<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1999
REGISTRATION NOS. 2-99715
811-4386
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 43 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 44 [X]
</TABLE>
VAN KAMPEN TAX FREE TRUST
(Exact Name of Registrant as Specified in Agreement and Declaration of Trust)
1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL 60181-5555
(Address of Principal Executive Offices)
(630) 684-6000
(Registrant's Telephone Number)
Dennis J. McDonnell
Executive Vice President
Van Kampen Investments Inc.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
(Name and Address of Agent for Service)
Copies to:
Wayne W. Whalen, Esq.
Thomas A. Hale, Esq.
Skadden, Arps, Slate, Meagher & Flom (Illinois)
333 West Wacker Drive
Chicago, IL 60606
(312) 407-0700
Approximate Date of Proposed Public Offering: As soon as practicable
following effectiveness of this Registration Statement.
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE: (CHECK APPROPRIATE
BOX)
[X] IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (B)
[ ] 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(1)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (A)(1)
[ ] 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(2)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (A)(2) OF RULE 485
IF APPROPRIATE CHECK THE FOLLOWING:
[ ] THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR
A PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT.
TITLE OF SECURITIES BEING REGISTERED SHARES OF BENEFICIAL INTEREST, PAR
VALUE $0.01 PER SHARE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains seven Prospectuses and seven
Statements of Additional Information describing seven series of the Registrant
(the "Applicable Series"). The Registration Statement is organized as follows:
Facing Page
Prospectuses with respect to the Applicable Series, in the following order:
(i) Van Kampen Tax Free High Income Fund
(ii) Van Kampen Insured Tax Free Income Fund
(iii) Van Kampen California Insured Tax Free Fund
(iv) Van Kampen Municipal Income Fund
(v) Van Kampen Intermediate Term Municipal Income Fund
(vi) Van Kampen Florida Insured Tax Free Income Fund
(vii) Van Kampen New York Tax Free Income Fund
Statements of Additional Information with respect to the Applicable Series,
in the following order:
(i) Van Kampen Tax Free High Income Fund
(ii) Van Kampen Insured Tax Free Income Fund
(iii) Van Kampen California Insured Tax Free Fund
(iv) Van Kampen Municipal Income Fund
(v) Van Kampen Intermediate Term Municipal Income Fund
(vi) Van Kampen Florida Insured Tax Free Income Fund
(vii) Van Kampen New York Tax Free Income Fund
Part C Information
Exhibits
-------------------------
The Prospectus and Statement of Additional Information with respect to each
of Van Kampen California Tax Free Income Fund, Van Kampen Michigan Tax Free
Income Fund, Van Kampen Missouri Tax Free Income Fund and Van Kampen Ohio Tax
Free Income Fund, four other series of the Registrant, included in
Post-Effective Amendment No. 31 to the Registration Statement of the Registrant,
are included herein by reference and no changes thereto are affected hereby.
<PAGE> 3
VAN KAMPEN
TAX FREE HIGH INCOME FUND
Van Kampen Tax Free High Income Fund is a
mutual fund with an investment objective to
provide investors with a high level of current
income exempt from federal income tax
primarily through investment in a diversified
portfolio of medium and lower grade municipal
securities.
Shares of the Fund have not been approved or
disapproved by the Securities and Exchange
Commission (SEC) or any state regulators, and
neither the SEC nor any state regulator has
ruled on the accuracy or adequacy of this
prospectus. It is a criminal offense to state
otherwise.
This prospectus is dated JANUARY 28, 1999.
[VAN KAMPEN FUNDS LOGO]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary................................ 3
Fees and Expenses of the Fund...................... 6
Investment Objective and Policies.................. 7
Investment Advisory Services....................... 14
Purchase of Shares................................. 15
Redemption of Shares............................... 22
Distributions from the Fund........................ 23
Shareholder Services............................... 24
Federal Income Taxation............................ 26
Financial Highlights............................... 28
Appendix--Description of Securities Ratings........ 29
</TABLE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus, in connection with the offer contained in this prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
<PAGE> 5
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund is a mutual fund with an investment objective to provide investors with
a high level of current income exempt from federal income tax primarily through
investment in a diversified portfolio of medium and lower grade municipal
securities. There can be no assurance that the Fund will achieve its investment
objective.
INVESTMENT STRATEGIES
Under normal market conditions, the Fund's management seeks to achieve the
investment objective by investing primarily in medium and lower grade municipal
securities that are rated at the time of purchase between BBB and B- (inclusive)
by Standard and Poor's ("S&P") or between Baa and B3 (inclusive) by Moody's
Investors Service, Inc. ("Moody's") or an equivalent rating by another
nationally recognized statistical rating organization ("NRSRO") or comparably
rated short term securities and unrated municipal securities believed by the
Fund's investment adviser to be of comparable quality at the time of purchase.
Securities rated BB or below by S&P, Ba or below by Moody's or unrated
securities of comparable quality are commonly referred to as "junk bonds" and
involve special risks as compared to investments in higher grade securities (see
sidebar for an explanation of quality ratings). Under normal market conditions,
up to 20% of the Fund's total assets may be invested in municipal securities
that are subject to federal alternative minimum tax. The Fund may purchase or
sell certain derivative instruments (such as options, futures and options on
futures, and interest rate swaps or other interest rate related transactions)
for various risk management and hedging purposes. The Fund may purchase or sell
securities on a when-issued or delayed delivery basis.
INVESTMENT RISKS
With its portfolio of medium and lower grade securities, the Fund has greater
risks than a fund owning higher grade securities. Because of the following
risks, you could lose money on your investment in the Fund over the short or
long term:
MARKET RISK. The prices of income securities tend to fall as interest rates
rise. This "market risk" is usually greater among securities with longer
maturities. Because the Fund does not have a policy limiting the maturities of
its investments and the Fund may own securities with longer maturities, the Fund
will be subject to greater market risk than a fund that owns shorter-term
securities.
Market risk is often greater among certain types of income securities, such as
zero-coupon bonds, which do not make regular interest payments but are instead
bought at a discount to their face values and paid in full upon maturity. As
interest rates change, these bonds often fluctuate more in price than bonds that
make regular interest payments. Because the Fund invests in zero-coupon bonds,
it may be subject to greater market risk than a fund that does not own this type
of bond.
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitments for these securities, the greater the Fund's
exposure to market price fluctuation.
UNDERSTANDING
QUALITY RATINGS
Bond ratings are based on the issuer's ability to pay interest and repay the
principal. Bonds with ratings above the line are considered "investment
grade," while those with ratings below the line are regarded as
"noninvestment grade," or "junk bonds." A detailed explanation of these
ratings can be found in the appendix to this prospectus.
<TABLE>
<CAPTION>
Moody's S&P Meaning
- ------------------------------------------------------
<S> <C> <C>
Aaa AAA Highest quality
......................................................
Aa AA High quality
......................................................
A Aa Above-average quality
......................................................
Baa BBB Average quality
- ------------------------------------------------------
Ba BB Below-average quality
......................................................
B B Marginal quality
......................................................
Caa CCC Poor quality
......................................................
Ca CC Highly speculative
......................................................
C C Lowest quality
......................................................
-- D In default
......................................................
</TABLE>
3
<PAGE> 6
Lower grade securities, especially those with long maturities or that do not
make regular interest payments, may fluctuate more in price in response to
negative issuer or general economic news than higher grade securities.
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest or principal. Because the Fund invests primarily in securities with
medium and lower grade credit quality, it is subject to a higher level of credit
risk than a fund that buys only investment grade securities. The credit quality
of "noninvestment grade" securities is considered speculative by recognized
rating agencies with respect to the issuer's continuing ability to pay interest
and principal. Lower grade securities may have less liquidity and a higher
incidence of default than investment in higher grade securities. The Fund may
incur higher expenditures to protect the Fund's interest in such securities. The
credit risks and market prices of lower grade securities are more sensitive to
negative issuer developments, such as reduced revenues or increased
expenditures, or adverse economic conditions, such as a recession, than are
higher grade securities.
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates, which can vary widely over the short and long term. If interest rates
drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of municipal
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would be reinvested by the Fund in securities with the new, lower
interest rates, resulting in a possible decline in the Fund's income and
distributions to shareholders.
MUNICIPAL SECURITIES RISK. The Fund invests primarily in municipal securities.
The yields of municipal securities may move differently and adversely compared
to the yields of the overall debt securities markets. While the interest
received from municipal securities generally is exempt from federal income tax,
the Fund may invest up to 20% of its net assets in municipal securities subject
to federal alternative minimum tax. In addition, there could be changes in
applicable tax laws or tax treatments that reduce or eliminate the current
federal income tax exemption on municipal securities or otherwise adversely
affect the current federal or state tax status of municipal securities.
RISKS OF USING DERIVATIVE INVESTMENTS. In general terms, a derivative investment
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures and options on futures, interest
rate swaps and other interest-rate related transactions are examples of
derivatives. Such transactions involve risks different from the direct
investment in underlying securities such as imperfect correlation between the
value of the instruments and the underlying assets; risks of default by the
other party to certain transactions; risks that the transactions may incur
losses that partially or completely offset gains in portfolio positions; risks
that the transactions may not be liquid; and manager risk.
MANAGER RISK. As with any fund, the Fund's management may not be successful in
selecting the best-performing securities and the Fund's performance may lag
behind that of similar funds.
An investment in the Fund is not a deposit of any bank or other insured
depository institution. Your investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
INVESTOR PROFILE
In light of its objective and investment strategies, the Fund may be appropriate
for investors who:
- - Seek current income.
- - Are in a high federal income tax bracket.
UNDERSTANDING
MUNICIPAL SECURITIES
Municipal securities, including municipal bonds, notes or leases, generally
are issued by state and local governments or regional governmental
authorities to raise money for their daily operations or special projects.
The interest received from municipal securities generally is exempt from
federal income tax. In addition, the interest may be exempt from certain
state or local taxes when received from issuers who are located in the
investors' home state, municipality or region. The interest from certain
municipal securities is a preference item subject to federal alternative
minimum tax.
4
<PAGE> 7
- - Are willing to take on the substantially increased risks of medium and lower
grade securities in exchange for potentially higher income.
- - Wish to add to their personal investment portfolios a fund that invests
primarily in medium and lower grade municipal securities.
Investors should carefully consider the additional risks associated with an
investment in medium or lower grade municipal securities. An investment in the
Fund may not be appropriate for all investors. The Fund is not intended to be a
complete investment program, and investors should consider their long-term
investment goals and financial needs when making an investment decision about
the Fund. An investment in the Fund is intended to be a long-term investment,
and the Fund should not be used as a trading vehicle.
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance varies from year to year. The following chart shows the annual
returns of the Fund's Class A Shares over the past ten calendar years prior to
the date of this prospectus. Sales loads are not reflected in this chart. If
these sales loads had been included, the returns shown below would have been
lower. Remember that the past performance of the Fund is not indicative of its
future performance.
[GRAPH]
<TABLE>
<CAPTION>
ANNUAL RETURN
-------------
<S> <C>
'1989' 9.71
'1990' 3.23
'1991' 8.51
'1992' 0.08
'1993' 15.82
'1994' -4.93
'1995' 15.52
'1996' 3.21
'1997' 9.05
'1998' 5.98
</TABLE>
The annual return variability of the Fund's Class B Shares and Class C Shares
would be substantially similar to that shown for the Class A Shares because all
of the Fund's shares are invested in the same portfolio of securities; however,
the actual annual returns of the Class B Shares and Class C Shares would be
lower than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
During the ten-year period shown in the bar chart, the highest quarterly return
was 6.09% (for the quarter ended March 31, 1995) and the lowest quarterly return
was -5.60% (for the quarter ended March 31, 1994).
COMPARATIVE PERFORMANCE
This table shows how the Fund's performance compares with the Lehman Brothers
Municipal Bond Index, a broad-based market index that the Fund's management
believes is an applicable benchmark for the Fund. Average annual total returns,
assuming payment of the maximum sales charge, are shown for the one-, five-, and
ten-year periods ended December 31, 1998 (the most recently completed calendar
year prior to the date of this prospectus). Remember that the past performance
of the Fund is not indicative of its future performance.
<TABLE>
<CAPTION>
Average Annual
Total Returns Past 10
for the Years
Periods Ended Past Past or Since
December 31, 1998 1 Year 5 Years Inception
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Van Kampen Tax
Free High Income
Fund
.................................................................
Class A Shares 0.94% 4.53% 5.92%
.................................................................
Class B Shares 1.14% 4.49% 5.98%(1)
.................................................................
Class C Shares 4.14% 4.74% 5.60%(2)
.................................................................
Lehman Brothers
Municipal Bond
Index 6.48% 6.22% 8.22%
.................................................................
</TABLE>
Inception dates: (1) 5/1/93, (2) 8/13/93.
The current yield for the thirty-day period ended September 30, 1998 is 4.11%
for Class A Shares, 3.55% for Class B Shares and 3.53% for Class C Shares.
Investors can obtain the current yield of the Fund for each class of shares by
calling (800) 341-2911.
5
<PAGE> 8
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum sales charge
(load) imposed on
purchases (as a
percentage of
offering price) 4.75%(1) None None
..............................................................
Maximum deferred
sales charge (load)
(as a percentage of
the lesser of
original purchase
price or redemption
proceeds) None(2) Year 1-4.00% Year 1-1.00%
Year 2-3.75% After-None
Year 3-3.50%
Year 4-2.50%
Year 5-1.50%
Year 6-1.00%
After--None
..............................................................
Maximum sales charge
(load) imposed on
reinvested dividends
(as a percentage of
offering price) None None None
..............................................................
Redemption fees (as a
percentage of amount None None None
redeemed)
..............................................................
Exchange fee None None None
..............................................................
</TABLE>
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares -- Class A Shares."
ANNUAL FUND
OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fees 0.47% 0.47% 0.47%
..............................................................
Distribution and/or 0.24% 1.00%(2) 1.00%(2)
Service (12b-1)
Fees(1)
..............................................................
Other Expenses 0.19% 0.19% 0.19%
..............................................................
Interest Expense 0.02% 0.02% 0.02%
..............................................................
Total Annual Fund 0.92% 1.68% 1.68%
Operating Expenses
..............................................................
</TABLE>
(1) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(2) Because Distribution and/or Service (12b-1) Fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges. Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by National Association of
Securities Dealers, Inc. rules.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% annual return each year and
that the Fund's operating expenses remain the same each year (except for the
ten-year amounts for Class B Shares which reflect the conversion of Class B
Shares to Class A Shares after eight years). Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $564 $754 $ 960 $1,553
......................................................................
Class B Shares $571 $880 $1,063 $1,785*
......................................................................
Class C Shares $271 $530 $ 913 $1,987
......................................................................
</TABLE>
6
-
<PAGE> 9
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $564 $754 $960 $1,553
......................................................................
Class B Shares $171 $530 $913 $1,785*
......................................................................
Class C Shares $171 $530 $913 $1,987
......................................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
To simplify comparison among funds, all funds are required by the SEC to assume
a 5% annual return. Class B Shares of the Fund acquired through the exchange
privilege are subject to the contingent deferred sales charge schedule of the
fund from which the shareholder's purchase of Class B Shares was originally
made. Accordingly, future expenses as projected could be higher than those
determined in the above table if the investor's Class B Shares were exchanged
from a fund with a higher contingent deferred sales charge. The Fund's actual
annual return and actual expenses for future periods may be greater or less than
those shown.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide investors with a high level of
current income exempt from federal income tax primarily through investment in a
diversified portfolio of medium and lower grade municipal securities. The Fund's
investment objective is a fundamental policy and may not be changed without
shareholder approval of the holders of a majority of the Fund's outstanding
voting securities, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"). There are risks inherent in all investments in securities;
accordingly there can be no assurance the Fund will achieve its investment
objective.
Under normal market conditions, the Fund's management seeks to achieve the
investment objective by investing primarily in medium and lower grade municipal
securities that are rated at the time of purchase between BBB and B--
(inclusive) by S &P or between Baa or B3 (inclusive) by Moody's or an equivalent
rating by another NRSRO or comparably rated short term securities and unrated
municipal securities believed by the Fund's investment adviser to be of
comparable quality at the time of purchase. Securities rated BB or below by S
&P, Ba or below by Moody's or unrated securities of comparable quality are
commonly referred to as "junk bonds" and involve special risks as compared to
investments in higher-grade securities. Under normal market conditions, up to
20% of the Fund's net assets may be invested in municipal securities that are
subject to alternative minimum tax. From time to time, the Fund temporarily may
invest up to 10% of its total assets in tax exempt money market funds that
invest in securities rated comparable to those in which the Fund may invest and
such instruments will be treated as investments in municipal securities.
The Fund's investment adviser will buy and sell securities for the Fund's
portfolio with a view to seeking a high level of current income exempt from
federal income tax and will select securities which the Fund's investment
adviser believes entail reasonable credit risk considered in relation to the
investment policies of the Fund. At times the Fund's investment adviser may
judge that conditions in the markets for medium and lower grade municipal
securities make pursuing the Fund's basic investment strategy of investing
primarily in such municipal securities inconsistent with the best interests of
shareholders. At such times, the Fund may invest all or a portion of its assets
in higher grade municipal securities and in municipal securities determined by
the Fund's investment adviser to be of comparable quality. As a result, the Fund
will not necessarily invest in the highest yielding municipal securities
permitted by its investment policies if the Fund's investment adviser determines
that market risks or credit risks associated with such investments would subject
the Fund's portfolio to undue risk. The potential for realization of capital
gains resulting from possible changes in interest rates will not be a major
consideration. Other than for tax purposes, frequency of portfolio turnover
generally will not be a limiting factor if the Fund's investment adviser
considers it advantageous to purchase or sell securities.
MUNICIPAL SECURITIES
Municipal securities are obligations issued by or on behalf of states,
territories or possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest on
which, in the opinion of bond counsel or other counsel to the issuers of such
securities, is,
7
<PAGE> 10
at the time of issuance, exempt from federal income tax. Under normal market
conditions, at least 80% of the Fund's net assets will be invested in municipal
securities. The policy stated in the foregoing sentence is a fundamental policy
of the Fund and may not be changed without shareholder approval of the holders
of a majority of the Fund's outstanding voting securities, as defined in the
1940 Act. Under normal market conditions, up to 20% of the Fund's net assets may
be invested in municipal securities that are subject to federal alternative
minimum tax.
The issuers of municipal securities obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
securities may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to lend to other public
institutions and facilities. Certain types of municipal securities are issued to
obtain funding for privately operated facilities.
The yields of municipal securities depend on, among other things, general money
market conditions, general conditions of the municipal securities market, size
of a particular offering, the maturity of the obligation and rating of the
issue. The ratings of S&P and Moody's represent their opinions of the quality of
the municipal securities they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may
have different yields while municipal securities of the same maturity and coupon
with different ratings may have the same yield.
The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special delegation" securities. "General
obligation" securities are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. "Revenue" securities
are usually payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Industrial development bonds are usually
revenue securities, the credit quality of which is normally directly related to
the credit standing of the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, variable rate demand notes, municipal leases,
custodial receipts, participation certificates and derivative municipal
securities (which include terms or elements similar in to certain strategic
transactions described below). Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to reflect market
rates of interest. The Fund also may also invest in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest. Investment in such securities involve special risks as
compared to a fixed rate municipal security. The extent of increases and
decreases in the value of derivative variable rate securities and the
corresponding change to the net asset value of the Fund generally will be larger
than comparable changes in the value of an equal principal amount of a fixed
rate municipal security having similar credit quality, redemption provisions and
maturity. The markets for such securities may be less developed and have less
liquidity than the markets for conventional municipal securities. The Fund will
not invest more than 15% of its total assets in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Municipal notes include tax, revenue and
bond anticipation notes of short maturity, generally less than three years,
which are issued to obtain temporary funds for various public purposes. Variable
rate demand notes are obligations which contain a floating or variable interest
rate adjustment formula and which are subject to a right of demand for payment
of the principal balance plus accrued interest either at any time or at
specified intervals. The interest rate on a variable rate demand note may be
based on a known lending rate, such as a bank's prime rate, and may be adjusted
when such rate changes, or the interest rate may be a market rate that is
adjusted at specified intervals. The adjustment formula maintains the value of
the variable rate demand note at approximately the par value of such note at the
adjustment date. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Certain municipal lease obligations may include "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a
8
-
<PAGE> 11
yearly basis. Custodial receipts are underwritten by securities dealers or banks
and evidence ownership of future interest payments, principal payments or both
on certain municipal securities. Participation certificates are obligations
issued by state or local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract. Municipal
securities may not be backed by the faith, credit and taxing power of the
issuer. Other than as set forth above, there is no limitation with respect to
the amount of the Fund's assets that may be invested in the foregoing types of
municipal securities. Certain of the municipal securities in which the Fund may
invest represent relatively recent innovations in the municipal securities
markets and the markets for such securities may be less developed than the
market for conventional fixed rate municipal securities. A more detailed
description of the types of municipal securities in which the Fund may invest is
included in the Statement of Additional Information.
Under normal market conditions, longer term municipal securities generally
provide a higher yield than shorter term municipal securities. The Fund has no
limitation as to the maturity of municipal securities in which it may invest.
The Fund's investment adviser may adjust the average maturity of the Fund's
portfolio from time to time depending on its assessment of the relative yields
available on securities of different maturities and its expectations of future
changes in interest rates.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund will invest primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities generally can be
expected to rise. Conversely, when interest rates rise, the value of a portfolio
invested in fixed income securities generally can be expected to decline. The
prices of longer term municipal securities generally are more volatile with
respect to changes in interest rates than the prices of shorter term municipal
securities. Volatility may be greater during periods of general economic
uncertainty.
Municipal securities, like other debt obligations, are subject to the credit
risk of non-payment. The ability of issuers of municipal securities to make
timely payments of interest and principal may be adversely impacted in general
economic downturns and as relative governmental cost burdens are allocated and
reallocated among federal, state and local governmental units. Such non-payment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal securities experiencing non-payment and
a potential decrease in the net asset value of the Fund. In addition, the Fund
may incur expenses to work out or restructure a distressed or defaulted
security. Securities below investment grade involve special risks compared to
higher grade securities. See "Lower Grade Municipal Securities" below.
The Fund may invest up to 20% of its net assets in municipal securities that are
subject to federal alternative minimum tax. The Fund may not be a suitable
investment for investors who are already subject to the federal alternative
minimum tax or who would become subject to the federal alternative minimum tax
as a result of an investment in the Fund.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the current federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected and the Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
The Fund generally considers investments in municipal securities not to be
subject to industry concentration policies (issuers of municipal securities as a
group are not an industry) and the Fund may invest in municipal securities
issued by entities having similar characteristics. The issuers may be located in
the same geographic area or may pay their interest obligations from revenue of
similar projects, such as hospitals, airports, utility systems and housing
finance agencies. This may make the Fund's investments more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation in the Fund's net asset value
also increases. The Fund may invest more than 25% of its total assets in a
segment of the municipal securities market with similar characteristics if the
Fund's investment adviser determines that the yields available from obligations
in a particular segment justify the additional risks of a larger investment in
such segment. The Fund may not,
9
<PAGE> 12
however, invest more than 25% of its total assets in industrial development
revenue bonds issued for companies in the same industry. Sizeable investments in
such obligations could involve increased risk to the Fund should any of such
issuers or any such related projects or facilities experience financial
difficulties.
The Fund has no fundamental policy limiting its investments in municipal
securities whose issuers are located in the same state. However, it is not the
present intention of the Fund to invest more than 25% of the value of its total
assets in issuers located in the same state. If the Fund were to invest more
than 25% of its total assets in issuers located in the same state, it would be
more susceptible to adverse economic, business, or regulatory conditions in that
state.
