pulse.
GENERAL OBLIGATION BONDS: Bonds backed by the full faith and credit (taxing
authority) of the issuer for timely payment of interest and principal. General
obligation bonds are issued to finance essential government projects, such as
highways and schools.
6
<PAGE> 176
GLOSSARY OF TERMS (CONTINUED)
INFLATION: An economic state in which the amount of money supply and business
activity dramatically increases, accompanied by sharply rising prices. Inflation
is widely measured by the Consumer Price Index, a leading economic indicator
that measures the change in the cost of purchased goods and services.
MUNICIPAL BOND: A debt security issued by a state, municipality or other
governmental entity to finance capital expenditures such as the construction of
highways, public works, or school buildings.
MUNICIPAL REVENUE BONDS: Bonds that are payable only from the revenues the
project will generate and are not backed by any taxing authority of the issuer.
Revenue bonds are issued to finance the building of hospitals, toll bridges,
electric dams, airports, and college dormitories.
MUNICIPAL YIELD CURVE: A representation of the actual or projected yields of
municipal bond securities in relationship to their maturities.
NET ASSET VALUE (NAV): The value of a mutual fund share, calculated by deducting
a fund's liabilities from its total assets and dividing this amount by the
number of shares outstanding. The NAV does not include any initial or contingent
deferred sales charges.
PUT BOND: A long-term bond that the bondholder can "put" back to the issuer for
redemption at a specified price on a specified future date prior to maturity.
PREREFUNDING: A process whereby new bonds are issued to refinance an outstanding
bond issue. This typically occurs when interest rates decline and an issuer
wishes to replace higher-yielding bonds with current lower-yielding issues.
YIELD CURVE: A result of viewing the yields of U.S. Treasury securities maturing
in 1, 5, 10, and 30 years, grouped together, will often reflect a pattern of
increasing yield as maturity extends. This pattern creates an upward sloping
"curve." A "flat" yield curve represents little difference between short- and
long-term interest rates. An "inverted" yield curve indicates that short-term
rates are higher than long-term rates.
ZERO COUPON BONDS: A corporate or municipal debt security traded at a deep
discount from face value that pays no interest and it may be redeemed at
maturity for full face value.
7
<PAGE> 177
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND
We recently spoke with the management team of the Van Kampen American Capital
Florida Insured Tax Free Income Fund about the key events and economic forces
that shaped the markets during the Fund's fiscal year. The team includes Thomas
M. Byron, portfolio manager, and Peter W. Hegel, chief investment officer for
fixed-income investments. The following excerpts reflect their views on the
Fund's performance during the 12-month period ended December 31, 1997.
Q HOW WOULD YOU DESCRIBE THE MARKET ENVIRONMENT IN WHICH THE FUND OPERATED
DURING THE PAST 12 MONTHS?
A The bond market saw healthy price advances during 1997, but this ascension
was not a smooth ride. Early in the year, bond prices began to fall when
economic indicators caused concerns about rising inflation and a potential
interest rate hike by the Federal Reserve Board. When the Fed raised interest
rates by a modest 0.25 percent in late March, bond prices fell even further. By
mid-April, however, the market's mood reversed, giving little indication of
price pressures despite the economy's strength. Bond prices also benefited from
heavy purchases by foreign investors and concerns that the stock market rally
was nearing an end.
While the economy showed few, if any, signs of inflation, bond prices
continued their climb, and long-term interest rates declined further. This
caused credit spreads between investment-grade and lower- or non-rated bonds to
contract significantly. Also, an unprecedented amount of insured bond issuance
reduced the supply of higher-yielding, lower-, and non-rated bonds available in
the market.
In Florida, a broad-based economic expansion, fueled by gains in the tourism
and construction industries, led to a noteworthy increase in job creation during
the reporting period. In addition to strong economic growth, an industry shift
from an agrarian/tourism focus to a concentration on a variety of financial and
import/export sectors has further strengthened the economy.
Demand for Florida municipal bonds was up significantly during the year.
Earlier in the year, statewide volume was considerably lower than national
averages, but recovered in light of the attractive interest rate environment
later in the second quarter. Insured bond issuance represented over 60 percent
of all new bonds issued in 1997--a marked increase over the national average of
49 percent.