From time to time, the Fund's investments may include securities as to which the
Fund, by itself or together with other funds or accounts managed by the Fund's
investment adviser, holds a major portion or all of an issue of municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Fund's investment adviser believes it is advisable to do so.
MEDIUM AND LOWER GRADE MUNICIPAL SECURITIES
Under normal market conditions, the Fund invests primarily in medium and lower
grade municipal securities that are rated at the time of purchase between BBB
and B- (inclusive) by S&P or between Baa and B3 (inclusive) by Moody's or an
equivalent rating by another NRSRO or comparably rated short term securities and
unrated municipal securities considered by the Fund's investment adviser to be
of comparable quality at the time of purchase. With respect to such investments,
the Fund has not established any limit on the percentage of its portfolio which
may be invested in securities in any one rating category. Securities rated BB or
below by S&P, Ba or below by Moody's or unrated securities of comparable quality
are commonly referred to as "junk bonds". Generally, medium and lower grade
securities provide higher yields than higher grade securities of similar
maturity but are subject to greater risks, such as greater credit risk, greater
market risk and volatility, greater liquidity concerns and potentially greater
manager risk. Investors should carefully consider the risks of owning shares of
a fund which invests in medium and lower grade municipal securities before
making an investment in the Fund.
The higher yield on such securities held by the Fund reflects the greater credit
risk that the financial condition of the issuer or adverse changes in general
economic conditions, or both, may impair the ability of the issuer to make
payments of income and principal. Lower grade securities are considered
speculative by the rating agencies with respect to the capacity of the issuer to
make interest and principal payments and both lower and medium grade securities
are more susceptible to nonpayment or default than higher grade securities. An
economic downturn or increase in interest rates could severely impact the
ability of such issuers to pay principal and interest or obtain other financing.
The ratings of S&P and Moody's represent their opinions of the quality of the
securities they undertake to rate, but not the market value risk of such
securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. Credit ratings are also subject to a risk
that the rating agencies may fail to change such ratings to reflect subsequent
events in a timely fashion. See the Appendix for a description of security
ratings.
The values of all debt securities fluctuate in response to changes in interest
rates, but medium and lower grade securities generally are subject to more
market risk and volatility than higher grade securities. Medium and lower grade
securities tend to react to short-term issuer or economic developments to a
greater extent than higher grade securities, which fluctuate primarily in
response to the general level of interest rates, assuming that there has been no
change in the fundamental quality of such securities. Yields on the Fund's
portfolio securities can be expected to fluctuate over time. A significant
increase in interest rates or a general economic downturn could severely disrupt
the market for medium and lower grade municipal securities and adversely affect
the market value of such securities. Such events also could lead to a higher
incidence of default by issuers of medium and lower grade municipal securities
compared to higher grade securities. In addition, changes in credit risks,
changes in interest rates, the credit markets or periods of general economic
uncertainty can be expected to result in increased volatility in the market
price of the Fund's medium and lower grade municipal securities and thus in the
net asset value of the Fund. Medium and lower grade securities may be more
susceptible to real or perceived adverse economic conditions than higher grade
securities. A
10
<PAGE> 13
projection of an economic downturn, for example, could cause a decline in prices
of medium and lower grade securities because the advent of a recession could
lessen the ability of a such issuer to make principal and interest payments on
its securities or obtain additional financing when necessary. In addition,
recent and proposed legislation may have an adverse impact on the market prices
or liquidity for medium and lower grade municipal securities.
The amount of available information about the financial condition of municipal
securities issuers is generally less extensive than that for corporate issuers
with publicly traded securities and the market for municipal securities is
generally considered to be less liquid than the market for corporate debt
obligations. In addition, the markets for medium and lower grade securities may
be less liquid than the markets for higher grade securities. Liquidity relates
to the ability of a fund to sell a security in a timely manner at a price which
reflects the value of that security. To the extent that there is no established
retail market for some of the medium and lower grade municipal securities in
which the Fund may invest, trading in such securities may be relatively
inactive. Prices of medium and lower grade debt securities may decline rapidly
in the event a significant number of holders decide to sell. Changes in
expectations regarding an individual issuer or medium or lower grade debt
securities generally could reduce market liquidity for such securities and make
their sale by the Fund more difficult, at least in the absence of price
concessions. The effects of adverse publicity and investor perceptions may be
more pronounced for securities for which no established retail market exists as
compared with the effects on securities for which such a market does exist. An
economic downturn or an increase in interest rates could severely disrupt the
market for such securities and adversely affect the value of outstanding bonds
or the ability of the issuers to repay principal and interest. Further, the Fund
may have more difficulty selling such securities in a timely manner and at their
stated value than would be the case for securities for which an established
retail market does exist. Certain municipal securities in which the Fund may
invest, such as special obligation bonds, lease obligations, participation
certificates and variable rate instruments, may be particularly less liquid.
Although the issuer of some such municipal securities may be obligated to redeem
such securities at face value, such redemption could result in capital losses to
the Fund to the extent such municipal securities were purchased by the Fund at a
premium to face value.
The Fund's investment adviser is responsible for determining the net asset value
of the Fund, subject to the supervision of the Fund's Board of Trustees. During
periods of reduced market liquidity or in the absence of readily available
market quotations for medium or lower grade municipal securities held in the
Fund's portfolio, the ability of the Fund's investment adviser to value the
Fund's securities becomes more difficult and the judgment of the Fund's
investment adviser may play a greater role in the valuation of the Fund's
securities due to the reduced availability of reliable objective data.
In the event that an issuer of securities held by the Fund experiences
difficulties in the timely payment of principal or interest and such issuer
seeks to restructure the terms of its borrowings, the Fund may incur additional
expenses and may determine to invest additional assets with respect to such
issuer or the project or projects to which the Fund's portfolio securities
relate. Further, the Fund may incur additional expenses to the extent that it is
required to seek recovery upon a default in the payment of interest or the
repayment of principal on its portfolio holdings, and the Fund may be unable to
obtain full recovery thereof.
The Fund's investment adviser seeks to minimize the risks involved in investing
in medium and lower grade municipal securities through diversification, careful
investment analysis and attention to current developments and trends in the
economy and financial and credit markets. In purchasing and selling securities,
the Fund's investment adviser evaluates the issuers of such securities based on
a number of factors, including but not limited to the issuer's financial
strength, its sensitivity to economic conditions and trends, its revenues or
earnings potential, its operating history and management skills. Municipal
securities generally are not listed for trading on any national securities
exchange, and many issuers of medium and lower grade municipal securities choose
not to have a rating assigned to their obligations by any nationally recognized
statistical rating organization. The amount of information available about the
financial condition of an issuer of unlisted or unrated securities generally is
not as extensive as that which is available with respect to issuers of listed or
rated securities. Thus, investment results of the Fund's medium and lower grade
securities may be more dependent upon the investment adviser's credit analysis,
judgment and experience than a fund investing solely in higher grade securities.
11
-
<PAGE> 14
Certain of the medium and lower grade municipal securities in which the Fund may
invest may be, subsequent to the Fund's investment in such securities,
downgraded or have their rating withdrawn by Moody's or S&P or may be deemed by
the Fund's investment adviser to be of a lower quality as a result of impairment
of the creditworthiness of the issuer of such securities or of the project the
revenues from which are the source of payment of interest and repayment of
principal with respect to such securities. The Fund may, if deemed appropriate
by the Fund's investment adviser, retain a security whose rating has been
downgraded or whose rating has been withdrawn. In such instances, the secondary
market for such municipal securities may become less liquid, with the
possibility that more than 15% of the Fund's net assets would be invested in
securities which are not readily marketable. In such event, the Fund will take
reasonable and appropriate steps to reduce the percentage of the Fund's
portfolio represented by securities that are not readily marketable to less than
15% of the Fund's net assets as soon as is reasonably practicable.
The table below sets forth the percentages of the Fund's assets invested during
the fiscal period ended September 30, 1998 in the various S&P's and Moody's
rating categories and in unrated securities determined by the Fund's investment
adviser to be of comparable quality. The percentages are based on the
dollar-weighted average of credit ratings of all municipal securities held by
the Fund during the 1998 fiscal period computed on a monthly basis.
<TABLE>
<CAPTION>
Period Ended September 30, 1998
Unrated Securities of
Rated Securities Comparable Quality
(As a Percentage of (As a Percentage of
Rating Category Portfolio Value) Portfolio Value)
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA/Aaa 29.0% 0%
.....................................................................
AA/Aa 5.8% 0%
.....................................................................
A/A 5.3% 1.0%
.....................................................................
BBB/Baa 17.5% 3.7%
.....................................................................
BB/Ba 2.3% 23.5%
.....................................................................
B/B 0% 9.7%
.....................................................................
CCC/Caa 0% 0.6%
.....................................................................
CC/Ca 0% 0%
.....................................................................
C/C 0% 0%
.....................................................................
D 0% 1.6%
.....................................................................
Percentage of
Rated and
Unrated
Securities 59.9% 40.1%
.....................................................................
</TABLE>
The percentage of the Fund's assets invested in securities of various grades may
vary from time to time from those set forth above.
SPECIAL CONSIDERATIONS
REGARDING CERTAIN SECURITIES
The Fund may invest in certain securities not producing immediate cash income,
such as zero coupon and payment-in-kind securities, when the Fund's investment
adviser believes the effective yield on such securities over comparable
instruments paying cash income makes these investments attractive. Zero coupon
securities are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or a specified date when the securities
begin paying current interest. They are issued and traded at a discount from
their face amounts or par value, which discount varies depending on the time
remaining until cash payments begin, prevailing interest rates, liquidity of the
security and the perceived credit quality of the issuer. Payment-in-kind
securities are securities that pay interest through the issuance of additional
securities. Prices on non-cash-paying instruments may be more sensitive to
changes in the issuer's financial condition, fluctuations in interest rates and
market demand/supply imbalances than cash-paying securities with similar credit
ratings, and thus may be more speculative than are securities that pay interest
periodically in cash. In addition, the amount of non-cash interest income earned
on such instruments is included, for federal income tax purposes, in the Fund's
calculation of income that is required to be distributed to shareholders for the
Fund to maintain its desired federal income tax status (even though such
non-cash paying securities do not provide the Fund with the cash flow with which
to pay such distributions). Accordingly, the Fund may be required to borrow or
to liquidate portfolio securities at a time that it otherwise would not have
done so in order to make such distributions. The Fund's investment adviser will
weigh these concerns against the expected total returns from such instruments.
OTHER INVESTMENTS AND RISK FACTORS
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income indices and other financial instruments, purchase and sell
financial futures contracts and enter into various interest rate transactions
such as swaps, caps, floors or collars. Collectively, all of the above
12
-
<PAGE> 15
are referred to as "Strategic Transactions." Strategic Transactions may be used
to attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the investment adviser's ability to predict pertinent market
movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. Strategic Transactions have risks associated with them including
possible default by the other party to the transaction, illiquidity and, to the
extent the investment adviser's view as to certain market movements is
incorrect, the risk that the use of such Strategic Transactions could result in
losses greater than if they had not been used. Use of put and call options may
result in losses to the Fund, force the sale of portfolio securities at
inopportune times or for prices other than at current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the risk management or hedging instrument may be greater than gains in the
value of the Fund's position. In addition, futures and options markets may not
be liquid in all circumstances and certain over-the-counter options may have no
markets. As a result, in certain markets, the Fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and their risks are described more
fully in the Fund's Statement of Additional Information. Income earned or deemed
to be earned by the Fund from its Strategic Transactions, if any, generally will
be taxable income of the Fund.
The Fund may purchase and sell municipal securities on a "when-issued" or
"delayed delivery" basis whereby the Fund buys or sells a security with payment
and delivery taking place in the future. The payment obligation and the interest
rate are fixed at the time the Fund enters into the commitment. No income
accrues to the Fund on municipal securities in connection with such transactions
prior to the date the Fund actually takes delivery of such securities. These
transactions are subject to market risk as the value or yield of a municipal
security at delivery may be more or less than the purchase price or the yield
generally available on municipal securities when delivery occurs. In addition,
the Fund is subject to counterparty risk because it relies on the buyer or
seller, as the case may be, to consummate the transaction, and failure by the
other party to complete the transaction may result in the Fund missing the
opportunity of obtaining a price or yield considered to be advantageous. The
Fund will only make commitments to purchase such securities with the intention
of actually acquiring these securities, but the Fund may sell these securities
prior to settlement if it is deemed advisable. No specific limitation exists as
to the percentage of the Fund's assets which may be used to acquire securities
on a "when-issued" or "delayed delivery" basis.
The Fund may invest up to 15% of the Fund's net assets in illiquid and certain
restricted securities. Such securities may be difficult or impossible to sell at
the time and the price that the Fund would like. Thus, the Fund may have to sell
such securities at a lower price, sell other securities instead to obtain cash
or forego other investment opportunities.
The Fund may borrow amounts up to 5% of its total assets in order to pay for
redemptions when liquidation of portfolio securities is considered
13
<PAGE> 16
disadvantageous or inconvenient and may pledge up to 10% of its total assets to
secure such borrowings.
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
Additional Information which can be obtained by investors free of charge as
described on the back cover of this prospectus.
Although the Fund does not intend to engage in substantial short-term trading,
it may sell securities without regard to the length of time they have been held
in order to take advantage of new investment opportunities or yield
differentials or otherwise. The Fund's portfolio turnover is shown under the
heading "Financial Highlights". The portfolio turnover rate may be expected to
vary from year to year. A high portfolio turnover rate (100% or more) increases
the Fund's transactions costs, including brokerage commissions or dealer costs,
and may result in the realization of more short-term capital gains than if the
Fund had a lower portfolio turnover. The turnover rate will not be a limiting
factor, however, if the Fund's investment adviser considers portfolio changes
appropriate.
When market conditions dictate a more "defensive" investment strategy, the Fund
may invest on a temporary basis a portion or all of its assets in high-quality,
short-term municipal obligations. If such high-quality, short-term securities
are not available or, in the investment adviser's judgment, do not afford
sufficient protection against adverse market conditions, the Fund may invest in
taxable obligations. Such taxable obligations may include in securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities, other
investment grade quality income securities, prime commercial paper, certificates
of deposit, bankers' acceptances and other obligations of domestic banks having
total assets of at least $500 million, and repurchase agreements. The effect of
taking such a defensive position may be that the Fund does not achieve its
investment objective.
YEAR 2000 RISKS. Like other mutual funds, financial and business organizations
and individuals around the world, the Fund could be adversely affected if the
computer systems used by the Fund's investment adviser and other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." The Fund's investment adviser is taking steps that it believes are
reasonably designed to address the Year 2000 Problem with respect to computer
systems that it uses and to obtain reasonable assurances that comparable steps
are being taken by the Fund's other major service providers. At this time, there
can be no assurances that these steps will be sufficient to avoid any adverse
impact to the Fund. In addition, the Year 2000 Problem may adversely affect the
markets and the issuers of securities in which the Fund may invest which, in
turn, may adversely affect the net asset value of the Fund. Improperly
functioning trading systems may result in settlement problems and liquidity
issues. In addition, corporate and governmental data processing errors may
result in production problems for individual companies or issuers and overall
economic uncertainty. Earnings of individual issuers will be affected by
remediation costs, which may be substantial and may be reported inconsistently
in U.S. and foreign financial statements. Accordingly, the Fund's investments
may be adversely affected. The statements above are subject to the Year 2000
Information and Readiness Disclosure Act which Act may limit the legal rights
regarding the use of such statements in the case of a dispute.
INVESTMENT ADVISORY SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp."). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $50 billion under management or supervision. Van
Kampen Investments' more than 50 open-end and 39 closed-end funds and more than
2,500 unit investment trusts are professionally distributed by leading financial
advisers nationwide. Van Kampen Funds Inc., the distributor of the Fund (the
"Distributor") and the sponsor of the funds mentioned above, is also a wholly
owned subsidiary of Van Kampen Investments. Van Kampen Investments is an
indirect wholly owned subsidiary of Morgan Stanley Dean Witter & Co. The
Adviser's principal office is located at 1 Parkview Plaza,
14
-
<PAGE> 17
PO Box 5555, Oakbrook Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed based upon an annual rate applied to average daily net assets of the
Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
- -----------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.50%
.....................................................
Over $500 million 0.45%
.....................................................
</TABLE>
Applying this fee schedule, the Fund paid the Adviser an advisory fee at the
effective rate of 0.47% of the Fund's average net assets for the Fund's fiscal
period ended September 30, 1998.
Under the Advisory Agreement, the Fund also reimburses the Adviser for the cost
of the Fund's accounting services, which include maintaining its financial books
and records and calculating its daily net asset value. Other operating expenses
paid by the Fund include service fees, distribution fees, custodial fees, legal
and accounting fees, the costs of reports and proxies to shareholders, trustees'
fees (other than those who are affiliated persons of the Adviser, Distributor or
Van Kampen Investments) and all other business expenses not specifically assumed
by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes of Ethics permit directors, trustees,
officers and employees to buy and sell securities for their personal accounts
subject to certain restrictions. Persons with access to certain sensitive
information are subject to pre-clearance and other procedures designed to
prevent conflicts of interest.
PORTFOLIO MANAGEMENT. David C. Johnson, a Senior Vice President of the Adviser,
has been primarily responsible for the day-to-day management of the Fund's
portfolio since April 1989. Mr. Johnson has been employed by the Adviser since
April 1989.
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each investor to choose the class of shares that is most beneficial given the
amount to be invested and the length of time the investor expects to hold the
shares. Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Both
minimums may be waived by the Distributor for plans involving periodic
investments.
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares bear the sales charge expenses at the time of redemption and any
expenses (including higher distribution fees and transfer agency costs)
resulting from such deferred sales charge arrangement, (ii) generally, each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan (described below) pursuant to which its
distribution fee or service fee is paid, (iii) each class of shares has
different exchange privileges, (iv) certain classes of shares are subject to a
conversion feature and (v) certain classes of shares have different shareholder
service options available.
The price of the Fund's shares is based upon the Fund's net asset value per
share. The net asset values per share of the Class A Shares, Class B Shares and
Class C Shares are generally expected to be substantially the same. In certain
circumstances, however, the per share net asset values of the classes of shares
may differ from one another, reflecting the daily expense accruals of the higher
distribution fees and transfer agency costs applicable to the Class B
15
-
<PAGE> 18
Shares and Class C Shares and the differential in the dividends that may be paid
on each class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on:
customary business holidays, any day on which no purchase or redemption orders
are received or there is not a sufficient degree of trading in the Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Fund reserves the right to calculate the net asset
value per share and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable. Net asset value per share for
each class is determined by dividing the value of the Fund's portfolio
securities, cash and other assets (including accrued interest) attributable to
such class, less all liabilities (including accrued expenses) attributable to
such class, by the total number of shares of the class outstanding. Portfolio
securities are valued by using market quotations, prices provided by market
makers or estimates of market values determined in good faith based upon yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees of the Fund.
Securities with remaining maturities of 60 days or less are valued at amortized
cost when amortized cost is determined in good faith by or under the direction
of the Board of Trustees of the Fund to be representative of the fair value at
which it is expected such securities may be resold. Any securities or other
assets for which current market quotations are not readily available are valued
at their fair value as determined in good faith under procedures established by
and under the general supervision of the Board of Trustees of the Fund.
The Fund has adopted a distribution plan (the "Distribution Plan") with respect
to each class of its shares pursuant to Rule 12b-1 under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Fund also has adopted a service
plan (the "Service Plan") with respect to each class of its shares. The
Distribution Plan and the Service Plan provide that the Fund may pay
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders of each class.
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. The net income attributable to a class of shares and the
dividends payable on such class of shares will be reduced by the amount of the
distribution fees and other expenses associated with such class of shares. To
assist investors in comparing classes of shares, the tables under the heading
"Fees and Expenses of the Fund" provide a summary of sales charges and expenses
and an example of the sales charges and expenses applicable to each class of
shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza, PO
Box 5555, Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through
members of the National Association of Securities Dealers, Inc. ("NASD") who are
acting as securities dealers ("dealers") and NASD members or eligible non-NASD
members who are acting as brokers or agents or investors ("brokers"). "Dealers"
and "brokers" are sometimes referred to herein as "authorized dealers."
Shares may be purchased on any business day by completing the application
accompanying this prospectus and forwarding the application, directly or through
an authorized dealer, to the Fund's shareholder service agent, Van Kampen
Investor Services Inc. ("Investor Services"), a wholly owned subsidiary of Van
Kampen Investments. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A Shares, Class B Shares or Class C Shares.
Sales personnel of authorized dealers distributing the Fund's shares are
entitled to receive compensation for selling such shares and may receive
differing compensation for selling Class A Shares, Class B Shares or Class C
Shares.
The price paid for shares purchased is based on the next calculation of net
asset value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers are priced
based on the date of receipt provided such order is transmitted to Investor
Services prior to Investor Services' close of business on such date. Orders
received by authorized dealers or transmitted to Investor Services after its
close of business are priced based on the date of the next computed net asset
value per share provided they are
16
-
<PAGE> 19
received by Investor Services prior to Investor Services' close of business on
such date. It is the responsibility of authorized dealers to transmit orders
received by them to Investor Services so they will be received in a timely
manner. Orders of less than $500 generally are mailed by the authorized dealer
and processed at the offering price next calculated after receipt by Investor
Services.
Shares of the Fund may be sold in foreign countries where permissible. The Fund
and the Distributor reserve the right to refuse any order for the purchase of
shares. The Fund also reserves the right to suspend the sale of the Fund's
shares in response to conditions in the securities markets or for other reasons.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gains
distributions, unless the investor instructs the Fund otherwise. Investors
wishing to receive cash instead of additional shares should contact the Fund at
(800) 341-2911 or by writing to the Fund, c/o Van Kampen Investors Services
Inc., PO Box 418256, Kansas City, MO 64141-9256.
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 4.75% of the offering price (or 4.99% of the net amount
invested), reduced on investments of $100,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of
Size of Offering Net Amount
Investment Price Invested
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.75% 4.99%
..........................................................
$100,000 but less than
$250,000 3.75% 3.90%
..........................................................
$250,000 but less than
$500,000 2.75% 2.83%
..........................................................
$500,000 but less than
$1,000,000 2.00% 2.04%
..........................................................
$1,000,000 or more * *
..........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1.00% on certain redemptions made within one year of
the purchase. The contingent deferred sales charge is assessed on an amount
equal to the lesser of the then current market value or the cost of the shares
being redeemed. Accordingly, no sales charge is imposed on increases in net
asset value above the initial purchase price.
The Fund may spend an aggregate amount up to 0.25% per year of the average daily
net assets attributable to the Class A Shares of the Fund pursuant to the
Distribution Plan and Service Plan. From such amount, the Fund may spend up to
0.25% per year of the Fund's average daily net assets attributable to the Class
A Shares pursuant to the Service Plan in connection with the ongoing provision
of services to holders of such shares by the Distributor and by brokers, dealers
or financial intermediaries and in connection with the maintenance of such
shareholders' accounts.
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
deferred sales charge if redeemed within six years of purchase as shown in the
table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
as a Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
- ------------------------------------------------
<S> <C> <C> <C>
First 4.00%
................................................
Second 3.75%
................................................
Third 3.50%
................................................
Fourth 2.50%
................................................
Fifth 1.50%
................................................
Sixth 1.00%
................................................
Seventh and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
It is presently the policy of the Distributor not to accept any order for Class
B Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor
17
-
<PAGE> 20
making such an investment to purchase Class A Shares.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for the purchase of Class B Shares
until the time of redemption of such shares. Solely for purposes of determining
the number of years from the time of any payment for the purchase of shares, all
payments during a month are aggregated and deemed to have been made on the last
day of the month.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and then of shares held the longest in the shareholder's account.
The Fund may spend up to 0.75% per year of the average daily net assets
attributable to the Class B Shares of the Fund pursuant to the Distribution
Plan. In addition, the Fund may spend up to 0.25% per year of the Fund's average
daily net assets attributable to the Class B Shares pursuant to the Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
deferred sales charge of 1.00% of the dollar amount subject to charge if
redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
It is presently the policy of the Distributor not to accept any order for Class
C Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and then of shares held the longest in the shareholder's account.
The Fund may spend up to 0.75% per year of the average daily net assets
attributable to the Class C Shares of the Fund pursuant to the Distribution
Plan. In addition, the Fund may spend up to 0.25% per year of the Fund's average
daily net assets attributable to the Class C Shares pursuant to the Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment
plan shares received thereon, automatically convert to Class A Shares eight
years after the end of the calendar month in which the shares were purchased.
Class B Shares purchased before June 1, 1996, and any dividend reinvestment plan
shares received thereon, automatically convert to Class A Shares seven years
after the end of the calendar month in which the shares were purchased. Class C
Shares purchased before January 1, 1997, and any dividend reinvestment plan
shares received thereon, automatically convert to Class A Shares ten years after
the end of the calendar month in which such shares were purchased. Such
conversion will be on the basis of the relative net asset values per share,
without the imposition of any sales load, fee or other charge. The conversion
schedule applicable to a share of the Fund acquired through the exchange
privilege from another Van Kampen fund is determined by reference to the Van
Kampen fund from which such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or distributions constituting
"preferential dividends" under the federal income tax law and (ii) the
conversion of shares does not constitute a taxable event under federal income
tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be
18
-
<PAGE> 21
subject to the higher aggregate fees applicable to such shares for an indefinite
period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) in
connection with required minimum distributions from an individual retirement
account ("IRA") or certain other retirement plan distributions, (iii) pursuant
to the Fund's systematic withdrawal plan but limited to 12% annually of the
initial value of the account, (iv) in circumstances under which no commission or
transaction fee is paid to authorized dealers at the time of purchase of such
shares and (v) effected pursuant to the right of the Fund to involuntarily
liquidate a shareholder's account as described under the heading "Redemption of
Shares." The contingent deferred sales charge also is waived on redemptions of
Class C Shares as it relates to the reinvestment of redemption proceeds in
shares of the same class of the Fund within 180 days after redemption. For a
more complete description of contingent deferred sales charge waivers, please
refer to the Statement of Additional Information or contact your authorized
dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced sales charges. Investors, or their authorized
dealers, must notify the Fund at the time of the purchase order whenever a
quantity discount is applicable to purchases. Upon such notification, an
investor will receive the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds which have been previously purchased and are
still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as out-lined in the Class A Shares sales
charge table. The size of investment shown in the Class A Shares sales charge
table also includes purchases of shares of the Participating Funds over a
13-month period based on the total amount of intended purchases plus the value
of all shares of the Participating Funds previously purchased and still owned.
An investor may elect to compute the 13-month period starting up to 90 days
before the date of execution of a Letter of Intent. Each investment made during
the period receives the reduced sales charge applicable to the total amount of
the investment goal. The initial purchase must be for an amount equal to at
least 5% of the minimum total purchase amount of the level selected. If trades
not initially made under a Letter of Intent subsequently qualify for a lower
sales charge through the 90-day back-dating provisions, an adjustment will be
made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustment in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. The Fund
initially will escrow shares totaling 5% of the dollar amount of the Letter of
Intent to be held by Investor Services in the name of the shareholder. In the
event the Letter of Intent goal is not achieved within the period, the investor
must pay the difference between the sales charge applicable to the purchases
made and the sales charges previously paid.
19
-
<PAGE> 22
Such payments may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrowed shares to obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges in
connection with the unit investment trust reinvestment program and purchases by
registered representatives of selling firms or purchases by persons affiliated
with the Fund or the Distributor. The Fund reserves the right to modify or
terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund, at net asset value per share and with no minimum initial or
subsequent investment requirement, if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by the Fund and the Distributor. The total sales charge for all other
investments made from unit trust distributions will be 1.00% of the offering
price (1.01% of net asset value). Of this amount, the Distributor will pay to
the authorized dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their authorized dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each participating investor in a computerized format fully
compatible with Investor Services' processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a quarterly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value, upon written assurance that the purchase is made for investment
purposes and that the shares will not be resold except through redemption by the
Fund, by:
(1) Current or retired trustees or directors of funds advised by Asset
Management or Advisory Corp. and such persons' families and their beneficial
accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries, employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser, and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21 years
of age when purchasing for any accounts they beneficially own, or, in the
case of any such financial institution, when purchasing for retirement plans
for such institution's employees; provided that such purchases are otherwise
permitted by such institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers through
which purchases are made an amount up to 0.50% of the amount invested, over
a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor and
which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Statement of Additional
Information for further details with respect to such alliance programs.
20
-
<PAGE> 23
(6) Beneficial owners of shares of Participating Funds held by a retirement plan
or held in a tax-advantaged retirement account who purchase shares of the
Fund with proceeds from distributions from such a plan or retirement account
other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit plans
qualified under Section 401(a) of the Code, or custodial accounts held by a
bank created pursuant to Section 403(b) of the Code and sponsored by
non-profit organizations defined under Section 501(c)(3) of the Code and
assets held by an employer or trustee in connection with an eligible
deferred compensation plan under Section 457 of the Code. Such plans will
qualify for purchases at net asset value provided, for plans initially
establishing accounts with the Distributor in the Participating Funds after
February 1, 1997, that (1) the initial amount invested in the Participating
Funds is at least $500,000 or (2) such shares are purchased by an employer
sponsored plan with more than 100 eligible employees. Such plans that have
been established with a Participating Fund or have received proposals from
the Distributor prior to February 1, 1997 based on net asset value purchase
privileges previously in effect will be qualified to purchase shares of the
Participating Funds at net asset value for accounts established on or before
May 1, 1997. Section 403(b) and similar accounts for which Van Kampen Trust
Company serves as custodian will not be eligible for net asset value
purchases based on the aggregate investment made by the plan or the number
of eligible employees, except under certain uniform criteria established by
the Distributor from time to time. Prior to February 1, 1997, a commission
will be paid to authorized dealers who initiate and are responsible for such
purchases within a rolling twelve-month period as follows: 1.00% on sales to
$5 million, plus 0.50% on the next $5 million, plus 0.25% on the excess over
$10 million. For purchases on February 1, 1997 and thereafter, a commission
will be paid as follows: 1.00% on sales to $2 million, plus 0.80% on the
next $1 million, plus 0.50% on the next $47 million, plus 0.25% on the
excess over $50 million.
(9) Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the Fund
and Participating Funds, (iv) has a membership that the authorized dealer
can certify as to the group's members and (v) satisfies other uniform
criteria established by the Distributor for the purpose of realizing
economies of scale in distributing such shares. A qualified group does not
include one whose sole organizational nexus, for example, is that its
participants are credit card holders of the same institution, policy holders
of an insurance company, customers of a bank or broker-dealer, clients of an
investment adviser or other similar groups. Shares purchased in each group's
participants account in connection with this privilege will be subject to a
contingent deferred sales charge of 1.00% in the event of redemption within
one year of purchase, and a commission will be paid to authorized dealers
who initiate and are responsible for such sales to each individual as
follows: 1.00% on sales to $2 million, plus 0.80% on the next $1 million and
0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust department, provided that
Investor Services receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described on
purchases made as described in (3) through (9) above. The Fund may terminate, or
amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
21
-
<PAGE> 24
REDEMPTION OF
SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the heading "Purchase of Shares," redemptions of Class B Shares
and Class C Shares may be subject to a contingent deferred sales charge. In
addition, certain redemptions of Class A Shares for shareholder accounts of $1
million or more may be subject to a contingent deferred sales charge.
Redemptions completed through an authorized dealer or a custodian of a
retirement plan account may involve additional fees charged by the dealer or
custodian.
Except as specified below under "Telephone Redemption Requests," payment for
shares redeemed generally will be made by check mailed within seven days after
acceptance by Investor Services of the request and any other necessary documents
in proper order. Such payment may be postponed or the right of redemption
suspended as provided by the rules of the SEC. Such payment may, under certain
circumstances, be paid wholly or in part by a distribution-in-kind of portfolio
securities. If the shares to be redeemed have been recently purchased by check,
Investor Services may delay the redemption until it confirms the purchase check
has cleared, which may take up to 15 days. A taxable gain or loss will be
recognized by the shareholder upon redemption of shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 418256, Kansas City, MO 64141-9256. The request for redemption
should indicate the number of shares to be redeemed, the class designation of
such shares and the shareholder's account number. The redemption request must be
signed by all persons in whose names the shares are registered. Signatures must
conform exactly to the account registration. If the proceeds of the redemption
exceed $50,000, or if the proceeds are not to be paid to the record owner at the
record address, or if the record address has changed within the previous 30
days, signature(s) must be guaranteed by one of the following: a bank or trust
company; a broker-dealer; a credit union; a national securities exchange,
registered securities association or clearing agency; a savings and loan
association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. In the case of shareholders holding
certificates, the certificates for the shares being redeemed properly endorsed
for transfer must accompany the redemption request. In the event the redemption
is requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the authorized signer and
certified within the prior 120 days must accompany the redemption request. IRA
redemption requests should be sent to the IRA custodian to be forwarded to
Investor Services. Contact the IRA custodian for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. Orders sent through authorized dealers
must be at least $500 (unless transmitted by your authorized dealer via the
FUNDSERV network). The redemption price for such shares is the net asset value
per share next calculated after an order in proper form is received by an
authorized dealer provided such order is transmitted to the Distributor prior to
the Distributor's close of business on such day. It is the responsibility of
authorized dealers to transmit redemption requests received by them to the
Distributor so they will be received prior to such time. Redemptions completed
through an authorized dealer may involve additional fees charged by the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application form accompanying this prospectus or call the Fund at (800) 341-2911
to request that a
22
-
<PAGE> 25
copy of the Telephone Redemption Authorization form be sent to them for
completion. To redeem shares, contact the telephone transaction line at (800)
421-5684. Van Kampen Investments, Investor Services and the Fund employ
procedures considered by them to be reasonable to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring certain
personal identification information prior to acting upon telephone instructions,
tape recording telephone communications and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen Investments, Investor Services nor the Fund will be liable
for following telephone instructions which it reasonably believes to be genuine.
Telephone redemptions may not be available if the shareholder cannot reach
Investor Services by telephone, whether because all telephone lines are busy or
for any other reason; in such case, a shareholder would have to use the Fund's
other redemption procedure previously described. Requests received by Investor
Services prior to 4:00 p.m., New York time, will be processed at the next
determined net asset value per share. These privileges are available for all
accounts other than retirement accounts or accounts with shares represented by
certificates. If an account has multiple owners, Investor Services may rely on
the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions payable by wire transfer are expected to be wired on the next
business day following the date of redemption. The Fund reserves the right at
any time to terminate, limit or otherwise modify this redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account with a
value on the date of the notice of redemption less than the minimum initial
investment as specified in this prospectus. At least 60 days advance written
notice of any such involuntary redemption will be given and the shareholder will
be given an opportunity to purchase the required value of additional shares at
the next determined net asset value without sales charge. Any involuntary
redemption may only occur if the shareholder account is less than the minimum
initial investment due to shareholder redemptions.
DISTRIBUTIONS FROM THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends and
capital gains distributions. Investors will be entitled to begin receiving
dividends on their shares on the business day after Investor Services receives
payment for such shares. However, shares become entitled to dividends on the day
Investor Services receives payment for the shares either through a fed wire or
NSCC settlement. Shares remain entitled to dividends through the day such shares
are processed for payment on redemption.
DIVIDENDS. Interest earned from investments is the Fund's main source of income.
Under the Fund's present policy, which may be changed at any time by the Board
of Trustees, distributions of all or substantially all of this income, less
expenses, are declared daily and paid monthly as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than purchase prices. Net realized capital gains represent the total
profit from sales of securities minus total losses from sales of securities
including losses carried forward from prior years. The Fund distributes any
taxable net realized capital gains to shareholders at least annually. As in the
case of dividends, capital gains distributions are automatically
23
-
<PAGE> 26
reinvested in additional shares of the Fund at net asset value unless the
shareholder instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value per share (without sales
charge) on the applicable payable date of the dividend or capital gains
distribution. Unless the shareholder instructs otherwise, the reinvestment plan
is automatic. This instruction may be made by telephone by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired) or by writing to Investor
Services. The investor may, on the initial application or prior to any
declaration, instruct that dividends be paid in cash and capital gains
distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to charge a bank account on a
regular basis to invest pre-determined amounts in the Fund. Additional
information is available from the Distributor or your authorized dealer.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint Investor Services as agent by completing the Authorization for
Redemption by Check form and the appropriate section of the application and
returning the form and the application to Investor Services. Once the form is
properly completed, signed and returned to the agent, a supply of checks drawn
on State Street Bank and Trust Company (the "Bank") will be sent to the Class A
shareholder. These checks may be made payable by the Class A shareholder to the
order of any person in any amount of $100 or more.
When a check is presented to the Bank for payment, full and fractional Class A
Shares required to cover the amount of the check are redeemed from the
shareholder's Class A account by Investor Services at the next determined net
asset value per share. Check writing redemptions represent the sale of Class A
Shares. Any gain or loss realized on the sale of shares is a taxable event.
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A account, the check will
be returned and the shareholder may be subject to additional charges. A Class A
shareholder may not liquidate the entire account by means of a check. The check
writing privilege may be terminated or suspended at any time by the Fund or the
Bank. Retirement plans and accounts that are subject to backup withholding are
not eligible for the privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next computed net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. Under normal circumstances, it is
the policy of the Adviser not to approve such requests.
When Class B Shares and Class C Shares are exchanged among Participating Funds,
the holding
24
-
<PAGE> 27
period for purposes of computing the contingent deferred sales charge is based
upon the date of the initial purchase of such shares from a Participating Fund.
If such Class B Shares or Class C Shares are redeemed and not exchanged for
shares of another Participating Fund, Class B Shares and Class C Shares are
subject to the contingent deferred sales charge schedule imposed by the
Participating Fund from which such shares were originally purchased.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is carried over and included in the
tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanying the prospectus. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, neither Van Kampen Investments, Investor Services nor
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gains options (except dividend
diversification) and authorized dealer of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or reinvest dividends
from the new account into another fund, however, an exchanging shareholder must
submit a specific request. The Fund reserves the right to reject any order to
acquire its shares through exchange. In addition, the Fund may modify, restrict
or terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these Participating Funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund prior to investing.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instruction. Van Kampen Investments, Investor
Services and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated through the internet are genuine. Such
procedures include requiring use of a personal identification number prior to
acting upon internet instructions and providing written confirmation of
instructions communicated through the internet. If reasonable procedures are
employed, neither Van Kampen Investments, Investor Services nor the Fund will be
liable for following instructions through the internet which it reasonably
believes to be genuine. If
25
-
<PAGE> 28
an account has multiple owners, Investor Services may rely on the instructions
of any one owner.
FEDERAL INCOME TAXATION
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined under applicable
federal income tax law). Exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. Exempt-interest dividends are included in determining what
portion, if any, of a person's social security and railroad retirement benefits
will be includable in gross income subject to federal income tax.
Under applicable federal income tax law, the interest on certain municipal
securities may be an item of tax preference subject to the alternative minimum
tax. The Fund may invest a portion of its assets in municipal securities subject
to this provision so that a portion of its exempt-interest dividends may be an
item of tax preference to the extent such dividends represent interest received
from such municipal securities. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax.
Although exempt-interest dividends from the Fund generally may be treated by
shareholders as interest excluded from their gross income, each shareholder is
advised to consult his or her tax adviser with respect to whether
exempt-interest dividends retain this exclusion given the investor's tax
circumstances. For example, exempt-interest dividends may not be excluded if the
shareholder would be treated as a "substantial user" (or a "related person" of a
substantial user, as each term is defined by applicable federal income tax law)
of the facilities financed with respect to any of the tax-exempt obligations
held by the Fund.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the shareholder's taxable
year. If a shareholder receives an exempt-interest dividend with respect to any
shares and such shares are held for six months or less, any loss on the sale or
exchange of the shares will be disallowed to the extent of the amount of such
exempt-interest dividend.
While the Fund expects that a major portion of its net investment income
(consisting generally of tax-exempt interest, taxable income and net short-term
capital gains) will constitute tax-exempt interest, a significant portion of the
Fund's net investment income may consist of taxable income. Distributions of
such taxable income are taxable to shareholders as ordinary income to the extent
of the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains (which are the
excess of net long-term capital gains over net short-term capital losses) as
capital gain dividends, if any, are taxable to shareholders as long-term capital
gains, whether paid in cash or reinvested in additional shares, and regardless
of how long the shares of the Fund have been held by such shareholders. Such
capital gain dividends may be taxed at different rates depending on how long the
Fund held the securities. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming such shares are held as a capital asset). Although
distributions generally are treated as taxable in the year they are paid,
distributions declared in October, November or December, payable to shareholders
of record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt interest dividends cannot exceed,
however, the excess of the amount of interest exempt from tax under Section 103
of the Code received by the Fund during the year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. Since the percentage of
dividends which are exempt-interest dividends is determined on an average annual
method for the taxable year, the percentage of income designated as tax-exempt
for any particular dividend may be substantially different from the percentage
of the Fund's income that was tax exempt during the period covered by the
dividend. Fund distributions generally will not qualify for the dividends
received deduction for corporations.
26
-
<PAGE> 29
The sale or exchange of shares is a taxable transaction for federal income tax
purposes. Shareholders who sell their shares will generally recognize gain or
loss in an amount equal to the difference between their adjusted tax basis in
the shares and the amount received. If such shares are held as a capital asset,
the gain or loss will be a capital gain or loss. Any capital gains may be taxed
at different rates depending on how long the shareholder held its shares.
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain required certifications
or who are otherwise subject to backup withholding.
The Fund intends to qualify as a regulated investment company under the federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its net investment income, the Fund will not be
required to pay federal income taxes on any income it distributed to
shareholders. If the Fund distributes less than the sum of 98% of its ordinary
income and 98% of its capital gain net income, then the Fund will be subject to
a 4% excise tax on the undistributed amounts.
The federal income tax discussion above is for general information only. The
exemption of interest income for federal income tax purposes may not result in
similar exemptions under the laws of a particular state or local taxing
authority. Income distributions may be taxable to shareholders under state or
local law as dividend income even though a portion of such distributions may be
derived from interest on tax-exempt obligations which, if realized directly,
would be exempt from such income taxes. The Fund will report annually to its
shareholders the percentage and source, on a state-by-state basis, of interest
income earned on municipal securities received by the Fund during the preceding
calendar year. Dividends and distributions paid by the Fund from sources other
than tax-exempt interest are generally subject to taxation at the state and
local levels. Prospective investors should consult their own tax advisers
regarding the specific federal tax consequences of purchasing, holding,
exchanging or selling shares, as well as the effects of state, local and foreign
tax law and any proposed tax law changes.
27
-
<PAGE> 30
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, independent accountants, whose report,
along with the Fund's financial statements, is included in the Statement of
Additional Information and may be obtained by shareholders without charge by
calling the telephone number on the back cover of this prospectus. This
information should be read in conjunction with the financial statements and
notes thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
Class A Shares Class B Shares
Year
Ended
Nine Months Nine Months December
Ended Year Ended December 31, Ended 31,
September 30, 1998 1997 1996 1995 1994 1993 September 30, 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
the Period.......... $14.845 $14.474 $14.984 $13.848 $15.629 $14.529 $14.844 $14.474
------- ------- ------- ------- ------- ------- ------- -------
Net Investment
Income............ .643 .895 .963 1.024 .956 1.052 .545 .774
Net Realized and
Unrealized
Gain/Loss......... .217 .376 (.513) 1.072 (1.717) 1.158 .229 .384
------- ------- ------- ------- ------- ------- ------- -------
Total from Investment
Operations.......... .860 1.271 .450 2.096 (.761) 2.210 .774 1.158
Less Distributions
from and in Excess
of Net Investment
Income.............. .629 .900 .960 .960 1.020 1.110 .547 .788
------- ------- ------- ------- ------- ------- ------- -------
Net Asset Value, End
of the Period....... $15.076 $14.845 $14.474 $14.984 $13.848 $15.629 $15.071 $14.844
======= ======= ======= ======= ======= ======= ======= =======
Total Return (a)..... 6.00%* 9.05% 3.21% 15.52% (4.93%) 15.82% 5.35%* 8.23%
Net Assets at End of
the Period (In
millions)........... $771.4 $706.3 $671.9 $665.8 $603.0 $636.2 $279.6 $229.6
Ratio of Expenses to
Average Net Assets
(b)................. .92% .94% .99% .95% .87% 1.03% 1.68% 1.71%
Ratio of Net
Investment Income to
Average Net Assets
(b)................. 5.66% 6.09% 6.60% 7.05% 6.48% 6.95% 4.90% 5.30%
Portfolio Turnover... 66% * 63% 59% 59% 101% 91% 66%* 63%
<CAPTION>
Class B Shares
May 1, 1993
(Commencement
of Distributions) to
1996 1995 1994 December 31, 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of
the Period.......... $14.983 $13.850 $15.621 $14.670
------- ------- ------- -------
Net Investment
Income............ .843 .908 .841 .656
Net Realized and
Unrealized
Gain/Loss......... (.506) 1.071 (1.718) .945
------- ------- ------- -------
Total from Investment
Operations.......... .337 1.979 (.877) 1.601
Less Distributions
from and in Excess
of Net Investment
Income.............. .846 .846 .894 .650
------- ------- ------- -------
Net Asset Value, End
of the Period....... $14.474 $14.983 $13.850 $15.621
======= ======= ======= =======
Total Return (a)..... 2.40% 14.62% (5.69%) 11.12%*
Net Assets at End of
the Period (In
millions)........... $173.8 $137.9 $112.4 $56.6
Ratio of Expenses to
Average Net Assets
(b)................. 1.75% 1.70% 1.64% 1.74%
Ratio of Net
Investment Income to
Average Net Assets
(b)................. 5.84% 6.25% 5.70% 5.95%
Portfolio Turnover... 59% 59% 101% 91%
<CAPTION>
Class C Shares
August 13, 1993
Nine Months (Commencement
Ended Year Ended December 31, of Distributions) to
September 30, 1998 1997 1996 1995 1994 December 31, 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
the Period.......... $14.842 $14.474 $14.987 $13.846 $15.610 $15.030
------- ------- ------- ------- ------- -------
Net Investment
Income............ .549 .778 .851 .910 .824 .369
Net Realized and
Unrealized
Gain/Loss......... .225 .378 (.518) 1.077 (1.694) .580
------- ------- ------- ------- ------- -------
Total from Investment
Operations.......... .774 1.156 .333 1.987 (.870) .949
Less Distributions
from and in Excess
of Net Investment
Income.............. .547 .788 .846 .846 .894 .369
------- ------- ------- ------- ------- -------
Net Asset Value, End
of the Period....... $15.069 $14.842 $14.474 $14.987 $13.846 $15.610
======= ======= ======= ======= ======= =======
Total Return (a)..... 5.35%* 8.23% 2.33% 14.70% (5.62%) 6.37%*
Net Assets at End of
the Period (In
millions)........... $63.2 $38.6 $18.8 $9.5 $7.6 $5.2
Ratio of Expenses to
Average Net Assets
(b)................. 1.68% 1.71% 1.75% 1.69% 1.64% 1.82%
Ratio of Net
Investment Income to
Average Net Assets
(b)................. 4.90% 5.24% 5.84% 6.19% 5.71% 5.21%
Portfolio Turnover... 66%* 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 and 1996, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to the
Adviser's reimbursement of certain expenses was less than 0.01%.