Q WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO IN LIGHT OF THESE CONDITIONS?
A Turnover in the portfolio remained relatively low, given that current
market conditions offered few opportunities to add value over existing
holdings. Our sector weightings are a reflection of where we found
opportunities to add yield on a bond-by-bond basis. Health care and senior
housing issues, namely continuing care retirement centers (CCRCs), are two areas
of interest for the portfolio. CCRCs provide housing,
8
<PAGE> 178
activities, and nursing services for elderly and retired individuals. As the
population lives longer and the number of people at retirement age increases,
the need for continuing care will naturally expand. Our CCRC holdings in the
portfolio increased during the period and currently represent approximately 5
percent of the Fund's total assets, as a result of their solid performance
during the reporting period.
At the beginning of the year, more than 82 percent of our holdings were
invested in insured bonds. It was our intention to lower that percentage to 80
percent to gain the added yield that uninsured investment-grade and lower-rated
bonds typically provide. However, as interest rates fell during the second and
third quarters, selling any insured paper would not have benefited the portfolio
because new bonds would have had lower yields than those bonds already in the
portfolio. In an effort to extend the call protection of the Fund, we sold a
number of bonds with shorter calls and replaced them with issues that had
similar yields but longer call dates.
The duration of the Fund stood at 8.75 years, slightly longer than the
Lehman Brothers Florida Municipal Bond Index benchmark, which had a duration of
7.70 years. By purchasing the longer maturities, we were able to gain additional
yield and build upon the dividend. We found the most attractive yields in the
intermediate maturity range (15- to 20-year), but also added a number of bonds
in the 25- to 30-year range. It was our intention to maintain duration longer
than the benchmark in an effort to increase the Fund's total return as interest
rates declined. For additional Fund portfolio highlights, please refer to page
eleven.
Q HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A The Fund posted positive results for the fiscal year. Total return for the
12 months ended December 31, 1997 was 8.72 percent(1) (Class A shares at
net asset value). By comparison, the Lehman Brothers Municipal Bond Index
produced a total return of 9.19 percent for the same period. Keep in mind that
this index is a broad-based, unmanaged index of municipal bonds and does not
reflect any commissions or fees that would be paid by an investor purchasing the
securities it represents. Please refer to the chart on page four for additional
Fund performance results.
The Fund's net asset value closed the period at $15.55 per share, up from
$15.06 per share at the beginning of the fiscal year. The Fund's tax-exempt
distribution rate of 4.74 percent(3) at year-end represents a taxable-equivalent
distribution rate of 7.41 percent(4) for an investor in the 36-percent federal
income tax bracket.
Q WHAT IS YOUR OUTLOOK FOR THE MONTHS AHEAD?
A We expect both the U.S. economy and Florida's economy to remain strong in
1998, although their growth rates could slow from current levels. The
expediency with which the crisis in Southeast Asia is resolved will play a
key role in how the Fed will manage the U.S. interest rate environment in the
coming year. We are cautiously optimistic that interest rates will remain fairly
stable, if not move slightly lower in 1998. In the event that conditions in
Southeast Asia stabilize and the U.S. economy shows increased signs of
9
<PAGE> 179
price appreciation and wage pressures, the Fed might take preemptive measures to
keep inflation in check.
Florida's municipal bond market continues to look strong. In an environment
of low and stable interest rates, a strong economy, and a steadily increasing
population, municipal bond issuance and the market for these bonds is likely to
increase. Health care, transportation, and CCRCs are attractive sectors that we
will continue to monitor in 1998.
We believe the Funds widely varied portfolio--with more than 12 different
sector concentrations--will help limit its price volatility in response to
changing market conditions. In the near term, we do not anticipate making any
major changes to the portfolio until market fundamentals shift more
dramatically.