28
<PAGE> 31
APPENDIX -- DESCRIPTION
OF SECURITIES RATINGS
STANDARD & POOR'S -- A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P follows):
A S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of payment--capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation:
2. Nature of and provisions of the obligation:
3. Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditor's rights.
LONG-TERM DEBT -- INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to meet
its financial commitment on the obligation is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only in small degree.
Capacity to meet its financial commitment on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligations in higher rated
categories. Capacity to meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to meet its financial commitment on the obligation.
SPECULATIVE GRADE
BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: Debt rated "BB" is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated "B" is more vulnerable to nonpayment than obligations rated "BB",
but the obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to nonpayment.
29
-
<PAGE> 32
C: The "C" rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this obligation
are being continued.
D: Debt rated "D" is in payment default. The "D" rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The "D" rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity concerns and market access risks unique
to notes. Notes due in 3 years or less will likely receive a note rating. Notes
maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment.
- -- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
- -- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Strong or strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse Financial and economic changes over the term of the
notes.
SP-3: Speculative capacity to pay principal and interest.
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from 'A-1' for the highest
quality obligations to 'D' for the lowest. These categories are as follows:
A-1: A short-term obligation rated A-1 is rated in the highest category by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B: A short-term obligation rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C: A short-term obligation rated C is currently vulnerable to nonpayment and is
dependent on
30
-
<PAGE> 33
favorable business, financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D: A short-term obligation rated D is in payment default. The D rating is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of, such information.
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option or demand
feature as part of their structure.
The first rating addresses the likelihood of repayment of principal and interest
as due, and the second rating addresses only the demand feature. The long-term
debt rating symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols for the put option (for example, 'AAA/A-1+').
With short-term demand debt, S&P's note rating symbols are used with the
commercial paper rating symbols (for example, 'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE INC. -- A brief description of the applicable Moody's
Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payment
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as
31
-
<PAGE> 34
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date date to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk,
long-term secular trends for example, may be less important over the short run.
A short-term rating may also be assigned on an issue having a demand
feature-variable rate demand obligation. Such ratings will be designated as
VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as MIG 1 or
VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's assigns a MIG
or VMIG rating, all categories define an investment grade situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG. This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's makes no representation that such obligations are exempt
from registration under the Securities Act of 1933, nor does it represent that
any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (on supporting institutions) have a superior ability for
repayment of short-term debt obligations. Prime-1 repayment ability will often
be evidenced by many of the following characteristics:
- -- Leading market positions in well established industries.
32
-
<PAGE> 35
- -- High rates of return on funds employed.
- -- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- -- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- -- Well established access to a ranges of financial markets and assured sources
of alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term debt obligations. This will normally be evidenced by
many of the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supported institutions) have an acceptable ability for
repayment of short-term debt obligations. The effect of industry characteristics
and market compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection measurements
and may require relatively high financial leverage. Adequate alternate liquidity
is maintained.
Issuers rated Not Prime do not fall within any of the prime rating categories.
33
-
<PAGE> 36
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or redemptions, call
the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUND INFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN TAX FREE HIGH INCOME FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen Tax Free High Income Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Tax Free High Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 37
VAN KAMPEN
TAX FREE HIGH INCOME FUND
PROSPECTUS
JANUARY 28, 1999
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports,
which explain the market conditions and
investment strategies affecting the Fund's
recent performance.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling (800)
341-2911 from 7:00 a.m. to 7:00 p.m., Central
time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800) 421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC Public
Reference Room in Washington, DC or online at
the SEC's web site (http://www.sec.gov). For
more information, please call the SEC at (800)
SEC-0330. You can also request these materials
by writing the Public Reference Section of the
SEC, Washington DC, 20549-6009, and paying a
duplication fee.
[VAN KAMPEN FUNDS LOGO]
Investment Company Act File No.
811-4386.
TFHI PRO 1/99
<PAGE> 38
VAN KAMPEN
INSURED TAX FREE
INCOME FUND
Van Kampen Insured Tax Free Income Fund is a
mutual fund with an investment objective to
provide investors with a high level of current
income exempt from federal income tax, with
liquidity and safety of principal, primarily
through investment in a diversified portfolio
of insured municipal securities.
Shares of the Fund have not been approved or
disapproved by the Securities and Exchange
Commission (SEC) or any state regulators, and
neither the SEC nor any state regulator has
ruled on the accuracy or adequacy of this
prospectus. It is a criminal offense to state
otherwise.
This prospectus is dated JANUARY 28, 1999.
[VAN KAMPEN FUNDS LOGO]
<PAGE> 39
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary................................ 3
Fees and Expenses of the Fund...................... 5
Investment Objective and Policies.................. 6
Investment Advisory Services....................... 12
Purchase of Shares................................. 12
Redemption of Shares............................... 19
Distributions from the Fund........................ 20
Shareholder Services............................... 21
Federal Income Taxation............................ 23
Financial Highlights............................... 25
</TABLE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus, in connection with the offer contained in this prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
<PAGE> 40
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund is a mutual fund with an investment objective to provide investors with
a high level of current income exempt from federal income tax, with liquidity
and safety of principal, primarily through investment in a diversified portfolio
of insured municipal securities. There can be no assurance that the Fund will
achieve its investment objective.
INVESTMENT STRATEGIES
Under normal market conditions, the Fund's management seeks to achieve the
investment objective by investing substantially all of the Fund's assets in a
portfolio of municipal securities that are insured at the time of purchase as to
timely payment of both principal and interest by a top-rated private insurance
company. Under normal market conditions, up to 20% of the Fund's net assets may
be invested in municipal securities that are subject to federal alternative
minimum tax. Under normal market conditions, up to 10% of the Fund's total
assets may be invested in tax-exempt money market funds which are not insured.
The Fund may purchase or sell certain derivative instruments (such as options,
futures and options on futures, and interest rate swaps or other interest rate
related transactions) for various risk management and hedging purposes. The Fund
may purchase or sell securities on a when-issued or delayed delivery basis.
INVESTMENT RISKS
Because of the following risks, you could lose money on your investment in the
Fund over the short or long term:
MARKET RISK. The prices of income securities tend to fall as interest rates
rise. This "market risk" is usually greater among securities with longer
maturities. Because the Fund does not have a policy limiting the maturities of
its investments and the Fund may own securities with longer maturities, the Fund
will be subject to greater market risk than a fund that owns shorter-term
securities.
Generally, the Fund's municipal securities are insured as to timely payment of
both principal and interest by a top-rated private insurance company. This
insurance does not, however, guarantee that the prices of these securities will
remain stable during interest rate changes.
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitments for these securities, the greater the Fund's
exposure to market price fluctuation.
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest and principal. Credit risk should be low for the Fund because it
invests substantially all of its assets in insured municipal securities.
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates, which can vary widely over the short and long term. If interest rates
drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of municipal
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would be reinvested by the Fund in securities with the new, lower
interest rates, resulting in a possible decline in the Fund's income and
distributions to shareholders.
-
UNDERSTANDING
MUNICIPAL SECURITIES
Municipal securities, including municipal bonds, notes or leases, generally
are issued by state and local governments or regional governmental
authorities to raise money for their daily operations or special projects.
The interest received from municipal securities generally is exempt from to
federal income tax. In addition, the interest may be exempt from certain
state or local taxes when received from issuers who are located in the
investors' home state, municipality or region. The interest from certain
municipal securities is a preference item subject to federal alternative
minimum tax.
3
<PAGE> 41
MUNICIPAL SECURITIES RISK. The Fund invests substantially all of its assets in
insured municipal securities. The yields of municipal securities, or of insured
municipal securities, may move differently and adversely compared to the yields
of the overall debt securities markets. While the interest received from
municipal securities generally is exempt from federal income tax, the Fund may
invest up to 20% of its net assets in municipal securities subject to federal
alternative minimum tax. In addition, there could be changes in applicable tax
laws or tax treatments that reduce or eliminate the current federal income tax
exemption on municipal securities or otherwise adversely affect the current
federal or state tax status of municipal securities.
RISKS OF USING DERIVATIVE INVESTMENTS. In general terms, a derivative investment
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures and options on futures, interest
rate swaps and other interest rate-related transactions are examples of
derivatives. Such transactions involve risks different from the direct
investment in underlying securities such as imperfect correlation between the
value of the instruments and the underlying assets; risks of default by the
other party to certain transactions; risks that the transactions may incur
losses that partially or completely offset gains in portfolio positions; risks
that the transactions may not be liquid; and manager risk.
MANAGER RISK. As with any fund, the Fund's management may not be successful in
selecting the best-performing securities and the Fund's performance may lag
behind that of similar funds.
An investment in the Fund is not a deposit of any bank or other insured
depository institution. Your investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
INVESTOR PROFILE
In light of its objective and investment strategies, the Fund may be appropriate
for investors who:
- - Seek current income.
- - Are in a high federal income tax bracket.
- - Wish to add to their personal investment portfolio a fund that invests
substantially all of its assets in insured municipal securities.
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program, and investors should consider
their long-term investment goals and financial needs when making an investment
decision about the Fund. An investment in the Fund is intended to be a long-term
investment, and the Fund should not be used as a trading vehicle.
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance varies from year to year. The following chart shows the annual
returns of the Fund's Class A Shares over the past ten calendar years prior to
the date of this prospectus. Sales loads are not reflected in this chart. If
these sales loads had been included, the returns shown below would have been
lower. Remember that the past performance of the Fund is not indicative of its
future performance.
BAR GRAPH
<TABLE>
<CAPTION>
ANNUAL RETURN
-------------
<S> <C>
'1989 9.37
'1990 7.07
'1991 10.62
'1992 9.51
'1993 12.32
'1994 -6.31
'1995 17.49
'1996 3.64
'1997 8.19
'1998 5.65
</TABLE>
The annual return variability of the Fund's Class B Shares and Class C Shares
would be substantially similar to that shown for the Class A Shares because all
of the Fund's shares are invested in the same portfolio of securities; however,
the actual annual returns of the Class B Shares and Class C Shares would be
lower than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
During the ten-year period shown in the bar chart, the highest quarterly return
was 7.35% (for the quarter ended March 31, 1995) and the lowest quarterly return
was -6.08% (for the quarter ended March 31, 1994).
4
-
<PAGE> 42
COMPARATIVE PERFORMANCE
This table shows how the Fund's performance compares with the Lehman Brothers
Municipal Bond Index, a broad-based market index that the Fund's management
believes is an applicable benchmark for the Fund. Average annual total returns,
assuming payment of the maximum sales charges, are shown for the one-, five-,
and ten-year periods ended December 31, 1998 (the most recently completed
calendar year prior to the date of this prospectus). Remember that the past
performance of the Fund is not indicative of its future performance.
<TABLE>
<CAPTION>
Average Annual
Total Returns Past 10
for the Years
Periods Ended Past Past or Since
December 31, 1998 1 Year 5 Years Inception
- -------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Van Kampen
Insured Tax Free
Income Fund
.......................................................
Class A Shares 0.62% 4.43% 8.75%
.......................................................
Class B Shares 0.89% 4.41% 5.02%(1)
.......................................................
Class C Shares 3.87% 4.66% 4.84%(2)
.......................................................
Lehman Brothers
Municipal Bond
Index 6.48% 6.22% 8.22%
.......................................................
</TABLE>
Inception dates: (1) 5/1/93, (2) 8/13/93.
The current yield for the thirty-day period ended September 30, 1998 is 3.11%
for Class A Shares, 2.49% for Class B Shares and 2.51% for Class C Shares.
Investors can obtain the current yield of the Fund for each class of shares by
calling (800) 341-2911.
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum sales charge
(load) imposed on
purchases (as a
percentage of
offering price) 4.75%(1) None None
..............................................................
Maximum deferred
sales charge (load)
(as a percentage of
the lesser of
original purchase
price or redemption
proceeds) None(2) Year 1-4.00% Year 1-1.00%
Year 2-3.75% After-None
Year 3-3.50%
Year 4-2.50%
Year 5-1.50%
Year 6-1.00%
After-None
..............................................................
Maximum sales charge
(load) imposed on
reinvested dividends
(as a percentage of
offering price) None None None
..............................................................
Redemption fees (as a
percentage of amount None None None
redeemed)
..............................................................
Exchange fee None None None
..............................................................
</TABLE>
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares -- Class A Shares."
5
-
<PAGE> 43
ANNUAL FUND
OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50%
..............................................................
Distribution and/or 0.24% 1.00%(2) 1.00%(2)
Service (12b-1)
Fees(1)
..............................................................
Other Expenses 0.16% 0.16% 0.16%
..............................................................
Total Annual Fund 0.90% 1.66% 1.66%
Operating Expenses
..............................................................
</TABLE>
(1) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(2) Because Distribution and/or Service (12b-1) Fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges. Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by National Association of
Securities Dealers, Inc. rules.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% annual return each year and
that the Fund's operating expenses remain the same each year (except for the
ten-year amounts for Class B Shares which reflect the conversion of Class B
Shares to Class A Shares after eight years). Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
---- ----- ------ ------
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $562 $748 $950 $1,530
......................................................................
Class B Shares $569 $873 $1,052 $1,763*
......................................................................
Class C Shares $269 $523 $902 $1,965
......................................................................
</TABLE>
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $562 $748 $950 $1,530
......................................................................
Class B Shares $169 $523 $902 $1,763*
......................................................................
Class C Shares $169 $523 $902 $1,965
......................................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
To simplify comparison among funds, all funds are required by the SEC to assume
a 5% annual return. Class B Shares of the Fund acquired through the exchange
privilege are subject to the contingent deferred sales charge schedule of the
fund from which the shareholder's purchase of Class B Shares was originally
made. Accordingly, future expenses as projected could be higher than those
determined in the above table if the investor's Class B Shares were exchanged
from a fund with a higher contingent deferred sales charge. The Fund's actual
annual return and actual expenses for future periods may be greater or less than
those shown.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide investors with a high level of
current income exempt from federal income tax, with liquidity and safety of
principal, primarily through investment in a diversified portfolio of insured
municipal securities. The Fund's investment objective is a fundamental policy
and may not be changed without shareholder approval of the holders of a majority
of the Fund's outstanding voting securities, as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"). There are risks inherent in
all investments in securities; accordingly there can be no assurance the Fund
will achieve its investment objective.
Under normal market conditions, the Fund's management seeks to achieve the
investment objective by investing substantially all of the Fund's assets in
municipal securities that are insured at the time of purchase as to timely
payment of both principal and interest by an entity whose claims-paying ability
is rated AAA by Standard and Poor's ("S&P") or Aaa by Moody's Investors Service,
Inc. ("Moody's") or
6
-
<PAGE> 44
an equivalent rating by another nationally recognized statistical rating
organization ("NRSRO"). Under normal market conditions, up to 20% of the Fund's
net assets may be invested in municipal securities that are subject to
alternative minimum tax. From time to time, the Fund temporarily may invest up
to 10% of its total assets in tax exempt money market funds, which are not
insured, and such instruments will be treated as investments in municipal
securities.
The Fund's investment adviser will buy and sell securities for the Fund's
portfolio with a view to seeking a high level of current income exempt from
federal income tax and will select securities which the Fund's investment
adviser believes entail reasonable credit risk considered in relation to the
investment policies of the Fund. As a result, the Fund will not necessarily
invest in the highest yielding municipal securities permitted by its investment
policies if the Fund's investment adviser determines that market risks or credit
risks associated with such investments would subject the Fund's portfolio to
undue risk. The potential for realization of capital gains resulting from
possible changes in interest rates will not be a major consideration. Other than
for tax purposes, frequency of portfolio turnover generally will not be a
limiting factor if the Fund's investment adviser considers it advantageous to
purchase or sell securities.
MUNICIPAL SECURITIES
Municipal securities are obligations issued by or on behalf of states,
territories or possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest on
which, in the opinion of bond counsel or other counsel to the issuers of such
securities, is, at the time of issuance, exempt from federal income tax. Under
normal market conditions, at least 80% of the Fund's total assets will be
invested in municipal securities. The policy stated in the foregoing sentence is
a fundamental policy of the Fund and may not be changed without shareholder
approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the 1940 Act. Under normal market conditions, up to
20% of the Fund's net assets may be invested in municipal securities that are
subject to federal alternative minimum tax.
The issuers of municipal securities obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
securities may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to lend to other public
institutions and facilities. Certain types of municipal securities are issued to
obtain funding for privately operated facilities.
The yields of municipal securities depend on, among other things, general money
market conditions, general conditions of the municipal securities market, size
of a particular offering, the maturity of the obligation and rating of the
issue. The ratings of S&P and Moody's represent their opinions of the quality of
the municipal securities they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may
have different yields while municipal securities of the same maturity and coupon
with different ratings may have the same yield.
The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special delegation" securities. "General
obligation" securities are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. "Revenue" securities
are usually payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Industrial development bonds are usually
revenue securities, the credit quality of which is normally directly related to
the credit standing of the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, variable rate demand notes, municipal leases,
custodial receipts, participation certificates and derivative municipal
securities (which include terms or elements similar in to certain strategic
transactions described below). Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to reflect market
rates of interest. The Fund also may also invest in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest. Investment in such securities involve special risks as
compared to a fixed rate municipal security. The extent of increases and
7
-
<PAGE> 45
decreases in the value of derivative variable rate securities and the
corresponding change to the net asset value of the Fund generally will be larger
than comparable changes in the value of an equal principal amount of a fixed
rate municipal security having similar credit quality, redemption provisions and
maturity. The markets for such securities may be less developed and have less
liquidity than the markets for conventional municipal securities. The Fund will
not invest more than 15% of its total assets in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Municipal notes include tax, revenue and
bond anticipation notes of short maturity, generally less than three years,
which are issued to obtain temporary funds for various public purposes. Variable
rate demand notes are obligations which contain a floating or variable interest
rate adjustment formula and which are subject to a right of demand for payment
of the principal balance plus accrued interest either at any time or at
specified intervals. The interest rate on a variable rate demand note may be
based on a known lending rate, such as a bank's prime rate, and may be adjusted
when such rate changes, or the interest rate may be a market rate that is
adjusted at specified intervals. The adjustment formula maintains the value of
the variable rate demand note at approximately the par value of such note at the
adjustment date. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Certain municipal lease obligations may include "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Custodial receipts are underwritten by
securities dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities. Participation
certificates are obligations issued by state or local governments or authorities
to finance the acquisition of equipment and facilities. They may represent
participations in a lease, an installment purchase contract, or a conditional
sales contract. Municipal securities may not be backed by the faith, credit and
taxing power of the issuer. Other than as set forth above, there is no
limitation with respect to the amount of the Fund's assets that may be invested
in the foregoing types of municipal securities. Certain of the municipal
securities in which the Fund may invest represent relatively recent innovations
in the municipal securities markets and the markets for such securities may be
less developed than the market for conventional fixed rate municipal securities.
A more detailed description of the types of municipal securities in which the
Fund may invest is included in the Statement of Additional Information.
Under normal market conditions, longer term municipal securities generally
provide a higher yield than shorter term municipal securities. The Fund has no
limitation as to the maturity of municipal securities in which it may invest.
The Fund's investment adviser may adjust the average maturity of the Fund's
portfolio from time to time depending on its assessment of the relative yields
available on securities of different maturities and its expectations of future
changes in interest rates.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund will invest primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities generally can be
expected to rise. Conversely, when interest rates rise, the value of a portfolio
invested in fixed income securities generally can be expected to decline. The
prices of longer term municipal securities generally are more volatile with
respect to changes in interest rates than the prices of shorter term municipal
securities. Volatility may be greater during periods of general economic
uncertainty.
Although the Fund invests substantially all of its assets in municipal
securities that are insured at the time of purchase as to timely payment of both
principal and interest, municipal securities, like other debt obligations, are
subject to the credit risk of non-payment. The ability of issuers of municipal
securities to make timely payments of interest and principal may be adversely
impacted in general economic downturns and as relative governmental cost burdens
are allocated and reallocated among federal, state and local governmental units.
Such non-payment would result in a reduction of income to the Fund, and could
result in a reduction in the value of the municipal securities experiencing
non-payment and a potential decrease in the net asset value of the Fund. In
addition, the Fund may incur expenses to work out or restructure a distressed or
defaulted security.
8
-
<PAGE> 46
The Fund may invest up to 20% of its net assets in municipal securities that are
subject to federal alternative minimum tax. The Fund may not be a suitable
investment for investors who are already subject to the federal alternative
minimum tax or who would become subject to the federal alternative minimum tax
as a result of an investment in the Fund.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the current federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected and the Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
The Fund generally considers investments in municipal securities no to be
subject to industry concentration policies (issuers of municipal securities as a
group are not an industry) and the Fund may invest in municipal securities
issued by entities having similar characteristics. The issuers may be located in
the same geographic area or may pay their interest obligations from revenue of
similar projects, such as hospitals, airports, utility systems and housing
finance agencies. This may make the Fund's investments more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation in the Fund's net asset value
also increases. The Fund may invest more than 25% of its total assets in a
segment of the municipal securities market with similar characteristics if the
Fund's investment adviser determines that the yields available from obligations
in a particular segment justify the additional risks of a larger investment in
such segment. The Fund may not, however, invest more than 25% of its total
assets in industrial development revenue bonds issued for companies in the same
industry. Sizeable investments in such obligations could involve an increased
risk to the Fund should any of such issuers or any such related projects or
facilities experience financial difficulties.
The Fund has no fundamental policy limiting its investments in municipal
securities whose issuers are located in the same state. However, it is not the
present intention of the Fund to invest more than 25% of the value of its total
assets in issuers located in the same state. If the Fund were to invest more
than 25% of its total assets in issuers located in the same state, it would be
more susceptible to adverse economic, business, or regulatory conditions in that
state.
From time to time, the Fund's investments may include securities as to which the
Fund, by itself or together with other funds or accounts managed by the Fund's
investment adviser, holds a major portion or all of an issue of municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Fund's investment adviser believes it is advisable to do so.
INSURED MUNICIPAL SECURITIES
The Fund invests substantially all of its assets in a portfolio of municipal
securities that are insured at the time of investment as to timely payment of
both principal and interest by a top-rated private insurance company. Such
insurance could be provided as: Original Issue Insurance, Secondary Market
Insurance or Portfolio Insurance. Original Issue Insurance is purchased with
respect to a particular issue of municipal securities by the issuer thereof or a
third party in conjunction with the original issue of such municipal securities.
Secondary Market Insurance is purchased by the Fund or a third party subsequent
to the time of original issuance of a municipal security. Both Original Issue
Insurance and Secondary Market Insurance remain in effect as long as the
municipal securities covered thereby remain outstanding and the insurer remains
in business, regardless of whether the Fund ultimately disposes of such
municipal securities. Portfolio Insurance may be purchased by the Fund with
respect to municipal securities which the Fund intends to purchase or already
owns and would generally terminate when the municipal security is sold by the
Fund or redeemed. There is no limitation on the percentage of the Fund's assets
that may be invested in municipal securities insured by any type of insurance or
by any given insurer.
Original Issue Insurance, Secondary Market Insurance and Portfolio Insurance
generally do not insure payment on an accelerated basis, the payment of any
redemption premium or the market value of the Fund's portfolio securities. Such
insurance also does not insure against nonpayment of principal or interest on
municipal securities resulting from the insolvency, negligence or any other act
or omission of the trustee or other paying agent for such obligations.
9
-
<PAGE> 47
The Fund invests in municipal securities insured by insurers whose claims-paying
ability is rated AAA by S&P, Aaa by Moody's or the equivalent by another NRSRO
at the time of the Fund's investment. A subsequent downgrade by S&P, Moody's or
another NRSRO of an insurer's claims-paying ability may result in increased
credit risk of the municipal securities insured by such insurer and may result
in a downgrade of the rating assigned to the municipal securities insured by
such insurer. The securities could experience a decrease in market price as a
result of such a downgrade. In the event the ratings assigned to such municipal
securities decline to below investment grade, such municipal securities would
probably become less liquid or even illiquid. There can be no assurance that an
insurer will be able to honor its obligations with respect to municipal
securities in the Fund's portfolio. For more information on insurance and a
description of S&P's and Moody's claims-paying ability ratings of insurers, see
the Statement of Additional Information.
OTHER INVESTMENTS AND RISK FACTORS
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income indices and other financial instruments, purchase and sell
financial futures contracts and enter into various interest rate transactions
such as swaps, caps, floors or collars. Collectively, all of the above are
referred to as "Strategic Transactions." Strategic Transactions may be used to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the investment adviser's ability to predict pertinent market
movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. Strategic Transactions have risks associated with them including
possible default by the other party to the transaction, illiquidity and, to the
extent the investment adviser's view as to certain market movements is
incorrect, the risk that the use of such Strategic Transactions could result in
losses greater than if they had not been used. Use of put and call options may
result in losses to the Fund, force the sale of portfolio securities at
inopportune times or for prices other than at current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the risk management or hedging instrument may be greater than gains in the
value of the Fund's position. In addition, futures and options markets may not
be liquid in all circumstances and certain over-the-counter options may have no
markets. As a result, in certain markets, the Fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and their risks are described more
fully in the Fund's Statement of Additional Information. Income earned or deemed
to be earned by the Fund from its Strategic Transactions, if any, generally will
be taxable income of the Fund.
The Fund may purchase and sell municipal securities on a "when-issued" or
"delayed delivery" basis whereby the Fund buys or sells a security with payment
and delivery taking place in the future. The payment obligation and the interest
rate are fixed at the time the Fund enters into the commitment. No income
accrues to the Fund on municipal securities in connection with such transactions
prior to the date the Fund actually takes delivery of such securities.
10
-
<PAGE> 48
These transactions are subject to market risk as the value or yield of a
municipal security at delivery may be more or less than the purchase price or
the yield generally available on municipal securities when delivery occurs. In
addition, the Fund is subject to counterparty risk because it relies on the
buyer or seller, as the case may be, to consummate the transaction, and failure
by the other party to complete the transaction may result in the Fund missing
the opportunity of obtaining a price or yield considered to be advantageous. The
Fund will only make commitments to purchase such securities with the intention
of actually acquiring these securities, but the Fund may sell these securities
prior to settlement if it is deemed advisable. No specific limitation exists as
to the percentage of the Fund's assets which may be used to acquire securities
on a "when-issued" or "delayed delivery" basis.
The Fund may invest up to 15% of the Fund's net assets in illiquid and certain
restricted securities. Such securities may be difficult or impossible to sell at
the time and the price that the Fund would like. Thus, the Fund may have to sell
such securities at a lower price, sell other securities instead to obtain cash
or forego other investment opportunities.
The Fund may borrow amounts up to 5% of its total assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its total assets to
secure such borrowings.
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
Additional Information which can be obtained by investors free of charge as
described on the back cover of this prospectus.
Although the Fund does not intend to engage in substantial short-term trading,
it may sell securities without regard to the length of time they have been held
in order to take advantage of new investment opportunities or yield
differentials or otherwise. The Fund's portfolio turnover is shown under the
heading "Financial Highlights". The portfolio turnover rate may be expected to
vary from year to year. A high portfolio turnover rate (100% or more) increases
the Fund's transactions costs, including brokerage commissions or dealer costs,
and may result in the realization of more short-term capital gains than if the
Fund had a lower portfolio turnover. The turnover rate will not be a limiting
factor, however, if the Fund's investment adviser considers portfolio changes
appropriate.
When market conditions dictate a more "defensive" investment strategy, the Fund
may invest on a temporary basis a portion or all of its assets in high-quality,
short-term municipal obligations. Furthermore, if such high-quality, short-term
securities are not available or, in the investment adviser's judgment, do not
afford sufficient protection against adverse market conditions, the Fund may
invest in taxable obligations. Such taxable obligations may include in
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, other investment grade quality income securities, prime
commercial paper, certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of at least $500 million, and
repurchase agreements. The effect of taking such a defensive position may be
that the Fund does not achieve its investment objective.
YEAR 2000 RISKS. Like other mutual funds, financial and business organizations
and individuals around the world, the Fund could be adversely affected if the
computer systems used by the Fund's investment adviser and other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." The Fund's investment adviser is taking steps that it believes are
reasonably designed to address the Year 2000 Problem with respect to computer
systems that it uses and to obtain reasonable assurances that comparable steps
are being taken by the Fund's other major service providers. At this time, there
can be no assurances that these steps will be sufficient to avoid any adverse
impact to the Fund. In addition, the Year 2000 Problem may adversely affect the
markets and the issuers of securities in which the Fund may invest which, in
turn, may adversely affect the net asset value of the Fund. Improperly
functioning trading systems may result in settlement problems and liquidity
issues. In addition, corporate and governmental data processing errors may
result in production problems for individual companies or issuers and overall
economic uncertainty. Earnings of individual issuers will be affected by
remediation costs, which may be substantial and may be reported inconsistently
in U.S. and foreign financial statements. Accordingly, the Fund's investments
may be adversely affected. The statements above are subject to the Year 2000
Information and Readiness Disclosure Act which Act
11
-
<PAGE> 49
may limit the legal rights regarding the use of such statements in the case of a
dispute.
INVESTMENT ADVISORY
SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp."). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $50 billion under management or supervision. Van
Kampen Investments' more than 50 open-end and 39 closed-end funds and more than
2,500 unit investment trusts are professionally distributed by leading financial
advisers nationwide. Van Kampen Funds Inc., the distributor of the Fund (the
"Distributor") and the sponsor of the funds mentioned above, is also a wholly
owned subsidiary of Van Kampen Investments. Van Kampen Investments is an
indirect wholly owned subsidiary of Morgan Stanley Dean Witter & Co. The
Adviser's principal office is located at 1 Parkview Plaza, PO Box 5555, Oakbrook
Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed based upon an annual rate applied to average daily net assets of the
Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
- ------------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.525%
......................................................
Next $500 million 0.500%
......................................................
Next $500 million 0.475%
......................................................
Over $1,500 million 0.450%
......................................................
</TABLE>
Applying this fee schedule, the Fund paid the Adviser an advisory fee at the
effective rate of 0.50% of the Fund's average net assets for the Fund's fiscal
period ended September 30, 1998.
Under the Advisory Agreement, the Fund also reimburses the Adviser for the cost
of the Fund's accounting services, which include maintaining its financial books
and records and calculating its daily net asset value. Other operating expenses
paid by the Fund include service fees, distribution fees, custodial fees, legal
and accounting fees, the costs of reports and proxies to shareholders, trustees'
fees (other than those who are affiliated persons of the Adviser, Distributor or
Van Kampen Investments) and all other business expenses not specifically assumed
by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes of Ethics permit directors, trustees,
officers and employees to buy and sell securities for their personal accounts
subject to certain restrictions. Persons with access to certain sensitive
information are subject to pre-clearance and other procedures designed to
prevent conflicts of interest.
PORTFOLIO MANAGEMENT. Joseph A. Piraro, a Vice President of the Adviser, has
been primarily responsible for the day-to-day management of the Fund's portfolio
since May 1992. Mr. Piraro has been employed by the Adviser since 1992 and was
previously employed by First Chicago Capital Markets.
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each
12
-
<PAGE> 50
investor to choose the class of shares that is most beneficial given the amount
to be invested and the length of time the investor expects to hold the shares.
Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Both
minimums may be waived by the Distributor for plans involving periodic
investments.
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares bear the sales charge expenses at the time of redemption and any
expenses (including higher distribution fees and transfer agency costs)
resulting from such deferred sales charge arrangement, (ii) generally, each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan (described below) pursuant to which its
distribution fee or service fee is paid, (iii) each class of shares has
different exchange privileges, (iv) certain classes of shares are subject to a
conversion feature and (v) certain classes of shares have different shareholder
service options available.
The price of the Fund's shares is based upon the Fund's net asset value per
share. The net asset values per share of the Class A Shares, Class B Shares and
Class C Shares are generally expected to be substantially the same. In certain
circumstances, however, the per share net asset values of the classes of shares
may differ from one another, reflecting the daily expense accruals of the higher
distribution fees and transfer agency costs applicable to the Class B Shares and
Class C Shares and the differential in the dividends that may be paid on each
class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on:
customary business holidays, any day on which no purchase or redemption orders
are received or there is not a sufficient degree of trading in the Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Fund reserves the right to calculate the net asset
value per share and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable. Net asset value per share for
each class is determined by dividing the value of the Fund's portfolio
securities, cash and other assets (including accrued interest) attributable to
such class, less all liabilities (including accrued expenses) attributable to
such class, by the total number of shares of the class outstanding. Portfolio
securities are valued by using market quotations, prices provided by market
makers or estimates of market values determined in good faith based upon yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees of the Fund.
Securities with remaining maturities of 60 days or less are valued at amortized
cost when amortized cost is determined in good faith by or under the direction
of the Board of Trustees of the Fund to be representative of the fair value at
which it is expected such securities may be resold. Any securities or other
assets for which current market quotations are not readily available are valued
at their fair value as determined in good faith under procedures established by
and under the general supervision of the Board of Trustees of the Fund.
The Fund has adopted a distribution plan (the "Distribution Plan") with respect
to each class of its shares pursuant to Rule 12b-1 under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Fund also has adopted a service
plan (the "Service Plan") with respect to each class of its shares. The
Distribution Plan and the Service Plan provide that the Fund may pay
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders of each class.
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. The net income attributable to a class of shares and the
dividends payable on such class of shares will be reduced by the amount of the
distribution fees and other expenses associated with such class of shares. To
assist investors in comparing classes of shares, the tables under the heading
"Fees and Expenses of the Fund" provide a summary of sales charges and expenses
and an example of the sales charges and expenses applicable to each class of
shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza, PO
Box
13
-
<PAGE> 51
5555, Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through
members of the National Association of Securities Dealers, Inc. ("NASD") who are
acting as securities dealers ("dealers") and NASD members or eligible non-NASD
members who are acting as brokers or agents or investors ("brokers"). "Dealers"
and "brokers" are sometimes referred to herein as "authorized dealers."
Shares may be purchased on any business day by completing the application
accompanying this prospectus and forwarding the application, directly or through
an authorized dealer, to the Fund's shareholder service agent, Van Kampen
Investor Services Inc. ("Investor Services"), a wholly owned subsidiary of Van
Kampen Investments. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A Shares, Class B Shares or Class C Shares.
Sales personnel of authorized dealers distributing the Fund's shares are
entitled to receive compensation for selling such shares and may receive
differing compensation for selling Class A Shares, Class B Shares or Class C
Shares.
The price paid for shares purchased is based on the next calculation of net
asset value per share (plus sales charges, where applicable) after an order is
received by Investors Services. Orders received by authorized dealers are priced
based on the date of receipt provided such order is transmitted to Investor
Services prior to Investors Services' close of business on such date. Orders
received by authorized dealers or transmitted to Investor Services after its
close of business are priced based on the date of the next computed net asset
value per share provided they are received by Investor Services prior to
Investor Services' close of business on such date. It is the responsibility of
authorized dealers to transmit orders received by them Investor Services so they
will be received in a timely manner. Orders of less than $500 generally are
mailed by the authorized dealer and processed at the offering price next
calculated after receipt by Investor Services.
Shares of the Fund may be sold in foreign countries where permissible. The Fund
and the Distributor reserve the right to refuse any order for the purchase of
shares. The Fund also reserves the right to suspend the sale of the Fund's
shares in response to conditions in the securities markets or for other reasons.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gains
distributions, unless the investor instructs the Fund otherwise. Investors
wishing to receive cash instead of additional shares should contact the Fund at
(800) 341-2911 or by writing to the Fund, c/o Van Kampen Investors Services
Inc., PO Box 418256, Kansas City, MO 64141-9256.
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 4.75% of the offering price (or 4.99% of the net amount
invested), reduced on investments of $100,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of
Size of Offering Net Amount
Investment Price Invested
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.75% 4.99%
..........................................................
$100,000 but less than
$250,000 3.75% 3.90%
..........................................................
$250,000 but less than
$500,000 2.75% 2.83%
..........................................................
$500,000 but less than
$1,000,000 2.00% 2.04%
..........................................................
$1,000,000 or more * *
..........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1.00% on certain redemptions made within one year of
the purchase. The contingent deferred sales charge is assessed on an amount
equal to the lesser of the then current market value or the cost of the shares
being redeemed. Accordingly, no sales charge is imposed on increases in net
asset value above the initial purchase price.
The Fund may spend an aggregate amount up to 0.25% per year of the average daily
net assets attributable to the Class A Shares of the Fund pursuant to the
Distribution Plan and Service Plan. From such amount, the Fund may spend up to
0.25% per year of the Fund's average daily net assets attributable to the Class
A Shares pursuant to the Service Plan in connection with the ongoing provision
of services to holders of such shares by the Distributor and by brokers, dealers
or financial intermediaries and in connection with the maintenance of such
shareholders' accounts.
14
-
<PAGE> 52
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
deferred sales charge if redeemed within six years of purchase as shown in the
table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
as a Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
- ------------------------------------------------
<S> <C> <C> <C>
First 4.00%
................................................
Second 3.75%
................................................
Third 3.50%
................................................
Fourth 2.50%
................................................
Fifth 1.50%
................................................
Sixth 1.00%
................................................
Seventh and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
It is presently the policy of the Distributor not to accept any order for Class
B Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for the purchase of Class B Shares
until the time of redemption of such shares. Solely for purposes of determining
the number of years from the time of any payment for the purchase of shares, all
payments during a month are aggregated and deemed to have been made on the last
day of the month.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and then of shares held the longest in the shareholder's account.
The Fund may spend up to 0.75% per year of the average daily net assets
attributable to the Class B Shares of the Fund pursuant to the Distribution
Plan. In addition, the Fund may spend up to 0.25% per year of the Fund's average
daily net assets attributable to the Class B Shares pursuant to the Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
deferred sales charge of 1.00% of the dollar amount subject to charge if
redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
It is presently the policy of the Distributor not to accept any order for Class
C Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and then of shares held the longest in the shareholder's account.
The Fund may spend up to 0.75% per year of the average daily net assets
attributable to the Class C Shares of the Fund pursuant to the Distribution
Plan. In addition, the Fund may spend up to 0.25% per year of the Fund's average
daily net assets attributable to the Class C Shares pursuant to the Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
15
-
<PAGE> 53
connection with the maintenance of such shareholders' accounts.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment
plan shares received thereon, automatically convert to Class A Shares eight
years after the end of the calendar month in which the shares were purchased.
Class B Shares purchased before June 1, 1996, and any dividend reinvestment plan
shares received thereon, automatically convert to Class A Shares seven years
after the end of the calendar month in which the shares were purchased. Class C
Shares purchased before January 1, 1997, and any dividend reinvestment plan
shares received thereon, automatically convert to Class A Shares ten years after
the end of the calendar month in which such shares were purchased. Such
conversion will be on the basis of the relative net asset values per share,
without the imposition of any sales load, fee or other charge. The conversion
schedule applicable to a share of the Fund acquired through the exchange
privilege from another Van Kampen fund is determined by reference to the Van
Kampen fund from which such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or distributions constituting
"preferential dividends" under the federal income tax law and (ii) the
conversion of shares does not constitute a taxable event under federal income
tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) in
connection with required minimum distributions from an individual retirement
account ("IRA") or certain other retirement plan distributions, (iii) pursuant
to the Fund's systematic withdrawal plan but limited to 12% annually of the
initial value of the account, (iv) in circumstances under which no commission or
transaction fee is paid to authorized dealers at the time of purchase of such
shares and (v) effected pursuant to the right of the Fund to involuntarily
liquidate a shareholder's account as described under the heading "Redemption of
Shares." The contingent deferred sales charge also is waived on redemptions of
Class C Shares as it relates to the reinvestment of redemption proceeds in
shares of the same class of the Fund within 180 days after redemption. For a
more complete description of contingent deferred sales charge waivers, please
refer to the Statement of Additional Information or contact your authorized
dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced sales charges. Investors, or their authorized
dealers, must notify the Fund at the time of the purchase order whenever a
quantity discount is applicable to purchases. Upon such notification, an
investor will receive the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a " company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds
16
-
<PAGE> 54
plus the current offering price of all shares of the Participating Funds which
have been previously purchased and are still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as out-lined in the Class A Shares sales
charge table. The size of investment shown in the Class A Shares sales charge
table also includes purchases of shares of the Participating Funds over a
13-month period based on the total amount of intended purchases plus the value
of all shares of the Participating Funds previously purchased and still owned.
An investor may elect to compute the 13-month period starting up to 90 days
before the date of execution of a Letter of Intent. Each investment made during
the period receives the reduced sales charge applicable to the total amount of
the investment goal. The initial purchase must be for an amount equal to at
least 5% of the minimum total purchase amount of the level selected. If trades
not initially made under a Letter of Intent subsequently qualify for a lower
sales charge through the 90-day back-dating provisions, an adjustment will be
made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustment in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. The Fund
initially will escrow shares totaling 5% of the dollar amount of the Letter of
Intent to be held by Investor Services in the name of the shareholder. In the
event the Letter of Intent goal is not achieved within the period, the investor
must pay the difference between the sales charge applicable to the purchases
made and the sales charges previously paid. Such payments may be made directly
to the Distributor or, if not paid, the Distributor will liquidate sufficient
escrowed shares to obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges in
connection with the unit investment trust reinvestment program and purchases by
registered representatives of selling firms or purchases by persons affiliated
with the Fund or the Distributor. The Fund reserves the right to modify or
terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund, at net asset value per share and with no minimum initial or
subsequent investment requirement, if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by the Fund and the Distributor. The total sales charge for all other
investments made from unit trust distributions will be 1.00% of the offering
price (1.01% of net asset value). Of this amount, the Distributor will pay to
the authorized dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their authorized dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each participating investor in a computerized format fully
compatible with Investor Services' processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a quarterly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value, upon written assurance that the purchase is made for investment
purposes and that the shares will not be resold except through redemption by the
Fund, by:
(1) Current or retired trustees or directors of funds advised by Asset
Management or Advisory Corp. and such persons' families and their beneficial
accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries, employees of an
17
-
<PAGE> 55
investment subadviser to any fund described in (1) above or an affiliate of
such subadviser, and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21 years
of age when purchasing for any accounts they beneficially own, or, in the
case of any such financial institution, when purchasing for retirement plans
for such institution's employees; provided that such purchases are otherwise
permitted by such institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers through
which purchases are made an amount up to 0.50% of the amount invested, over
a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor and
which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Statement of Additional
Information for further details with respect to such alliance programs.
(6) Beneficial owners of shares of Participating Funds held by a retirement plan
or held in a tax-advantaged retirement account who purchase shares of the
Fund with proceeds from distributions from such a plan or retirement account
other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit plans
qualified under Section 401(a) of the Code, or custodial accounts held by a
bank created pursuant to Section 403(b) of the Code and sponsored by
non-profit organizations defined under Section 501(c)(3) of the Code and
assets held by an employer or trustee in connection with an eligible
deferred compensation plan under Section 457 of the Code. Such plans will
qualify for purchases at net asset value provided, for plans initially
establishing accounts with the Distributor in the Participating Funds after
February 1, 1997, that (1) the initial amount invested in the Participating
Funds is at least $500,000 or (2) such shares are purchased by an employer
sponsored plan with more than 100 eligible employees. Such plans that have
been established with a Participating Fund or have received proposals from
the Distributor prior to February 1, 1997 based on net asset value purchase
privileges previously in effect will be qualified to purchase shares of the
Participating Funds at net asset value for accounts established on or before
May 1, 1997. Section 403(b) and similar accounts for which Van Kampen Trust
Company serves as custodian will not be eligible for net asset value
purchases based on the aggregate investment made by the plan or the number
of eligible employees, except under certain uniform criteria established by
the Distributor from time to time. Prior to February 1, 1997, a commission
will be paid to authorized dealers who initiate and are responsible for such
purchases within a rolling twelve-month period as follows: 1.00% on sales to
$5 million, plus 0.50% on the next $5 million, plus 0.25% on the excess over
$10 million. For purchases on February 1, 1997 and thereafter, a commission
will be paid as follows: 1.00% on sales to $2 million, plus 0.80% on the
next $1 million, plus 0.50% on the next $47 million, plus 0.25% on the
excess over $50 million.
(9) Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the Fund
and Participating Funds, (iv) has a membership that the authorized dealer
can certify as to the group's members and (v) satisfies other uniform
criteria established by the Distributor for the purpose of realizing
economies of scale in distributing such shares. A qualified group does not
include one whose sole organizational nexus,
18
-
<PAGE> 56
for example, is that its participants are credit card holders of the same
institution, policy holders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups.
Shares purchased in each group's participants account in connection with
this privilege will be subject to a contingent deferred sales charge of
1.00% in the event of redemption within one year of purchase, and a
commission will be paid to authorized dealers who initiate and are
responsible for such sales to each individual as follows: 1.00% on sales to
$2 million, plus 0.80% on the next $1 million and 0.50% on the excess over
$3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust department, provided that
Investor Services receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described on
purchases made as described in (3) through (9) above. The Fund may terminate, or
amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
REDEMPTION OF
SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the heading "Purchase of Shares," redemptions of Class B Shares
and Class C Shares may be subject to a contingent deferred sales charge. In
addition, certain redemptions of Class A Shares for shareholder accounts of $1
million or more may be subject to a contingent deferred sales charge.
Redemptions completed through an authorized dealer or a custodian of a
retirement plan account may involve additional fees charged by the dealer or
custodian.