[SIG]
Peter W. Hegel
Chief Investment Officer
Fixed Income Investments
[SIG]
Thomas M. Byron
Portfolio Manager
Please see footnotes on page four
10
<PAGE> 180
PORTFOLIO HIGHLIGHTS
VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND
CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
As of December 31, 1997
<S> <C>
AAA........................ 85.7%
AA......................... 3.8%
A.......................... 4.2% [PIE CHART]
BBB........................ 5.8%
Non-Rated.................. 0.5%
</TABLE>
<TABLE>
<CAPTION>
1
As of June 30, 1997
<S> <C>
AAA........................ 85.4%
AA......................... 4.6% [PIE CHART]
A.......................... 5.1%
BBB........................ 4.3%
Non-Rated.................. 0.6%
</TABLE>
Based upon the highest credit quality ratings as determined by Standard & Poor's
or Moody's.
TOP FIVE PORTFOLIO SECTORS AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF JUNE 30, 1997(1)
<S> <C> <C> <C>
Public Education ...... 20.1% Health Care ........... 21.5%
Health Care ........... 19.6% Public Education ...... 17.7%
Water and Sewer ....... 10.0% Water and Sewer ....... 11.6%
Single-Family Single-Family
Housing ............. 9.2% Housing ............. 11.5%
Higher Education ...... 8.0% Higher Education ...... 9.2%
</TABLE>
DURATION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997(1) AS OF JUNE 30, 1997(1)
<S> <C> <C>
Duration 8.75 years 8.46 years
</TABLE>
(1)Unaudited
11
<PAGE> 181
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
12
<PAGE> 182
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
13
<PAGE> 183
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
14
<PAGE> 184
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
15
<PAGE> 185
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
16
<PAGE> 186
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
17
<PAGE> 187
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
18
<PAGE> 188
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
19
<PAGE> 189
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
20
<PAGE> 190
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.
21
<PAGE> 191
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
22
<PAGE> 192
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.
23
<PAGE> 193
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>
24
<PAGE> 194
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>
25
<PAGE> 195
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).
26
<PAGE> 196
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.
27
<PAGE> 197
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
28
<PAGE> 198
VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND
BOARD OF TRUSTEES
J. MILES BRANAGAN
RICHARD M. DEMARTINI*
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
JACK E. NELSON
DON G. POWELL*
PHILLIP B. ROONEY
FERNANDO SISTO
WAYNE W. WHALEN* -- Chairman
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
ALAN T. SACHTLEBEN*
PAUL R. WOLKENBERG*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
DISTRIBUTOR
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
SHAREHOLDER SERVICING AGENT
ACCESS INVESTOR
SERVICES, INC.
P.O. Box 418256
Kansas City, Missouri 64141-9256
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Fund, as defined in the Investment Company Act of
1940.
(C) Van Kampen American Capital Distributors, Inc., 1998 All rights reserved.
(SM) denotes a service mark of Van Kampen American Capital Distributors, Inc.
This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless it
has been preceded or is accompanied by an effective prospectus of the Fund which
contains additional information on how to purchase shares, the sales charge, and
other pertinent data. After June 30, 1998, the report, if used with prospective
investors, must be accompanied by a quarterly performance update.
29
<PAGE> 199
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 4
Performance in Perspective....................... 5
Glossary of Terms................................ 6
Portfolio Management Review...................... 8
Portfolio Highlights............................. 11
Portfolio of Investments......................... 12
Statement of Assets and Liabilities.............. 15
Statement of Operations.......................... 16
Statement of Changes in Net Assets............... 17
Financial Highlights............................. 18
Notes to Financial Statements.................... 21
Report of Independent Accountants................ 28
</TABLE>
NYTF ANR 2/98
<PAGE> 200
LETTER TO SHAREHOLDERS
February 3, 1998
Dear Shareholder,
The new year ushers in what
promises to be an exciting and
challenging time for investors. The
Taxpayer Relief Act of 1997 signed
into law by President Clinton in
August creates many new opportunities [PHOTO]
for you and your family to take a
more active role in achieving your
long-term financial goals.
Most Americans will benefit from DENNIS J. MCDONNELL AND DON G. POWELL
the bill's $95 billion in tax cuts
over five years. The so-called Kiddie Credit gives parents $400 in immediate tax
relief for every child under age 17, and families will find it easier to save
for their children's college expenses through the new Education IRA. The bill
also cuts capital gains tax rates for the first time in over a decade and
loosens restrictions on tax-deductible IRA contributions. Perhaps the most
exciting feature of all is the new Roth IRA, which allows investment earnings to
grow tax free, not just tax deferred.