Except as specified below under "Telephone Redemption Requests," payment for
shares redeemed generally will be made by check mailed within seven days after
acceptance by Investor Services of the request and any other necessary documents
in proper order. Such payment may be postponed or the right of redemption
suspended as provided by the rules of the SEC. Such payment may, under certain
circumstances, be paid wholly or in part by a distribution-in-kind of portfolio
securities. If the shares to be redeemed have been recently purchased by check,
Investor Services may delay the redemption until it confirms the purchase check
has cleared, which may take up to 15 days. A taxable gain or loss will be
recognized by the shareholder upon redemption of shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 418256, Kansas City, MO 64141-9256. The request for redemption
should indicate the number of shares to be redeemed, the class designation of
such shares and the shareholder's account number. The redemption request must be
signed by all persons in whose names the shares are registered. Signatures must
conform exactly to the account registration. If the proceeds of the redemption
exceed $50,000, or if the proceeds are not to be paid to the record owner at the
record address, or if the record address has changed within the previous 30
days, signature(s) must be guaranteed by one of the following: a bank or trust
company; a broker-dealer; a credit union; a national securities exchange,
registered securities association or clearing agency; a savings and loan
association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. In the case of shareholders holding
certificates, the certificates for the shares being redeemed properly endorsed
for transfer must accompany the redemption request. In the event the redemption
is requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation
19
-
<PAGE> 57
appointing the authorized signer and certified within the prior 120 days must
accompany the redemption request. IRA redemption requests should be sent to the
IRA custodian to be forwarded to Investor Services. Contact the IRA custodian
for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. Orders sent through authorized dealers
must be at least $500 (unless transmitted by your authorized dealer via the
FUNDSERV network). The redemption price for such shares is the net asset value
per share next calculated after an order in proper form is received by an
authorized dealer provided such order is transmitted to the Distributor prior to
the Distributor's close of business on such day. It is the responsibility of
authorized dealers to transmit redemption requests received by them to the
Distributor so they will be received prior to such time. Redemptions completed
through an authorized dealer may involve additional fees charged by the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application form accompanying this prospectus or call the Fund at (800) 341-2911
to request that a copy of the Telephone Redemption Authorization form be sent to
them for completion. To redeem shares, contact the telephone transaction line at
(800) 421-5684. Van Kampen Investments, Investor Services and the Fund employ
procedures considered by them to be reasonable to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring certain
personal identification information prior to acting upon telephone instructions,
tape recording telephone communications and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen Investments, Investor Services nor the Fund will be liable
for following telephone instructions which it reasonably believes to be genuine.
Telephone redemptions may not be available if the shareholder cannot reach
Investor Services by telephone, whether because all telephone lines are busy or
for any other reason; in such case, a shareholder would have to use the Fund's
other redemption procedure previously described. Requests received by Investor
Services prior to 4:00 p.m., New York time, will be processed at the next
determined net asset value per share. These privileges are available for all
accounts other than retirement accounts or accounts with shares represented by
certificates. If an account has multiple owners, Investor Services may rely on
the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions payable by wire transfer are expected to be wired on the next
business day following the date of redemption. The Fund reserves the right at
any time to terminate, limit or otherwise modify this redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account with a
value on the date of the notice of redemption less than the minimum initial
investment as specified in this prospectus. At least 60 days advance written
notice of any such involuntary redemption will be given and the shareholder will
be given an opportunity to purchase the required value of additional shares at
the next determined net asset value without sales charge. Any involuntary
redemption may only occur if the shareholder account is less than the minimum
initial investment due to shareholder redemptions.
DISTRIBUTIONS FROM
THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends
20
-
<PAGE> 58
and capital gains distributions. Investors will be entitled to begin receiving
dividends on their shares on the business day after Investor Services receives
payment for such shares. However, shares become entitled to dividends on the day
Investor Services receives payment for the shares either through a fed wire or
NSCC settlement. Shares remain entitled to dividends through the day such shares
are processed for payment on redemption.
DIVIDENDS. Interest earned from investments is the Fund's main source of income.
Under the Fund's present policy, which may be changed at any time by the Board
of Trustees, distributions of all or substantially all of this income, less
expenses, are declared daily and paid monthly as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than purchase prices. Net realized capital gains represent the total
profit from sales of securities minus total losses from sales of securities
including losses carried forward from prior years. The Fund distributes any
taxable net realized capital gains to shareholders at least annually. As in the
case of dividends, capital gains distributions are automatically reinvested in
additional shares of the Fund at net asset value unless the shareholder
instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value per share (without sales
charge) on the applicable payable date of the dividend or capital gains
distribution. Unless the shareholder instructs otherwise, the reinvestment plan
is automatic. This instruction may be made by telephone by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired) or by writing to Investor
Services. The investor may, on the initial application or prior to any
declaration, instruct that dividends be paid in cash and capital gains
distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to charge a bank account on a
regular basis to invest pre-determined amounts in the Fund. Additional
information is available from the Distributor or your authorized dealer.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint Investor Services as agent by completing the Authorization for
Redemption by Check form and the appropriate section of the application and
returning the form and the application to Investor Services. Once the form is
properly completed, signed and returned to the agent, a supply of checks drawn
on State Street Bank and Trust Company (the "Bank") will be sent to the Class A
shareholder. These checks may be made payable by the Class A shareholder to the
order of any person in any amount of $100 or more.
When a check is presented to the Bank for payment, full and fractional Class A
Shares required to cover the amount of the check are redeemed from the share
holder's Class A account by Investor Services at the next determined net asset
value per share. Check writing redemptions represent the sale of Class A Shares.
Any gain or loss realized on the sale of shares is a taxable event.
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of
21
<PAGE> 59
all uncertificated shares held in the shareholder's Class A account, the check
will be returned and the shareholder may be subject to additional charges. A
Class A shareholder may not liquidate the entire account by means of a check.
The check writing privilege may be terminated or suspended at any time by the
Fund or the Bank. Retirement plans and accounts that are subject to backup
withholding are not eligible for the privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next computed net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. Under normal circumstances, it is
the policy of the Adviser not to approve such requests.
When Class B Shares and Class C Shares are exchanged among Participating Funds,
the holding period for purposes of computing the contingent deferred sales
charge is based upon the date of the initial purchase of such shares from a
Participating Fund. If such Class B Shares or Class C Shares are redeemed and
not exchanged for shares of another Participating Fund, Class B Shares and Class
C Shares are subject to the contingent deferred sales charge schedule imposed by
the Participating Fund from which such shares were originally purchased.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is carried over and included in the
tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanying the prospectus. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, neither Van Kampen Investments, Investor Services nor
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gains options (except dividend
diversification) and authorized dealer of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish asystematic withdrawal plan for the new account or reinvest dividends
from the new account into another fund, however, an exchanging shareholder must
submit a specific request. The Fund reserves the right to reject any order to
acquire its shares through exchange. In addition, the Fund may modify, restrict
or terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an
22
-
<PAGE> 60
investment will be redeemed at the net asset value per share next determined on
the date of receipt. Shares of the new fund into which the shareholder is
investing will also normally be purchased at the net asset value per share, plus
any applicable sales charge, next determined on the date of receipt. Exchange
requests received on a business day after the time shares of the funds involved
in the request are priced will be processed on the next business day in the
manner described herein.
A prospectus of any of these Participating Funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund prior to investing.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instruction. Van Kampen Investments, Investor
Services and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated through the internet are genuine. Such
procedures include requiring use of a personal identification number prior to
acting upon internet instructions and providing written confirmation of
instructions communicated through the internet. If reasonable procedures are
employed, neither Van Kampen Investments, Investor Services nor the Fund will be
liable for following instructions through the internet which it reasonably
believes to be genuine. If an account has multiple owners, Investor Services may
rely on the instructions of any one owner.
FEDERAL INCOME
TAXATION
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined under applicable
federal income tax law). Exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. Exempt-interest dividends are included in determining what
portion, if any, of a person's social security and railroad retirement benefits
will be includable in gross income subject to federal income tax.
Under applicable federal income tax law, the interest on certain municipal
securities may be an item of tax preference subject to the alternative minimum
tax. The Fund may invest a portion of its assets in municipal securities subject
to this provision so that a portion of its exempt-interest dividends may be an
item of tax preference to the extent such dividends represent interest received
from such municipal securities. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax.
Although exempt-interest dividends from the Fund generally may be treated by
shareholders as interest excluded from their gross income, each shareholder is
advised to consult his or her tax adviser with respect to whether
exempt-interest dividends retain this exclusion given the investor's tax
circumstances. For example, exempt-interest dividends may not be excluded if the
shareholder would be treated as a "substantial user" (or a "related person" of a
substantial user, as each term is defined by applicable federal income tax law)
of the facilities financed with respect to any of the tax-exempt obligations
held by the Fund.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the shareholder's taxable
year. If a shareholder receives an exempt-interest dividend with respect to any
shares and such shares are held for six months or less, any loss on the sale or
exchange of the shares will be disallowed to the extent of the amount of such
exempt-interest dividend.
While the Fund expects that a major portion of its net investment income
(consisting generally of tax-exempt interest, taxable income and net short-term
capital gains) will constitute tax-exempt interest, a significant portion of the
Fund's net investment income may consist of taxable income. Distributions of
such taxable income are taxable to shareholders as ordinary income to the extent
of the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains (which are the
excess of net long-term capital gains over net short-term capital losses) as
capital gain dividends, if any, are taxable to
23
-
<PAGE> 61
shareholders as long-term capital gains, whether paid in cash or reinvested in
additional shares, and regardless of how long the shares of the Fund have been
held by such shareholders. Such capital gain dividends may be taxed at different
rates depending on how long the Fund held the securities. Distributions in
excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming such shares are
held as a capital asset). Although distributions generally are treated as
taxable in the year they are paid, distributions declared in October, November
or December, payable to shareholders of record on a specified date in such month
and paid during January of the following year will be treated as having been
distributed by the Fund and received by the shareholders on the December 31st
prior to the date of payment. The Fund will inform shareholders of the source
and tax status of all distributions promptly after the close of each calendar
year. The aggregate amount of dividends designated as exempt-interest dividends
cannot exceed, however, the excess of the amount of interest exempt from tax
under Section 103 of the Code received by the Fund during the year over any
amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Code.
Since the percentage of dividends which are exempt-interest dividends is
determined on an average annual method for the taxable year, the percentage of
income designated as tax-exempt for any particular dividend may be substantially
different from the percentage of the Fund's income that was tax exempt during
the period covered by the dividend. Fund distributions generally will not
qualify for the dividends received deduction for corporations.
The sale or exchange of shares is a taxable transaction for federal income tax
purposes. Shareholders who sell their shares will generally recognize gain or
loss in an amount equal to the difference between their adjusted tax basis in
the shares and the amount received. If such shares are held as a capital asset,
the gain or loss will be a capital gain or loss. Any capital gains may be taxed
at different rates depending on how long the shareholder held its shares.
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain required certifications
or who are otherwise subject to backup withholding.
The Fund intends to qualify as a regulated investment company under the federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its net investment income, the Fund will not be
required to pay federal income taxes on any income it distributed to
shareholders. If the Fund distributes less than the sum of 98% of its ordinary
income and 98% of its capital gain net income, then the Fund will be subject to
a 4% excise tax on the undistributed amounts.
The federal income tax discussion above is for general information only. The
exemption of interest income for federal income tax purposes may not result in
similar exemptions under the laws of a particular state or local taxing
authority. Income distributions may be taxable to shareholders under state or
local law as dividend income even though a portion of such distributions may be
derived from interest on tax-exempt obligations which, if realized directly,
would be exempt from such income taxes. The Fund will report annually to its
shareholders the percentage and source, on a state-by-state basis, of interest
income earned on municipal securities received by the Fund during the preceding
calendar year. Dividends and distributions paid by the Fund from sources other
than tax-exempt interest are generally subject to taxation at the state and
local levels. Prospective investors should consult their own tax advisers
regarding the specific federal tax consequences of purchasing, holding,
exchanging or selling shares, as well as the effects of state, local and foreign
tax law and any proposed tax law changes.
24
-
<PAGE> 62
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, independent accountants, whose report,
along with the Fund's financial statements, is included in the Statement of
Additional Information and may be obtained by shareholders without charge by
calling the telephone number on the back cover of this prospectus. This
information should be read in conjunction with the financial statements and
notes thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
Class A Shares Class B Shares
Nine Months Nine Months
Ended Ended
September 30, Year Ended December 31, September 30,
1998 1997 1996 1995 1994 1993 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $19.631 $19.238 $19.549 $17.572 $19.857 $18.721 $19.634
-------- -------- -------- -------- -------- -------- -------
Net Investment Income............ .710 .974 .980 1.021 1.051 1.107 .598
Net Realized and Unrealized
Gain/Loss...................... .371 .551 (.304) 1.982 (2.280) 1.145 .370
-------- -------- -------- -------- -------- -------- -------
Total from Investment
Operations....................... 1.081 1.525 .676 3.003 (1.229) 2.252 .968
-------- -------- -------- -------- -------- -------- -------
Less:
Distributions from and in Excess
of Net Investment Income....... .720 .971 .987 1.026 1.056 1.116 .609
Distributions from Net Realized
Gain........................... .036 .161 -0- -0- -0- -0- .036
-------- -------- -------- -------- -------- -------- -------
Total Distributions............... .756 1.132 .987 1.026 1.056 1.116 .645
-------- -------- -------- -------- -------- -------- -------
Net Asset Value, End of the
Period........................... $19.956 $19.631 $19.238 $19.549 $17.572 $19.857 $19.957
======== ======== ======== ======== ======== ======== =======
Total Return (a).................. 5.61%* 8.19% 3.65% 17.49% (6.31%) 12.32% 5.07%*
Net Assets at End of the Period
(In millions).................... $1,353.9 $1,283.5 $1,283.7 $1,365.4 $1,110.2 $1,230.0 $71.9
Ratio of Expenses to Average Net
Assets (b)....................... .90% .92% .95% .88% .88% .84% 1.66%
Ratio of Net Investment Income to
Average Net Assets (b)........... 4.85% 5.07% 5.11% 5.44% 5.70% 5.69% 4.08%
Portfolio Turnover................ 62%* 82% 92% 70% 48% 79% 62%*
<CAPTION>
Class B Shares
May 1, 1993
(Commencement
Year Ended December 31, of Distribution) to
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%
<CAPTION>
Class C Shares
Nine Months August 13, 1993
Ended (Commencement
September 30, Year Ended December 31, of Distribution) to
1998 1997 1996 1995 1994 December 31, 1993
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $19.630 $19.239 $19.548 $17.568 $19.823 $19.650
------- ------- ------- ------- ------- -------
Net Investment Income............ .594 .822 .830 .883 .908 .350
Net Realized and Unrealized
Gain/Loss...................... .373 .552 (.302) 1.979 (2.279) .181
------- ------- ------- ------- ------- -------
Total from Investment
Operations....................... .967 1.374 .528 2.862 (1.371) .531
------- ------- ------- ------- ------- -------
Less:
Distributions from and in Excess
of Net Investment Income....... .609 .822 .837 .882 .884 .358
Distributions from Net Realized
Gain........................... .036 .161 -0- -0- -0- -0-
------- ------- ------- ------- ------- -------
Total Distributions............... .645 .983 .837 .882 .884 .358
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period........................... $19.952 $19.630 $19.239 $19.548 $17.568 $19.823
======= ======= ======= ======= ======= =======
Total Return (a).................. 5.02%* 7.36% 2.83% 16.60% (6.98%) 2.70%*
Net Assets at End of the Period
(In millions).................... $6.8 $5.6 $4.9 $5.1 $3.5 $5.0
Ratio of Expenses to Average Net
Assets (b)....................... 1.66% 1.69% 1.74% 1.67% 1.70% 1.68%
Ratio of Net Investment Income to
Average Net Assets (b)........... 4.06% 4.29% 4.37% 4.68% 4.89 4.21%
Portfolio Turnover................ 62%* 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 the
Adviser's reimbursement of certain expenses was less than 0.01%.
* Non-Annualized
25
<PAGE> 63
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or redemptions, call
the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUND INFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN INSURED TAX FREE INCOME FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen Insured Tax Free Income Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Insured Tax Free Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 64
VAN KAMPEN
INSURED TAX FREE
INCOME FUND
PROSPECTUS
JANUARY 28, 1999
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports,
which explain the market conditions and
investment strategies affecting the Fund's
recent performance.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling (800)
341-2911 from 7:00 a.m. to 7:00 p.m., Central
time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800) 421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC Public
Reference Room in Washington, DC or online at
the SEC's web site (http://www.sec.gov). For
more information, please call the SEC at (800)
SEC-0330. You can also request these materials
by writing the Public Reference Section of the
SEC, Washington DC, 20549-6009, and paying a
duplication fee.
[VAN KAMPEN FUNDS LOGO]
Investment Company Act File No.
811-4386.
TFIN PRO 1/99
<PAGE> 65
VAN KAMPEN
CALIFORNIA INSURED
TAX FREE FUND
Van Kampen California Insured Tax Free Fund is
a mutual fund with an investment objective to
provide only California investors with a high
level of current income exempt from federal
and California income taxes, with liquidity
and safety of principal, primarily through
investment in a diversified portfolio of
insured California municipal securities. The
Fund is designed for investors who are
residents of California for tax purposes.
Shares of the Fund have not been approved or
disapproved by the Securities and Exchange
Commission (SEC) or any state regulators, and
neither the SEC nor any state regulator has
ruled on the accuracy or adequacy of this
prospectus. It is a criminal offense to state
otherwise.
This Prospectus is dated JANUARY 28, 1999.
[VAN KAMPEN FUNDS LOGO]
<PAGE> 66
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary................................ 3
Fees and Expenses of the Fund...................... 5
Investment Objective and Policies.................. 6
Investment Advisory Services....................... 13
Purchase of Shares................................. 14
Redemption of Shares............................... 20
Distributions from the Fund........................ 22
Shareholder Services............................... 22
California Taxation................................ 24
Federal Income Taxation............................ 24
Financial Highlights............................... 27
</TABLE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus, in connection with the offer contained in this prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
<PAGE> 67
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund is a mutual fund with an investment objective to provide only
California investors with a high level of current income exempt from federal and
California income taxes, with liquidity and safety of principal, primarily
through investment in a diversified portfolio of insured California municipal
securities. The Fund is designed for investors who are residents of California
for tax purposes. There can be no assurance that the Fund will achieve its
investment objective.
INVESTMENT STRATEGIES
Under normal market conditions, the Fund's management seeks to achieve the
investment objective by investing substantially all of the Fund's assets in a
portfolio of California municipal securities that are insured at the time of
purchase as to timely payment of both principal and interest by a top-rated
private insurance company. Distributions to corporations may be subject to
California franchise tax or California corporate income tax. Under normal market
conditions, up to 20% of the Fund's net assets may be invested in municipal
securities that are subject to federal alternative minimum tax. Under normal
market conditions, up to 10% of the Fund's total assets may be invested in
tax-exempt money market funds that are not insured. The Fund may purchase or
sell certain derivative instruments (such as options, futures and options on
futures, and interest rate swaps or other interest rate related transactions)
for various risk management and hedging purposes. The Fund may purchase or sell
securities on a when-issued or delayed delivery basis.
INVESTMENT RISKS
Because of the following risks, you could lose money on your investment in the
Fund over the short or long term:
MARKET RISK. The prices of income securities tend to fall as interest rates
rise. This "market risk" is usually greater among securities with longer
maturities. Because the Fund does not have a policy limiting the maturities of
its investments and the Fund may own securities with longer maturities, the Fund
will be subject to greater market risk than a fund that owns shorter-term
securities.
Generally, the Fund's municipal securities are insured as to timely payment of
both principal and interest by a top-rated private insurance company. This
insurance does not, however, guarantee that the prices of these securities will
remain stable during interest rate changes.
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitments for these securities, the greater the Fund's
exposure to market price fluctuation.
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest and principal. Credit risk should be low for the Fund because it
invests substantially all of its assets in insured municipal securities.
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates, which can vary widely over the short and long term. If interest rates
drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of municipal
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would be reinvested by the Fund in securities with the new, lower
interest rates, resulting in a possible decline in the Fund's income and
distributions to shareholders.
MUNICIPAL SECURITIES RISK. The Fund invests substantially of its assets in
insured municipal securities. The yields of municipal securities, or of insured
municipal
UNDERSTANDING
MUNICIPAL SECURITIES
Municipal securities, including municipal bonds, notes or leases, generally
are issued by state and local governments or regional governmental
authorities to raise money for their daily operations or special projects.
The interest received from municipal securities generally is exempt from
federal income tax. In addition, the interest may be exempt from certain
state or local taxes when received from issuers who are located in the
investors' home state, municipality or region. The interest from certain
municipal securities is a preference item subject to federal alternative
minimum tax.
3
<PAGE> 68
securities, may move differently and adversely compared to the yields of the
overall debt securities markets. While the interest received from municipal
securities generally is exempt from federal income tax, the Fund may invest up
to 20% of its net assets in municipal securities subject to federal alternative
minimum tax. In addition, there could be changes in applicable tax laws or tax
treatments that reduce or eliminate the current federal income tax exemption on
municipal securities or otherwise adversely affect the current federal or state
tax status of municipal securities.
STATE-SPECIFIC RISKS. Because the Fund invests substantially of its assets in a
portfolio of California municipal securities, the Fund is more susceptible to
political, economic, regulatory or other factors affecting issuers of California
municipal securities than a fund that does not limit its investments to such
issuers.
RISKS OF USING DERIVATIVE INVESTMENTS. In general terms, a derivative investment
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures and options on futures, interest
rate swaps and other interest rate-related transactions are examples of
derivatives. Such transactions involve risks different from the direct
investment in underlying securities such as imperfect correlation between the
value of the instruments and the underlying assets; risks of default by the
other party to certain transactions; risks that the transactions may incur
losses that partially or completely offset gains in portfolio positions; risks
that the transactions may not be liquid; and manager risk.
MANAGER RISK. As with any fund, the Fund's management may not be successful in
selecting the best-performing securities and the Fund's performance may lag
behind that of similar funds.
An investment in the Fund is not a deposit of any bank or other insured
depository institution. Your investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
INVESTOR PROFILE
In light of its objective and investment strategies, the Fund may be appropriate
for investors who:
- - Seek current income.
- - Are in a high federal income tax bracket.
- - Are subject to California income tax.
- - Wish to add to their personal investment portfolios a fund that invests
substantially all of its assets in insured California municipal securities.
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program, and investors should consider
their long-term investment goals and financial needs when making an investment
decision about the Fund. An investment in the Fund is intended to be a long-term
investment, and the Fund should not be used as a trading vehicle.
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance varies from year to year. The following chart shows the annual
returns of the Fund's Class A Shares over the past ten calendar years prior to
the date of this prospectus. Sales loads are not reflected in this chart. If
these sales loads had been included, the returns shown below would have been
lower. Remember that the past performance of the Fund is not indicative of its
future performance.
BAR GRAPH
<TABLE>
<CAPTION>
ANNUAL RETURN
-------------
<S> <C>
'1989 9.22
'1990 7.44
'1991 9.98
'1992 10.08
'1993 14.56
'1994 -8.64
'1995 18.21
'1996 4.20
'1997 8.93
'1998 6.33
</TABLE>
The annual return variability of the Fund's Class B Shares and Class C Shares
would be substantially similar to that shown for the Class A Shares because all
of the Fund's shares are invested in the same portfolio of securities; however,
the actual annual returns of the Class B Shares and Class C Shares would be
lower than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
During the ten-year period shown in the bar chart, the highest quarterly return
was 7.63% (for the quarter ended March 31, 1995) and the lowest quarterly return
was -7.62% (for the quarter ended March 31, 1994).
4
-
<PAGE> 69
COMPARATIVE PERFORMANCE
This table shows how the Fund's performance compares with the Lehman Brothers
Municipal Bond Index, a broad-based market index that the Fund's management
believes is an applicable benchmark for the Fund. Average annual total returns,
assuming payment of the maximum sales charges, are shown for the one-, five-,
and ten-year periods ended December 31, 1998 (the most recently completed
calendar year prior to the date of this prospectus). Remember that the past
performance of the Fund is not indicative of its future performance.
<TABLE>
<CAPTION>
Average Annual
Total Returns Past 10
for the Years
Periods Ended Past Past or Since
December 31, 1998 1 Year 5 Years Inception
- -------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Van Kampen
California
Insured Tax Free
Fund
.......................................................
Class A Shares 2.90% 4.74% 7.84%
.......................................................
Class B Shares 2.52% 4.64% 5.38%(1)
.......................................................
Class C Shares 4.46% 4.64% 4.91%(2)
.......................................................
Lehman Brothers
Municipal Bond
Index 6.48% 6.22% 8.22%
.......................................................
</TABLE>
Inception dates: (1) 5/1/93, (2) 8/13/93.
The current yield for the thirty-day period ended September 30, 1998 is 3.46%
for Class A Shares, 2.81% for Class B Shares and 2.83% for Class C Shares.
Investors can obtain the current yield of the Fund for each class of shares by
calling (800) 341-2911.
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum sales charge
(load) imposed on
purchases (as a
percentage of
offering price) 3.25%(1) None None
..............................................................
Maximum deferred
sales charge (load)
(as a percentage of
the lesser of
original purchase
price or redemption
proceeds) None(2) Year 1-3.00% Year 1-1.00%
Year 2-2.50% After-None
Year 3-2.00%
Year 4-1.00%
After-None
..............................................................
Maximum sales charge
(load) imposed on
reinvested dividends
(as a percentage of
offering price) None None None
..............................................................
Redemption fees (as a
percentage of amount None None None
redeemed)
..............................................................
Exchange fee None None None
..............................................................
</TABLE>
(1) Reduced for purchases of $25,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares -- Class A Shares."
5
-
<PAGE> 70
ANNUAL FUND
OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fees 0.48% 0.48% 0.48%
..............................................................
Distribution and/or
Service (12b-1) 0.24% 1.00% (2) 1.00% (2)
Fees(1)
..............................................................
Other Expenses 0.16% 0.16% 0.15%
..............................................................
Total Annual Fund
Operating Expenses 0.88% 1.64% 1.63%
..............................................................
</TABLE>
(1) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(2) Because Distribution and/or Service (12b-1) Fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges. Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by National Association of
Securities Dealers, Inc. rules.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% annual return each year and
that the Fund's operating expenses remain the same each year (except for the
ten-year amounts for Class B Shares which reflect the conversion of Class B
Shares to Class A Shares after eight years). Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $412 $597 $797 $1,374
.....................................................................
Class B Shares $467 $717 $892 $1,549*
.....................................................................
Class C Shares $266 $514 $887 $1,933
.....................................................................
</TABLE>
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $412 $597 $797 $1,374
.....................................................................
Class B Shares $167 $517 $892 $1,549*
.....................................................................
Class C Shares $166 $514 $887 $1,933
.....................................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
To simplify comparison among funds, all funds are required by the SEC to assume
a 5% annual return. Class B Shares of the Fund acquired through the exchange
privilege are subject to the contingent deferred sales charge schedule of the
fund from which the shareholder's purchase of Class B Shares was originally
made. Accordingly, future expenses as projected could be higher than those
determined in the above table if the investor's Class B Shares were exchanged
from a fund with a higher contingent deferred sales charge. The Fund's actual
annual return and actual expenses for future periods may be greater or less than
those shown.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide only California investors with a
high level of current income exempt from federal and California income taxes,
with liquidity and safety of principal, primarily through investment in a
diversified portfolio of insured California municipal securities. The Fund is
designed for investors who are residents of California for tax purposes. The
Fund's investment objective is a fundamental policy and may not be changed
without shareholder approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the Investment Company Act of 1940,
as amended (the "1940 Act"). There are risks inherent in all investments in
securities; accordingly there can be no assurance the Fund will achieve its
investment objective.
Under normal market conditions, the Fund's management seeks to achieve the
investment objective by investing substantially all of the Fund's assets in
California municipal securities that are insured at the time of purchase as to
timely payment of both
6
-
<PAGE> 71
principal and interest by an entity whose claims-paying ability is rated AAA by
Standard and Poor's ("S&P") or Aaa by Moody's Investors Service, Inc.
("Moody's") or an equivalent rating by another nationally recognized statistical
rating organization ("NRSRO"). Under normal market conditions, up to 20% of the
Fund's net assets may be invested in municipal securities that are subject to
alternative minimum tax. From time to time, the Fund temporarily may invest up
to 10% of its total assets in tax exempt money market funds, which are not
insured, and such instruments will be treated as investments in municipal
securities.
California municipal securities are municipal securities, the interest on which,
in the opinion of bond counsel or other counsel to the issuers of such
securities, is, at the time of purchase, exempt from federal and California
income taxes. Distribution to corporations subject to the California franchise
tax will be included in such corporations' gross income for purposes of
determining the California franchise tax. In addition, corporations subject to
the California corporate income tax may, in certain circumstances, be subject to
such taxes with respect to distributions from the Fund. Accordingly, an
investment in shares of the Fund may not be appropriate for corporations subject
to either tax.
The Fund's investment adviser will buy and sell securities for the Fund's
portfolio with a view to seeking a high level of current income exempt from
federal and California income taxes and will select securities which the Fund's
investment adviser believes entail reasonable credit risk considered in relation
to the investment policies of the Fund. As a result, the Fund will not
necessarily invest in the highest yielding California municipal securities
permitted by its investment policies if the Fund's investment adviser determines
that market risks or credit risks associated with such investments would subject
the Fund's portfolio to undue risk. The potential for realization of capital
gains resulting from possible changes in interest rates will not be a major
consideration. Other than for tax purposes, frequency of portfolio turnover
generally will not be a limiting factor if the Fund's investment adviser
considers it advantageous to purchase or sell securities.
MUNICIPAL SECURITIES
Municipal securities are obligations issued by or on behalf of states,
territories or possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest on
which, in the opinion of bond counsel or other counsel to the issuers of such
securities, is, at the time of issuance, exempt from federal income tax. Under
normal market conditions, at least 80% of the Fund's total assets will be
invested in municipal securities. The policy stated in the foregoing sentence is
a fundamental policy of the Fund and may not be changed without shareholder
approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the 1940 Act. Under normal market conditions, up to
20% of the Fund's net assets may be invested in municipal securities that are
subject to federal alternative minimum tax.
The issuers of municipal securities obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
securities may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to lend to other public
institutions and facilities. Certain types of municipal securities are issued to
obtain funding for privately operated facilities.
The yields of municipal securities depend on, among other things, general money
market conditions, general conditions of the municipal securities market, size
of a particular offering, the maturity of the obligation and rating of the
issue. The ratings of S&P and Moody's represent their opinions of the quality of
the municipal securities they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may
have different yields while municipal securities of the same maturity and coupon
with different ratings may have the same yield.
The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special delegation" securities. "General
obligation" securities are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. "Revenue" securities
are usually payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Industrial development bonds are usually
revenue securities, the credit
7
<PAGE> 72
quality of which is normally directly related to the credit standing of the
industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, variable rate demand notes, municipal leases,
custodial receipts, participation certificates and derivative municipal
securities (which include terms or elements similar in to certain strategic
transactions described below). Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to reflect market
rates of interest. The Fund also may also invest in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest. Investment in such securities involve special risks as
compared to a fixed rate municipal security. The extent of increases and
decreases in the value of derivative variable rate securities and the
corresponding change to the net asset value of the Fund generally will be larger
than comparable changes in the value of an equal principal amount of a fixed
rate municipal security having similar credit quality, redemption provisions and
maturity. The markets for such securities may be less developed and have less
liquidity than the markets for conventional municipal securities. The Fund will
not invest more than 15% of its total assets in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Municipal notes include tax, revenue and
bond anticipation notes of short maturity, generally less than three years,
which are issued to obtain temporary funds for various public purposes. Variable
rate demand notes are obligations which contain a floating or variable interest
rate adjustment formula and which are subject to a right of demand for payment
of the principal balance plus accrued interest either at any time or at
specified intervals. The interest rate on a variable rate demand note may be
based on a known lending rate, such as a bank's prime rate, and may be adjusted
when such rate changes, or the interest rate may be a market rate that is
adjusted at specified intervals. The adjustment formula maintains the value of
the variable rate demand note at approximately the par value of such note at the
adjustment date. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Certain municipal lease obligations may include "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Custodial receipts are underwritten by
securities dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities. Participation
certificates are obligations issued by state or local governments or authorities
to finance the acquisition of equipment and facilities. They may represent
participations in a lease, an installment purchase contract, or a conditional
sales contract. Municipal securities may not be backed by the faith, credit and
taxing power of the issuer. Other than as set forth above, there is no
limitation with respect to the amount of the Fund's assets that may be invested
in the foregoing types of municipal securities. Certain of the municipal
securities in which the Fund may invest represent relatively recent innovations
in the municipal securities markets and the markets for such securities may be
less developed than the market for conventional fixed rate municipal securities.
A more detailed description of the types of municipal securities in which the
Fund may invest is included in the Statement of Additional Information.
Under normal market conditions, longer term municipal securities generally
provide a higher yield than shorter term municipal securities. The Fund has no
limitation as to the maturity of municipal securities in which it may invest.
The Fund's investment adviser may adjust the average maturity of the Fund's
portfolio from time to time depending on its assessment of the relative yields
available on securities of different maturities and its expectations of future
changes in interest rates.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund will invest primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities generally can be
expected to rise. Conversely, when interest rates rise, the value of a portfolio
invested in fixed income securities generally can be expected to decline. The
prices of longer term municipal securities generally are more volatile with
respect to changes in interest rates than the prices of shorter term municipal
securities. Volatility may be greater during periods of general economic
uncertainty.
8
<PAGE> 73
Although the Fund invests substantially all of its assets in municipal
securities that are insured at the time of purchase as to timely payment of both
principal and interest, municipal securities, like other debt obligations, are
subject to the credit risk of non-payment. The ability of issuers of municipal
securities to make timely payments of interest and principal may be adversely
impacted in general economic downturns and as relative governmental cost burdens
are allocated and reallocated among federal, state and local governmental units.
Such non-payment would result in a reduction of income to the Fund, and could
result in a reduction in the value of the municipal securities experiencing
non-payment and a potential decrease in the net asset value of the Fund. In
addition, the Fund may incur expenses to work out or restructure a distressed or
defaulted security.
The Fund may invest up to 20% of its net assets in municipal securities that are
subject to federal alternative minimum tax. The Fund may not be a suitable
investment for investors who are already subject to the federal alternative
minimum tax or who would become subject to the federal alternative minimum tax
as a result of an investment in the Fund.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the current federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected and the Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
The Fund generally considers investments in municipal securities not to be
subject to industry concentration policies (issuers of municipal securities as a
group are not an industry) and the Fund may invest in municipal securities
issued by entities having similar characteristics. The issuers may be located in
the same geographic area or may pay their interest obligations from revenue of
similar projects, such as hospitals, airports, utility systems and housing
finance agencies. This may make the Fund's investments more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation in the Fund's net asset value
also increases. The Fund may invest more than 25% of its total assets in a
segment of the municipal securities market with similar characteristics if the
Fund's investment adviser determines that the yields available from obligations
in a particular segment justify the additional risks of a larger investment in
such segment. The Fund may not, however, invest more than 25% of its total
assets in industrial development revenue bonds issued for companies in the same
industry. Sizeable investments in such obligations could involve an increased
risk to the Fund should any of such issuers or any such related projects or
facilities experience financial difficulties.
From time to time, the Fund's investments may include securities as to which the
Fund, by itself or together with other funds or accounts managed by the Fund's
investment adviser, holds a major portion or all of an issue of municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Fund's investment adviser believes it is advisable to do so.
INSURED MUNICIPAL SECURITIES
The Fund invests substantially all of its assets in a portfolio of municipal
securities that are insured at the time of investment as to timely payment of
both principal and interest by a top-rated private insurance company. Such
insurance could be provided as: Original Issue Insurance, Secondary Market
Insurance or Portfolio Insurance. Original Issue Insurance is purchased with
respect to a particular issue of municipal securities by the issuer thereof or a
third party in conjunction with the original issue of such municipal securities.
Secondary Market Insurance is purchased by the Fund or a third party subsequent
to the time of original issuance of a municipal security. Both Original Issue
Insurance and Secondary Market Insurance remain in effect as long as the
municipal securities covered thereby remain outstanding and the insurer remains
in business, regardless of whether the Fund ultimately disposes of such
municipal securities. Portfolio Insurance may be purchased by the Fund with
respect to municipal securities which the Fund intends to purchase or already
owns and would generally terminate when the municipal security is sold by the
Fund or redeemed. There is no limitation on the percentage of the Fund's assets
that may be invested in municipal securities insured by any type of insurance or
by any given insurer.
Original Issue Insurance, Secondary Market Insurance and Portfolio Insurance
generally do not insure
9
<PAGE> 74
payment on an accelerated basis, the payment of any redemption premium or the
market value of the Fund's portfolio securities. Such insurance also does not
insure against nonpayment of principal or interest on municipal securities
resulting from the insolvency, negligence or any other act or omission of the
trustee or other paying agent for such obligations.
The Fund invests in municipal securities insured by insurers whose claims-paying
ability is rated AAA by S&P, Aaa by Moody's or the equivalent by another NRSRO
at the time of the Fund's investment. A subsequent downgrade by S&P, Moody's or
another NRSRO of an insurer's claims-paying ability may result in increased
credit risk of the municipal securities insured by such insurer and may result
in a downgrade of the rating assigned to the municipal securities insured by
such insurer. The securities could experience a decrease in market price as a
result of such a downgrade. In the event the ratings assigned to such municipal
securities decline to below investment grade, such municipal securities would
probably become less liquid or even illiquid. There can be no assurance that an
insurer will be able to honor its obligations with respect to municipal
securities in the Fund's portfolio. For more information on insurance and a
description of S&P's and Moody's claims-paying ability ratings of insurers, see
the Statement of Additional Information.
SPECIAL CONSIDERATIONS REGARDING
CALIFORNIA MUNICIPAL SECURITIES
The Fund invests substantially all of its assets in a portfolio of California
municipal securities, which are municipal securities the interest on which, in
the opinion of bond counsel or other counsel to the issuers of such securities,
is, at the time of issuance, exempt from federal and California income taxes.
Because the Fund invests substantially all of its assets in a portfolio of
California municipal securities, the Fund is more susceptible to political,
economic, regulatory or other factors affecting issuers of California municipal
securities than a fund which does not limit its investments to such issuers.
These risks include possible legislative, state constitutional or regulatory
amendments that may affect the ability of state and local governments or
regional governmental authorities to raise money to pay principal and interest
on their municipal securities. Economic, fiscal and budgetary conditions
throughout the state may also influence the Fund's performance.
The following information is a summary of a more detailed description of certain
factors affecting California municipal securities which is contained in the
Statement of Additional Information. Investors should obtain a copy of the
Statement of Additional Information for the more detailed discussion of such
factors. Such information is derived from certain official statements of the
State of California published in connection with the issuance of specific
California municipal securities, as well as from other publicly available
documents. Such information has not been independently verified by the Fund and
may not apply to all California municipal securities acquired by the Fund. The
Fund assumes no responsibility for the completeness or accuracy of such
information.
California state and local government obligations may be adversely affected by
political and economic conditions and developments within the State of
California and the nation as a whole. With respect to an investment in the Fund,
through popular initiative and legislative activity, the ability of the State of
California and its local governments to raise money through property taxes and
to increase spending has been the subject of considerable debate and change in
recent years. Various State Constitutional amendments, for example, have been
adopted which have the effect of limiting property tax and spending increases,
while legislation has sometimes added to these limitations and has at other
times sought to reduce their impact. To date, these Constitutional, legislative
and budget developments do not appear to have severely decreased the ability of
the State and local governments to pay principal and interest on their
obligations. It can be expected that similar types of State legislation or
Constitutional proposals will continue to be introduced. The impact of future
developments in these areas is unclear.
From 1990 until 1994, the State experienced the worst economic, fiscal and
budget conditions since the 1930's. The recession seriously affected State tax
revenues and caused increased expenditures for health and welfare programs. As a
result, the State faced several budget imbalances and used up many of its
available cash resources. Accordingly, rating agencies have reduced the State's
credit ratings several times during recent years.
Although revenue obligations of the State of California or its political
subdivisions may be payable from a specific project or source, including lease
rentals, there can be no assurance that future economic difficulties and the
resulting impact on
10
<PAGE> 75
State and local government finances will not adversely affect the market value
of the portfolio of the Fund or the ability of the respective obligors to make
timely payments of principal and interest on such obligations.
The value of California municipal instruments may also be affected by general
conditions in the money markets or the municipal bond markets, the levels of
federal income tax rates, the supply of tax-exempt bonds, the credit quality and
rating of the issues and perceptions with respect to the level of interest
rates.
There can be no assurance that there will not be a decline in economic
conditions or that particular California municipal securities in the portfolio
of the Fund will not be adversely affected by any such changes.
More detailed information concerning California municipal securities and the
State of California is included in the Statement of Additional Information.
OTHER INVESTMENTS AND RISK FACTORS
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income indices and other financial instruments, purchase and sell
financial futures contracts and enter into various interest rate transactions
such as swaps, caps, floors or collars. Collectively, all of the above are
referred to as "Strategic Transactions." Strategic Transactions may be used to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the investment adviser's ability to predict pertinent market
movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. Strategic Transactions have risks associated with them including
possible default by the other party to the transaction, illiquidity and, to the
extent the investment adviser's view as to certain market movements is
incorrect, the risk that the use of such Strategic Transactions could result in
losses greater than if they had not been used. Use of put and call options may
result in losses to the Fund, force the sale of portfolio securities at
inopportune times or for prices other than at current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the risk management or hedging instrument may be greater than gains in the
value of the Fund's position. In addition, futures and options markets may not
be liquid in all circumstances and certain over-the-counter options may have no
markets. As a result, in certain markets, the Fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and their risks are described more
fully in the Fund's Statement of Additional Information. Income earned or deemed
to be earned by the Fund from its Strategic Transactions, if any, generally will
be taxable income of the Fund.
The Fund may purchase and sell municipal securities on a "when-issued" or
"delayed delivery" basis whereby the Fund buys or sells a security with payment
and delivery taking place in the future. The payment obligation and the interest
rate are fixed at the time the Fund enters into the commitment. No income
accrues to the Fund on municipal securities in connection with such transactions
prior to the date
11
<PAGE> 76
the Fund actually takes delivery of such securities. These transactions are
subject to market risk as the value or yield of a municipal security at delivery
may be more or less than the purchase price or the yield generally available on
municipal securities when delivery occurs. In addition, the Fund is subject to
counterparty risk because it relies on the buyer or seller, as the case may be,
to consummate the transaction, and failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. The Fund will only make commitments to
purchase such securities with the intention of actually acquiring these
securities, but the Fund may sell these securities prior to settlement if it is
deemed advisable. No specific limitation exists as to the percentage of the
Fund's assets which may be used to acquire securities on a "when-issued" or
"delayed delivery" basis.
The Fund may invest up to 15% of the Fund's net assets in illiquid and certain
restricted securities. Such securities may be difficult or impossible to sell at
the time and the price that the Fund would like. Thus, the Fund may have to sell
such securities at a lower price, sell other securities instead to obtain cash
or forego other investment opportunities.
The Fund may borrow amounts up to 5% of its total assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its total assets to
secure such borrowings.
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
Additional Information which can be obtained by investors free of charge as
described on the back cover of this prospectus.
Although the Fund does not intend to engage in substantial short-term trading,
it may sell securities without regard to the length of time they have been held
in order to take advantage of new investment opportunities or yield
differentials or otherwise. The Fund's portfolio turnover is shown under the
heading "Financial Highlights". The portfolio turnover rate may be expected to
vary from year to year. A high portfolio turnover rate (100% or more) increases
the Fund's transactions costs, including brokerage commissions or dealer costs,
and may result in the realization of more short-term capital gains than if the
Fund had a lower portfolio turnover. The turnover rate will not be a limiting
factor, however, if the Fund's investment adviser considers portfolio changes
appropriate.
When market conditions dictate a more "defensive" investment strategy, the Fund
may invest on a temporary basis a portion or all of its assets in high-quality,
short-term California municipal obligations. If such municipal obligations are
not available or, in the investment adviser's judgment, do not afford sufficient
protection against adverse market conditions, the Fund may invest in
high-quality municipal securities of issuers other than issuers of California
municipal securities. Furthermore, if such high-quality securities are not
available or, in the investment adviser's judgment, do not afford sufficient
protection against adverse market conditions, the Fund may invest in taxable
obligations. Such taxable obligations may include in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, other
investment grade quality income securities, prime commercial paper, certificates
of deposit, bankers' acceptances and other obligations of domestic banks having
total assets of at least $500 million, and repurchase agreements. The effect of
taking such a defensive position may be that the Fund does not achieve its
investment objective.
YEAR 2000 RISKS. Like other mutual funds, financial and business organizations
and individuals around the world, the Fund could be adversely affected if the
computer systems used by the Fund's investment adviser and other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." The Fund's investment adviser is taking steps that it believes are
reasonably designed to address the Year 2000 Problem with respect to computer
systems that it uses and to obtain reasonable assurances that comparable steps
are being taken by the Fund's other major service providers. At this time, there
can be no assurances that these steps will be sufficient to avoid any adverse
impact to the Fund. In addition, the Year 2000 Problem may adversely affect the
markets and the issuers of securities in which the Fund may invest which, in
turn, may adversely affect the net asset value of the Fund. Improperly
functioning trading systems may result in settlement problems and liquidity
issues. In addition, corporate and governmental data processing errors may
result in production problems for individual companies or issuers and overall
economic uncertainty. Earnings of individual issuers will be affected by
remediation costs, which
12
<PAGE> 77
may be substantial and may be reported inconsistently in U.S. and foreign
financial statements. Accordingly, the Fund's investments may be adversely
affected. The statements above are subject to the Year 2000 Information and
Readiness Disclosure Act which Act may limit the legal rights regarding the use
of such statements in the case of a dispute.
INVESTMENT ADVISORY SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp."). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $50 billion under management or supervision. Van
Kampen Investments' more than 50 open-end and 39 closed-end funds and more than
2,500 unit investment trusts are professionally distributed by leading financial
advisers nationwide. Van Kampen Funds Inc., the distributor of the Fund (the
"Distributor") and the sponsor of the funds mentioned above, is also a wholly
owned subsidiary of Van Kampen Investments. Van Kampen Investments is an
indirect wholly owned subsidiary of Morgan Stanley Dean Witter & Co. The
Adviser's principal office is located at 1 Parkview Plaza, PO Box 5555, Oakbrook
Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed based upon an annual rate applied to average daily net assets of the
Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
- -----------------------------------------------------
<S> <C>
First $100 million 0.500%
.....................................................
Next $150 million 0.450%
.....................................................
Next $250 million 0.425%
.....................................................
Over $500 million 0.400%
.....................................................
</TABLE>
Applying this fee schedule, the Fund paid the Adviser an advisory fee at the
effective rate of 0.48% of the Fund's average net assets for the Fund's fiscal
period ended September 30, 1998.
Under the Advisory Agreement, the Fund also reimburses the Adviser for the cost
of the Fund's accounting services, which include maintaining its financial books
and records and calculating its daily net asset value. Other operating expenses
paid by the Fund include service fees, distribution fees, custodial fees, legal
and accounting fees, the costs of reports and proxies to shareholders, trustees'
fees (other than those who are affiliated persons of the Adviser, Distributor or
Van Kampen Investments) and all other business expenses not specifically assumed
by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes of Ethics permit directors, trustees,
officers and employees to buy and sell securities for their personal accounts
subject to certain restrictions. Persons with access to certain sensitive
information are subject to pre-clearance and other procedures designed to
prevent conflicts of interest.