This year more than ever, it could be important for you to talk with your
financial adviser about how to make the tax code work to your advantage. At Van
Kampen American Capital, we have prepared a variety of publications to help you
understand your choices under the new tax legislation. And with the help of your
adviser, we'll help you locate the many benefits hidden among the changing tax
landscape.
ECONOMIC OVERVIEW
These continue to be the best of times for the U.S. economy. Growth is
strong, consumers are optimistic, unemployment is low, the budget is heading for
surplus, and our nation's currency is rising around the world.
Despite the strength in the economy, there is no indication of troublesome
inflation. In fact, the producer price index fell by 1.2 percent during the
year, the largest annual decline in wholesale prices since 1986. Inflation at
the consumer level was also virtually nonexistent, with the consumer price index
rising by only 1.7 percent during 1997. A strong dollar, and significant
productivity gains helped offset inflationary pressures caused by rising wages.
After increasing short-term interest rates by 0.25 percent in March, the
Federal Reserve Board left monetary policy unchanged for the remainder of the
year. In addition to signs that the economy was slowing modestly from its
breakneck pace of early 1997, Fed policy-makers were concerned about the impact
that higher U.S. interest rates might have on the struggling economies of
Southeast Asia. Generally, higher U.S. interest rates cause the dollar to rise
relative to other currencies. With nearly all Asian currencies already down
Continued on page two
1
<PAGE> 201
significantly, a hike in U.S. rates would force monetary authorities in Asia to
choose between letting their currencies decline further or matching the rate
increase, thereby slowing their already-sluggish economies.
MARKET OVERVIEW
Low inflation and steady Federal Reserve policy contributed to solid gains
for fixed-income investments over the reporting period. The yield on the
Treasury's benchmark 30-year bond began the year at 6.64 percent and climbed to
7.17 percent in April amid fears that strong economic growth would reignite
inflation. When subsequent data showed the economy to be slowing, bond yields
gradually drifted lower. By the end of the reporting period, long-term
Treasury-bond yields had fallen to 5.92 percent, the lowest level in more than
four years.
During the 12 months through December, long-term general obligation bonds
returned more than 11 percent, compared to just under 9 percent for
intermediate-term bonds. Total volume of municipal debt rose to over $200
billion, the highest level since 1993. Close to 50 percent of issuance was
enhanced by insurance. This increase in AAA-rated volume caused spreads between
high quality and lower-rated paper to compress, making quality offerings
attractive during the period. At the same time, however, it was difficult to
build the income component of the portfolio due to the scarcity of higher
yielding securities.
OUTLOOK
We believe that reduced demand for American exports to Asia will exert a
mild drag on the U.S. economy in coming months. But while corporate profits
could suffer, slower economic growth will help mitigate the inflationary
pressures caused by the tight domestic labor market. That scenario is typically
good for fixed-income investments.
However, if bond yields continue to drift lower, economic growth in the U.S.
could accelerate later in 1998. In recent years, each significant decline in
long-term interest rates has ignited economic growth by making housing, autos,
and other big-ticket consumer goods more affordable. We also expect the healthy
economy to keep credit spreads relatively tight in coming months.
As we noted earlier, the Taxpayer Relief Act of 1997 provides attractive new
vehicles through which investors can save for a variety of goals, including
higher education and retirement. We encourage you to work with your financial
adviser to consider how the tax changes can work to your benefit.
Continued on page three
2
<PAGE> 202
Additional details about your Fund, including a question-and-answer section
with your portfolio management team, are provided in this report. As always, we
are pleased to have the opportunity to serve you through our diverse menu of
quality investments.
Sincerely,
[SIG]
Don G. Powell
Chairman
Van Kampen American Capital
Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen American Capital
Investment Advisory Corp.
3
<PAGE> 203
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1997
VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND
<TABLE>
<CAPTION>
TOTAL RETURNS
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
One-year total return based on NAV(1).... 10.92% 10.07% 10.07%
One-year total return(2)................. 5.63% 6.07% 9.07%
Life-of-Fund average annual total
return(2)................................ 7.10% 7.22% 7.83%
Commencement date........................ 07/29/94 07/29/94 07/29/94
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION RATES AND YIELD
<S> <C> <C> <C>
Distribution rate(3)..................... 4.83% 4.39% 4.39%
Taxable equivalent distribution rate(4).. 8.10% 7.37% 7.37%
SEC Yield(5)............................. 4.60% 4.06% 4.04%
</TABLE>
(1)Assumes reinvestment of all distributions for the period and does not include
payment of the maximum sales charge (4.75% for A shares) or contingent deferred
sales charge for early withdrawal (4% for B shares and 1% for C shares).
(2)Standardized total return. Assumes reinvestment of all distributions for the
period ended and includes payment of the maximum sales charge (A shares) or
contingent deferred sales charge for early withdrawal (B and C shares).
(3)Distribution rate represents the monthly annualized distributions of the Fund
at the end of the period and not the earnings of the Fund.
(4)Taxable equivalent calculations reflect a combined federal and state income
tax rate of 40.4% which takes into consideration the deductibility of individual
state taxes paid.
(5)SEC Yield is a standardized calculation prescribed by the Securities and
Exchange Commission for determining the amount of net income a portfolio should
theoretically generate for the 30-day period ending December 31, 1997. Had
certain expenses of the Fund not been assumed by VKAC, the SEC Yield would have
been 3.71%, 3.13%, and 3.11% for Classes A, B and C, respectively, and total
returns would have been lower.
A portion of the interest income may be taxable for those investors subject to
the federal alternative minimum tax (AMT).
See the Fund Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. Fund shares, when redeemed, may be worth more
or less than their original cost.
Investing in lower-rated securities involves a higher degree of credit and
market risk. Investments in derivative securities will subject the Fund to
greater risks.
Market forecasts provided in this report may not necessarily come to pass.
4
<PAGE> 204
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:
- Illustrate the general market environment in which your investments are
being managed
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over the
period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Lehman Brothers Municipal Bond
Index over time. As a broad-based, unmanaged statistical composite, this index
does not reflect any commissions or fees which would be incurred by an investor
purchasing the securities it represents. Similarly, its performance does not
reflect any sales charges or other costs which would be applicable to an
actively managed portfolio, such as that of the Fund.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital New York Tax Free Income Fund vs. Lehman Brothers
Municipal Bond Index (July 29, 1994 through December 31, 1997)
[GRAPH]
<TABLE>
<CAPTION>
VKAC Lehman Brothers
New York Tax Free Municipal Bond
Value at Income Fund Index
<S> <C> <C>
Jul 1994 9,527.00 10,000.00
Dec 1994 9,248.00 9,745.50
Jun 1995 10,046.00 10,686.50
Dec 1995 10,850.00 11,447.30
Jun 1996 10,735.00 11,395.90
Dec 1996 11,408.00 11,955.40
Jun 1997 11,833.00 12,338.80
Dec 1997 12,654.00 13,055.50
- -------------------------------
Fund's Total Return
1 Year Avg. Annual = 5.63%
3 Year Avg. Annual = 9.22%
Inception Avg. Annual = 7.10%
- -------------------------------
</TABLE>
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions and includes payment of the maximum
sales charge (4.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
5
<PAGE> 205
GLOSSARY OF TERMS
BASIS POINT: A measure used in quoting yields on bonds. One hundred basis points
is equal to one percent. For example, if a bond's yield changes from 7.00 to
6.65 percent, it would be considered a 35 basis point move.
CALL FEATURE: Allows the issuer to buy back the bond before the date of
maturity. When the bond is called, the issuer repurchases it at or above its
face value, and stops paying interest on that loan.
CLASS A SHARES: When Class A shares of a fund are purchased, the share price
includes the net asset value plus a one-time sales charge (or "load"). There is
no redemption fee (Contingent Deferred Sales Charge).
COUPON RATE: The stated rate of interest the bond pays until maturity, expressed
as a percentage of the face value.
CREDIT SPREAD: Also called quality spread, the difference in yield between
higher-quality issues (such as AAA-rated municipal bonds) and lower-quality
issues (such as BBB- and non-rated municipal bonds). Under normal circumstances,
lower-quality issues provide higher yields in order to compensate investors for
the additional credit risk.
DURATION: A measure of a bond's sensitivity to changes in interest rates,
expressed in years. The longer a fund's duration, the greater the effect of
interest rate movements on net asset value. Typically, funds with shorter
durations have performed better in rising rate environments, while funds with
longer durations have performed better when rates decline.
FEDERAL FUNDS RATE: The interest rate charged by one institution lending federal
funds to another. This overnight rate is used to meet banks' daily reserve
requirements. The Federal Reserve Board uses the federal funds rate to affect
the direction of interest rates.
FEDERAL RESERVE BOARD (THE FED): A seven-member group that directs the
operations of the Federal Reserve System, the central bank system of the United
States. Currently led by Chairman Alan Greenspan, the Fed meets eight times a
year to establish monetary policy and monitor the country's economic pulse.
GENERAL OBLIGATION BONDS: Bonds backed by the full faith and credit (taxing
authority) of the issuer for timely payment of interest and principal. General
obligation bonds are issued to finance essential government projects, such as
highways and schools.
6
<PAGE> 206
GLOSSARY OF TERMS (CONTINUED)
INFLATION: An economic state in which the amount of money supply and business
activity dramatically increases, accompanied by sharply rising prices. Inflation
is widely measured by the Consumer Price Index, a leading economic indicator
that measures the change in the cost of purchased goods and services.
MUNICIPAL BOND: A debt security issued by a state, municipality or other
governmental entity to finance capital expenditures such as the construction of
highways, public works, or school buildings.
MUNICIPAL REVENUE BONDS: Bonds that are payable only from the revenues the
project will generate and are not backed by any taxing authority of the issuer.
Revenue bonds are issued to finance the building of hospitals, toll bridges,
electric dams, airports, and college dormitories.
MUNICIPAL YIELD CURVE: A representation of the actual or projected yields of
municipal bond securities in relationship to their maturities.
NET ASSET VALUE (NAV): The value of a mutual fund share, calculated by deducting
a fund's liabilities from its total assets and dividing this amount by the
number of shares outstanding. The NAV does not include any initial or contingent
deferred sales charges.
PUT BOND: A long-term bond that the bondholder can "put" back to the issuer for
redemption at a specified price on a specified future date prior to maturity.
PREREFUNDING: A process whereby new bonds are issued to refinance an outstanding
bond issue. This typically occurs when interest rates decline and an issuer
wishes to replace higher-yielding bonds with current lower-yielding issues.
YIELD CURVE: A result of viewing the yields of U.S. Treasury securities maturing
in 1, 5, 10, and 30 years, grouped together, will often reflect a pattern of
increasing yield as maturity extends. This pattern creates an upward sloping
"curve." A "flat" yield curve represents little difference between short- and
long-term interest rates. An "inverted" yield curve indicates that short-term
rates are higher than long-term rates.
ZERO COUPON BONDS: A corporate or municipal debt security traded at a deep
discount from face value that pays no interest and it may be redeemed at
maturity for full face value.
7
<PAGE> 207
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND
We recently spoke with the management team of the Van Kampen American Capital
New York Tax Free Income Fund about the key events and economic forces that
shaped the markets during the Fund's fiscal year. The team includes Dennis S.
Pietrzak, portfolio manager, and Peter W. Hegel, chief investment officer for
fixed-income investments. The following excerpts reflect their views on the
Fund's performance during the 12-month period ended December 31, 1997.
Q HOW WOULD YOU DESCRIBE THE MARKET ENVIRONMENT IN WHICH THE FUND HAS
OPERATED DURING THE PAST 12 MONTHS?
A The bond market saw healthy price advances during 1997, but this ascension
was not a smooth ride. Early in the year, bond prices began to fall when
economic indicators caused concerns about rising inflation and a potential
interest rate hike by the Federal Reserve Board. When the Fed raised interest
rates by a modest 0.25 percent in late March, bond prices fell even further. By
mid-April, however, the market's mood reversed, giving little indication of
price pressures despite the economy's strength. Bond prices also benefited from
heavy purchases by foreign investors and concerns that the stock market rally
was nearing an end.
While the economy showed few, if any, signs of inflation, bond prices
continued their climb, and long-term interest rates declined further. This
caused credit spreads between investment-grade and lower- or non-rated bonds to
contract significantly. Also, an unprecedented amount of insured bond
issuance--49 percent of total volume--reduced the supply of higher-yielding,
lower-, and non-rated bonds available in the market.
In New York, a broad-based economic expansion, fueled by strong advances
on Wall Street, contributed to a large increase in personal tax collections.
The state's coffers continued to fatten as income tax, especially in New York
City, benefited from an economic upswing. Bond issuance across the state
surpassed last year's numbers, but yield spreads between insured issues and
New York state-appropriated bonds continued to contract.
Early in the year, New York City reached its ceiling on debt issuance.
Rather than creating a credit crunch, the city created the New York Transitional
Finance Authority, which tied new debt issuance to city income tax revenues. The
bonds from this new authority received excellent coverage and an unexpected AA
rating.
Q HOW HAVE THESE CONDITIONS AFFECTED THE MANAGEMENT OF THE FUND?
A Although declining yields in the market made it more difficult to add
significant value over many of our existing holdings, we did not change
our fundamental investment strategy. Instead, we evaluated bond issues on
an individual basis and made purchases where we found the most appropriate
opportunities.
The narrowing of credit spreads, while limiting the attractiveness of the
high-yielding, higher-risk securities offered at the current market levels,
actually increased the value of these bonds in the Fund's portfolio, as the
prices of these securities appreciated
8
<PAGE> 208
considerably. We found value in the long end of the yield curve and concentrated
on municipal bonds that mature in the 20- to 30-year range, which proved to be
the most attractive for maintaining the Fund's yield.
Q WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO?
A During the period, the Fund almost doubled in asset size, which enabled us
to add larger positions to the portfolio. Bonds issued by New York state
agencies proved to be the most attractive purchases for the Fund, because
they offered additional yield with slightly higher risk than insured bonds. New
York City, New York state agencies, and Port Authority bonds served the
portfolio well during the period.
We maintained a relatively neutral stance on the Fund's duration toward
the end of the period in an effort to manage volatility. Earlier in the year,
when fears of inflation and an interest rate hike appeared possible, we kept
the Fund's duration shorter than its benchmark. When rates fell after the minor
up-tick in rates in March and April, our duration remained short of the
benchmark, causing the return to suffer slightly at the beginning of the second
quarter. The Fund recovered its losses in late June and early July, when we
extended the duration closer to the benchmark. For additional Fund portfolio
highlights, please refer to page eleven.
Q HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A The Fund posted positive results for the fiscal year. Total return for the
12 months ended December 31, 1997 was 10.92 percent(1) (Class A shares at
net asset value). By comparison, the Fund's benchmark, the Lehman Brothers
Municipal Bond Index returned 9.19 percent for the same period. Keep in mind
that this index is a broad-based, unmanaged index of municipal bonds and does
not reflect any commissions or fees that would be paid by an investor purchasing
the securities it represents. Please refer to the chart on page four for
additional Fund performance results.
The Fund also continued to meet its goal of providing a competitive
level of tax-exempt current income. Its tax-exempt distribution rate (Class A
shares) was 4.83 percent(3) as of December 31, 1997, based on a monthly
dividend of $.0665 per Class A share and a maximum public offering price of
$16.51 per share. For investors in the 40.4 percent combined state and federal
income tax bracket, the Fund's taxable-equivalent distribution rate was 8.10
percent(4).
Q WHAT IS YOUR OUTLOOK FOR THE MONTHS AHEAD?
A We expect both the U.S. economy and the New York state economy to remain
strong going into 1998, although their growth rates could slow from
current levels. The expediency with which the crisis in Southeast Asia is
resolved will play a key role in how the Fed will manage the U.S. interest rate
environment in the coming year. We are cautiously optimistic that interest rates
will remain fairly stable, if not move slightly lower in 1998. In the event that
conditions in Southeast Asia stabilize and the U.S. economy shows
9
<PAGE> 209
increased signs of price appreciation and wage pressures, the Fed might take
preemptive measures to keep inflation in check.
On a national level, we anticipate that the long-term municipal bond yields
will remain stable and the tax-exempt bond market should continue to track
Treasuries. The current interest rate environment should encourage bond issuers
to prepay their higher-yielding debt through the issuance of refunding bonds.
While this could increase supply, New York has a tremendous concentration of
wealth and high tax rates that should ultimately create a large demand for
tax-exempt investments.
We believe the Fund is well positioned to weather changes in interest rates
in the coming year. Regardless of market conditions, we believe the Fund's
duration and diversity will help the portfolio be less volatile to interest rate
changes.
[SIG]
Peter W. Hegel
Chief Investment Officer
Fixed Income Investments
[SIG]
Dennis S. Pietrzak
Portfolio Manager
Please see footnotes on page four
10
<PAGE> 210
PORTFOLIO HIGHLIGHTS
VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND
CREDIT QUALITY AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF JUNE 30, 1997 (1)
<S> <C> <C> <C>
AAA.............. 28.6% AAA.............. 36.4%
AA............... 3.7% AA............... 9.3%
A................ 10.9% [PIE CHART] A................ 4.4% [PIE CHART]
BBB.............. 45.9% BBB.............. 37.7%
Non-Rated........ 10.9% Non-Rated........ 12.2%
</TABLE>
Based upon the highest credit quality ratings as determined by Standard & Poor's
or Moody's.
TOP FIVE PORTFOLIO SECTORS AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF JUNE 30, 1997(1)
<S> <C> <C> <C>
Industrial Revenue ... 17.1% Higher Education ..... 16.9%
Transportation ....... 13.9% Industrial Revenue ... 16.0%
Higher Education ..... 11.9% Health Care .......... 11.9%
General Purpose ...... 9.6% Transportation ....... 11.8%
Health Care .......... 8.4% General Purpose ...... 11.2%
</TABLE>
DURATION
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997(1) AS OF JUNE 30, 1997(1)
<S> <C> <C>
Duration 8.87 years 8.08 years
</TABLE>
(1) Unaudited
11
<PAGE> 211
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
12
<PAGE> 212
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
13
<PAGE> 213
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
14
<PAGE> 214
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
15
<PAGE> 215
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
16
<PAGE> 216
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
17
<PAGE> 217
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
18
<PAGE> 218
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
19
<PAGE> 219
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
20
<PAGE> 220
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
21
<PAGE> 221
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.
22
<PAGE> 222
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.
23
<PAGE> 223
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>
24
<PAGE> 224
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>
25
<PAGE> 225
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).
26
<PAGE> 226
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.
27
<PAGE> 227
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
28
<PAGE> 228
VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND
BOARD OF TRUSTEES
J. MILES BRANAGAN
RICHARD M. DEMARTINI*
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
JACK E. NELSON
DON G. POWELL*
PHILLIP B. ROONEY
FERNANDO SISTO
WAYNE W. WHALEN* - Chairman
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
EDWARD C. WOOD, III*
Vice President and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
JOHN L. SULLIVAN*
Treasurer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
ALAN T. SACHTLEBEN*
PAUL R. WOLKENBERG*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
DISTRIBUTOR
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
SHAREHOLDER SERVICING AGENT
ACCESS INVESTOR
SERVICES, INC.
P.O. Box 418256
Kansas City, Missouri 64141-9256
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, Illinois 60601
* "Interested" persons of the Fund, as defined in the
Investment Company Act of 1940.
(C) Van Kampen American Capital Distributors, Inc., 1998 All rights reserved.
(SM) denotes a service mark of Van Kampen American Capital Distributors, Inc.
This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless it
has been preceded or is accompanied by an effective prospectus of the Fund which
contains additional information on how to purchase shares, the sales charge, and
other pertinent data. After June 30, 1998, the report, if used with prospective
investors, must be accompanied by a quarterly performance update.
29
<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> 21
<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> 22
<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> 23
<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> 41
<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> 42
<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> 43
<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> 81
<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> 82
<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> 83
<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>