PORTFOLIO MANAGEMENT. Joseph A. Piraro, a Vice President of the Adviser, has
been primarily responsible for the day-to-day management of the Fund's portfolio
since May 1992. Mr. Piraro has been employed by the Adviser since 1992 and was
previously employed by First Chicago Capital Markets.
13
<PAGE> 78
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each investor to choose the class of shares that is most beneficial given the
amount to be invested and the length of time the investor expects to hold the
shares. Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Both
minimums may be waived by the Distributor for plans involving periodic
investments.
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares bear the sales charge expenses at the time of redemption and any
expenses (including higher distribution fees and transfer agency costs)
resulting from such deferred sales charge arrangement, (ii) generally, each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan (described below) pursuant to which its
distribution fee or service fee is paid, (iii) each class of shares has
different exchange privileges, (iv) certain classes of shares are subject to a
conversion feature and (v) certain classes of shares have different shareholder
service options available.
The price of the Fund's shares is based upon the Fund's net asset value per
share. The net asset values per share of the Class A Shares, Class B Shares and
Class C Shares are generally expected to be substantially the same. In certain
circumstances, however, the per share net asset values of the classes of shares
may differ from one another, reflecting the daily expense accruals of the higher
distribution fees and transfer agency costs applicable to the Class B Shares and
Class C Shares and the differential in the dividends that may be paid on each
class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on:
customary business holidays, any day on which no purchase or redemption orders
are received or there is not a sufficient degree of trading in the Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Fund reserves the right to calculate the net asset
value per share and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable. Net asset value per share for
each class is determined by dividing the value of the Fund's portfolio
securities, cash and other assets (including accrued interest) attributable to
such class, less all liabilities (including accrued expenses) attributable to
such class, by the total number of shares of the class outstanding. Portfolio
securities are valued by using market quotations, prices provided by market
makers or estimates of market values determined in good faith based upon yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees of the Fund.
Securities with remaining maturities of 60 days or less are valued at amortized
cost when amortized cost is determined in good faith by or under the direction
of the Board of Trustees of the Fund to be representative of the fair value at
which it is expected such securities may be resold. Any securities or other
assets for which current market quotations are not readily available are valued
at their fair value as determined in good faith under procedures established by
and under the general supervision of the Board of Trustees of the Fund.
The Fund has adopted a distribution plan (the "Distribution Plan") with respect
to each class of its shares pursuant to Rule 12b-1 under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Fund also has adopted a service
plan (the "Service Plan") with respect to each class of its shares. The
Distribution Plan and the Service Plan provide that the Fund may pay
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders of each class.
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. The net income attributable to a class of shares and the
dividends payable on such class of shares will be reduced by the amount of the
distribution fees and other expenses associated with such class of shares.
14
<PAGE> 79
To assist investors in comparing classes of shares, the tables under the heading
"Fees and Expenses of the Fund" provide a summary of sales charges and expenses
and an example of the sales charges and expenses applicable to each class of
shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza, PO
Box 5555, Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through
members of the National Association of Securities Dealers, Inc. ("NASD") who are
acting as securities dealers ("dealers") and NASD members or eligible non-NASD
members who are acting as brokers or agents or investors ("brokers"). "Dealers"
and "brokers" are sometimes referred to herein as "authorized dealers."
Shares may be purchased on any business day by completing the application
accompanying this prospectus and forwarding the application, directly or through
an authorized dealer, to the Fund's shareholder service agent, Van Kampen
Investor Services Inc. ("Investor Services"), a wholly owned subsidiary of Van
Kampen Investments. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A Shares, Class B Shares or Class C Shares.
Sales personnel of authorized dealers distributing the Fund's shares are
entitled to receive compensation for selling such shares and may receive
differing compensation for selling Class A Shares, Class B Shares or Class C
Shares.
The price paid for shares purchased is based on the next calculation of net
asset value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers are priced
based on the date of receipt provided such order is transmitted to Investor
Services prior to Investor Services' close of business on such date. Orders
received by authorized dealers or transmitted to Investor Services after its
close of business are priced based on the date of the next computed net asset
value per share provided they are received by Investor Services prior to
Investor Services' close of business on such date. It is the responsibility of
authorized dealers to transmit orders received by them to Investor Services so
they will be received in a timely manner. Orders of less than $500 generally are
mailed by the authorized dealer and processed at the offering price next
calculated after receipt by Investor Services.
Shares of the Fund may be sold in foreign countries where permissible. The Fund
and the Distributor reserve the right to refuse any order for the purchase of
shares. The Fund also reserves the right to suspend the sale of the Fund's
shares in response to conditions in the securities markets or for other reasons.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gains
distributions, unless the investor instructs the Fund otherwise. Investors
wishing to receive cash instead of additional shares should contact the Fund at
(800) 341-2911 or by writing to the Fund, c/o Van Kampen Investors Services
Inc., PO Box 418256, Kansas City, MO 64141-9256.
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 3.25% of the offering price (or 3.36% of the net amount
invested), reduced on investments of $25,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of Net
Size of Offering Amount
Investment Price Invested
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $25,000 3.25% 3.36%
...........................................................
$25,000 but less than
$250,000 2.75% 2.83%
...........................................................
$250,000 but less than
$500,000 1.75% 1.78%
...........................................................
$500,000 but less than
$1,000,000 1.50% 1.52%
...........................................................
$1,000,000 or more * *
...........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1.00% on certain redemptions made within one year of
the purchase. The contingent deferred sales charge is assessed on an amount
equal to the lesser of the then current market value or the cost of the shares
being redeemed. Accordingly, no sales charge is imposed on increases in net
asset value above the initial purchase price.
The Fund may spend an aggregate amount up to 0.25% per year of the average daily
net assets attributable to the Class A Shares of the Fund pursuant to the
Distribution Plan and Service Plan. From such amount, the Fund may spend up to
0.25% per year of the Fund's average daily net assets attributable to the Class
A Shares pursuant to the
15
-
<PAGE> 80
Service Plan in connection with the ongoing provision of services to holders of
such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
deferred sales charge if redeemed within four years of purchase as shown in the
table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
as a Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
- ------------------------------------------------
<S> <C> <C> <C>
First 3.00%
................................................
Second 2.50%
................................................
Third 2.00%
................................................
Fourth 1.00%
................................................
Fifth and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
It is presently the policy of the Distributor not to accept any order for Class
B Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for the purchase of Class B Shares
until the time of redemption of such shares. Solely for purposes of determining
the number of years from the time of any payment for the purchase of shares, all
payments during a month are aggregated and deemed to have been made on the last
day of the month.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and then of shares held the longest in the shareholder's account.
The Fund may spend up to 0.75% per year of the average daily net assets
attributable to the Class B Shares of the Fund pursuant to the Distribution
Plan. In addition, the Fund may spend up to 0.25% per year of the Fund's average
daily net assets attributable to the Class B Shares pursuant to the Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
deferred sales charge of 1.00% of the dollar amount subject to charge if
redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
It is presently the policy of the Distributor not to accept any order for Class
C Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and then of shares held the longest in the shareholder's account.
The Fund may spend up to 0.75% per year of the average daily net assets
attributable to the Class C Shares of the Fund pursuant to the Distribution
Plan. In addition, the Fund may spend up to 0.25% per year of the Fund's average
daily net assets attributable to the Class C Shares pursuant to the Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
16
-
<PAGE> 81
connection with the maintenance of such shareholders' accounts.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment
plan shares received thereon, automatically convert to Class A Shares eight
years after the end of the calendar month in which the shares were purchased.
Class B Shares purchased before June 1, 1996, and any dividend reinvestment plan
shares received thereon, automatically convert to Class A Shares seven years
after the end of the calendar month in which the shares were purchased. Class C
Shares purchased before January 1, 1997, and any dividend reinvestment plan
shares received thereon, automatically convert to Class A Shares ten years after
the end of the calendar month in which such shares were purchased. Such
conversion will be on the basis of the relative net asset values per share,
without the imposition of any sales load, fee or other charge. The conversion
schedule applicable to a share of the Fund acquired through the exchange
privilege from another Van Kampen fund is determined by reference to the Van
Kampen fund from which such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or distributions constituting
"preferential dividends" under the federal income tax law and (ii) the
conversion of shares does not constitute a taxable event under federal income
tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) in
connection with required minimum distributions from an individual retirement
account ("IRA") or certain other retirement plan distributions, (iii) pursuant
to the Fund's systematic withdrawal plan but limited to 12% annually of the
initial value of the account, (iv) in circumstances under which no commission or
transaction fee is paid to authorized dealers at the time of purchase of such
shares and (v) effected pursuant to the right of the Fund to involuntarily
liquidate a shareholder's account as described under the heading "Redemption of
Shares." The contingent deferred sales charge also is waived on redemptions of
Class C Shares as it relates to the reinvestment of redemption proceeds in
shares of the same class of the Fund within 180 days after redemption. For a
more complete description of contingent deferred sales charge waivers, please
refer to the Statement of Additional Information or contact your authorized
dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced sales charges. Investors, or their authorized
dealers, must notify the Fund at the time of the purchase order whenever a
quantity discount is applicable to purchases. Upon such notification, an
investor will receive the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount
17
-
<PAGE> 82
being invested in shares of the Participating Funds plus the current offering
price of all shares of the Participating Funds which have been previously
purchased and are still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as out-lined in the Class A Shares sales
charge table. The size of investment shown in the Class A Shares sales charge
table also includes purchases of shares of the Participating Funds over a
13-month period based on the total amount of intended purchases plus the value
of all shares of the Participating Funds previously purchased and still owned.
An investor may elect to compute the 13-month period starting up to 90 days
before the date of execution of a Letter of Intent. Each investment made during
the period receives the reduced sales charge applicable to the total amount of
the investment goal. The initial purchase must be for an amount equal to at
least 5% of the minimum total purchase amount of the level selected. If trades
not initially made under a Letter of Intent subsequently qualify for a lower
sales charge through the 90-day back-dating provisions, an adjustment will be
made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustment in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. The Fund
initially will escrow shares totaling 5% of the dollar amount of the Letter of
Intent to be held by Investor Services in the name of the shareholder. In the
event the Letter of Intent goal is not achieved within the period, the investor
must pay the difference between the sales charge applicable to the purchases
made and the sales charges previously paid. Such payments may be made directly
to the Distributor or, if not paid, the Distributor will liquidate sufficient
escrowed shares to obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges in
connection with the unit investment trust reinvestment program and purchases by
registered representatives of selling firms or purchases by persons affiliated
with the Fund or the Distributor. The Fund reserves the right to modify or
terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund, at net asset value per share and with no minimum initial or
subsequent investment requirement, if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by the Fund and the Distributor. The total sales charge for all other
investments made from unit trust distributions will be 1.00% of the offering
price (1.01% of net asset value). Of this amount, the Distributor will pay to
the authorized dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their authorized dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each participating investor in a computerized format fully
compatible with Investor Services' processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a quarterly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value, upon written assurance that the purchase is made for investment
purposes and that the shares will not be resold except through redemption by the
Fund, by:
(1) Current or retired trustees or directors of funds advised by Asset
Management or Advisory Corp. and such persons' families and their
beneficial accounts.
18
-
<PAGE> 83
(2) Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries, employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser, and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21
years of age when purchasing for any accounts they beneficially own, or, in
the case of any such financial institution, when purchasing for retirement
plans for such institution's employees; provided that such purchases are
otherwise permitted by such institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers through
which purchases are made an amount up to 0.50% of the amount invested, over
a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor
and which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Statements of Additional
Information for further details with respect to such alliance programs.
(6) Beneficial owners of shares of Participating Funds held by a retirement
plan or held in a tax-advantaged retirement account who purchase shares of
the Fund with proceeds from distributions from such a plan or retirement
account other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit
plans qualified under Section 401(a) of the Code, or custodial accounts
held by a bank created pursuant to Section 403(b) of the Code and sponsored
by non-profit organizations defined under Section 501(c)(3) of the Code and
assets held by an employer or trustee in connection with an eligible
deferred compensation plan under Section 457 of the Code. Such plans will
qualify for purchases at net asset value provided, for plans initially
establishing accounts with the Distributor in the Participating Funds after
February 1, 1997, that (1) the initial amount invested in the Participating
Funds is at least $500,000 or (2) such shares are purchased by an employer
sponsored plan with more than 100 eligible employees. Such plans that have
been established with a Participating Fund or have received proposals from
the Distributor prior to February 1, 1997 based on net asset value purchase
privileges previously in effect will be qualified to purchase shares of the
Participating Funds at net asset value for accounts established on or
before May 1, 1997. Section 403(b) and similar accounts for which Van
Kampen Trust Company serves as custodian will not be eligible for net asset
value purchases based on the aggregate investment made by the plan or the
number of eligible employees, except under certain uniform criteria
established by the Distributor from time to time. Prior to February 1,
1997, a commission will be paid to authorized dealers who initiate and are
responsible for such purchases within a rolling twelve-month period as
follows: 1.00% on sales to $5 million, plus 0.50% on the next $5 million,
plus 0.25% on the excess over $10 million. For purchases on February 1,
1997 and thereafter, a commission will be paid as follows: 1.00% on sales
to $2 million, plus 0.80% on the next $1 million, plus 0.50% on the next
$47 million, plus 0.25% on the excess over $50 million.
(9) Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the
Fund and Participating Funds, (iv) has a membership that the authorized
dealer can certify as to the group's members and (v) satisfies other
uniform
19
-
<PAGE> 84
criteria established by the Distributor for the purpose of realizing
economies of scale in distributing such shares. A qualified group does not
include one whose sole organizational nexus, for example, is that its
participants are credit card holders of the same institution, policy
holders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups. Shares purchased
in each group's participants account in connection with this privilege will
be subject to a contingent deferred sales charge of 1.00% in the event of
redemption within one year of purchase, and a commission will be paid to
authorized dealers who initiate and are responsible for such sales to each
individual as follows: 1.00% on sales to $2 million, plus 0.80% on the next
$1 million and 0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust department, provided that
Investor Services receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described on
purchases made as described in (3) through (9) above. The Fund may terminate, or
amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
REDEMPTION OF SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the heading "Purchase of Shares," redemptions of Class B Shares
and Class C Shares may be subject to a contingent deferred sales charge. In
addition, certain redemptions of Class A Shares for shareholder accounts of $1
million or more may be subject to a contingent deferred sales charge.
Redemptions completed through an authorized dealer or a custodian of a
retirement plan account may involve additional fees charged by the dealer or
custodian.
Except as specified below under "Telephone Redemption Requests," payment for
shares redeemed generally will be made by check mailed within seven days after
acceptance by Investor Services of the request and any other necessary documents
in proper order. Such payment may be postponed or the right of redemption
suspended as provided by the rules of the SEC. Such payment may, under certain
circumstances, be paid wholly or in part by a distribution-in-kind of portfolio
securities. If the shares to be redeemed have been recently purchased by check,
Investor Services may delay the redemption until it confirms the purchase check
has cleared, which may take up to 15 days. A taxable gain or loss will be
recognized by the shareholder upon redemption of shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 418256, Kansas City, MO 64141-9256. The request for redemption
should indicate the number of shares to be redeemed, the class designation of
such shares and the shareholder's account number. The redemption request must be
signed by all persons in whose names the shares are registered. Signatures must
conform exactly to the account registration. If the proceeds of the redemption
exceed $50,000, or if the proceeds are not to be paid to the record owner at the
record address, or if the record address has changed within the previous 30
days, signature(s) must be guaranteed by one of the following: a bank or trust
company; a broker-dealer; a credit union; a national securities exchange,
registered securities association or clearing agency; a savings and loan
association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. In the case of shareholders holding
certificates, the certificates for the shares being redeemed properly endorsed
for transfer must accompany the redemption request. In the event the redemption
is requested by a
20
-
<PAGE> 85
corporation, partnership, trust, fiduciary, executor or administrator, and the
name and title of the individual(s) authorizing such redemption is not shown in
the account registration, a copy of the corporate resolution or other legal
documentation appointing the authorized signer and certified within the prior
120 days must accompany the redemption request. IRA redemption requests should
be sent to the IRA custodian to be forwarded to Investor Services. Contact the
IRA custodian for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. Orders sent through authorized dealers
must be at least $500 (unless transmitted by your authorized dealer via the
FUNDSERV network). The redemption price for such shares is the net asset value
per share next calculated after an order in proper form is received by an
authorized dealer provided such order is transmitted to the Distributor prior to
the Distributor's close of business on such day. It is the responsibility of
authorized dealers to transmit redemption requests received by them to the
Distributor so they will be received prior to such time. Redemptions completed
through an authorized dealer may involve additional fees charged by the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application form accompanying this prospectus or call the Fund at (800) 341-2911
to request that a copy of the Telephone Redemption Authorization form be sent to
them for completion. To redeem shares, contact the telephone transaction line at
(800) 421-5684. Van Kampen Investments, Investor Services and the Fund employ
procedures considered by them to be reasonable to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring certain
personal identification information prior to acting upon telephone instructions,
tape recording telephone communications and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen Investments, Investor Services nor the Fund will be liable
for following telephone instructions which it reasonably believes to be genuine.
Telephone redemptions may not be available if the shareholder cannot reach
Investor Services by telephone, whether because all telephone lines are busy or
for any other reason; in such case, a shareholder would have to use the Fund's
other redemption procedure previously described. Requests received by Investor
Services prior to 4:00 p.m., New York time, will be processed at the next
determined net asset value per share. These privileges are available for all
accounts other than retirement accounts or accounts with shares represented by
certificates. If an account has multiple owners, Investor Services may rely on
the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions payable by wire transfer are expected to be wired on the next
business day following the date of redemption. The Fund reserves the right at
any time to terminate, limit or otherwise modify this redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account with a
value on the date of the notice of redemption less than the minimum initial
investment as specified in this prospectus. At least 60 days advance written
notice of any such involuntary redemption will be given and the shareholder will
be given an opportunity to purchase the required value of additional shares at
the next determined net asset value without sales charge. Any involuntary
redemption may only occur if the shareholder account is less than the minimum
initial investment due to shareholder redemptions.
21
-
<PAGE> 86
DISTRIBUTIONS
FROM THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends and
capital gains distributions. Investors will be entitled to begin receiving
dividends on their shares on the business day after Investor Services receives
payment for such shares. However, shares become entitled to dividends on the day
Investor Services receives payment for the shares either through a fed wire or
NSCC settlement. Shares remain entitled to dividends through the day such shares
are processed for payment on redemption.
DIVIDENDS. Interest earned from investments is the Fund's main source of income.
Under the Fund's present policy, which may be changed at any time by the Board
of Trustees, distributions of all or substantially all of this income, less
expenses, are declared daily and paid monthly as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than purchase prices. Net realized capital gains represent the total
profit from sales of securities minus total losses from sales of securities
including losses carried forward from prior years. The Fund distributes any
taxable net realized capital gains to shareholders at least annually. As in the
case of dividends, capital gains distributions are automatically reinvested in
additional shares of the Fund at net asset value unless the shareholder
instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value per share (without sales
charge) on the applicable payable date of the dividend or capital gains
distribution. Unless the shareholder instructs otherwise, the reinvestment plan
is automatic. This instruction may be made by telephone by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired) or by writing to Investor
Services. The investor may, on the initial application or prior to any
declaration, instruct that dividends be paid in cash and capital gains
distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to charge a bank account on a
regular basis to invest pre-determined amounts in the Fund. Additional
information is available from the Distributor or your authorized dealer.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint Investor Services as agent by completing the Authorization for
Redemption by Check form and the appropriate section of the application and
returning the form and the application to Investor Services. Once the form is
properly completed, signed and returned to the agent, a supply of checks drawn
on State Street Bank and Trust Company (the "Bank") will be sent to the Class A
shareholder. These checks may be made payable by the Class A shareholder to the
order of any person in any amount of $100 or more.
When a check is presented to the Bank for payment, full and fractional Class A
Shares required to cover
22
-
<PAGE> 87
the amount of the check are redeemed from the share holder's Class A account by
Investor Services at the next determined net asset value per share. Check
writing redemptions represent the sale of Class A Shares. Any gain or loss
realized on the sale of shares is a taxable event.
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A account, the check will
be returned and the share holder may be subject to additional charges. A Class A
shareholder may not liquidate the entire account by means of a check. The check
writing privilege may be terminated or suspended at any time by the Fund or the
Bank. Retirement plans and accounts that are subject to backup withholding are
not eligible for the privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next computed net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. Under normal circumstances, it is
the policy of the Adviser not to approve such requests.
When Class B Shares and Class C Shares are exchanged among Participating Funds,
the holding period for purposes of computing the contingent deferred sales
charge is based upon the date of the initial purchase of such shares from a
Participating Fund. If such Class B Shares or Class C Shares are redeemed and
not exchanged for shares of another Participating Fund, Class B Shares and Class
C Shares are subject to the contingent deferred sales charge schedule imposed by
the Participating Fund from which such shares were originally purchased.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is carried over and included in the
tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanying the prospectus. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, neither Van Kampen Investments, Investor Services nor
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gains options (except dividend
diversification) and authorized dealer of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or reinvest dividends
from the new account into another fund, however, an exchanging shareholder must
submit a specific request. The Fund reserves the right to reject any order to
acquire its shares through exchange. In addition, the Fund may modify, restrict
or terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
23
-
<PAGE> 88
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these Participating Funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund prior to investing.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instruction. Van Kampen Investments, Investor
Services and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated through the internet are genuine. Such
procedures include requiring use of a personal identification number prior to
acting upon internet instructions and providing written confirmation of
instructions communicated through the internet. If reasonable procedures are
employed, neither Van Kampen Investments, Investor Services nor the Fund will be
liable for following instructions through the internet which it reasonably
believes to be genuine. If an account has multiple owners, Investor Services may
rely on the instructions of any one owner.
CALIFORNIA TAXATION
Under existing California income tax law, if at the close of each quarter of the
Fund's taxable year at least 50% of the value of its total assets consists of
obligations that, when held by individuals, pay interest that is exempt from tax
under California law, shareholders of the Fund who are subject to the California
personal income tax will not be subject to such tax on distributions with
respect to their shares of the Fund to the extent that such distributions are
attributable to such tax-exempt interest from such obligations (less expenses
applicable thereto). If such distributions are received by a corporation subject
to the California franchise tax, however, the distributions will be includable
in its gross income for purposes of determining its California franchise tax.
Corporations subject to the California corporate income tax may be subject to
such taxes with respect to distributions from the Fund. Under California
personal property tax law, securities owned by the Fund and any interest thereon
are exempt from such personal property tax.
Generally, any proceeds paid to the Fund under an insurance policy which
represent matured interest on defaulted obligations should be exempt from
California personal income tax if, and to the same extent that, such interest
would have been exempt if paid by the issuer of such defaulted obligations.
California tax laws substantially incorporate those provisions of the Code
governing the treatment of regulated investment companies.
The state tax discussion set forth above is for general information only.
Prospective investors should consult their own tax advisers regarding the
specific state tax consequences of holding and disposing of shares, as well as
the effects of federal, local and foreign tax law and any proposed tax law
changes.
FEDERAL INCOME TAXATION
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined under applicable
federal income tax law). Exempt-interest dividends
24
-
<PAGE> 89
paid to shareholders generally are not includable in the shareholders' gross
income for federal income tax purposes. Exempt-interest dividends are included
in determining what portion, if any, of a person's social security and railroad
retirement benefits will be includable in gross income subject to federal income
tax.
Under applicable federal income tax law, the interest on certain municipal
securities may be an item of tax preference subject to the alternative minimum
tax. The Fund may invest a portion of its assets in municipal securities subject
to this provision so that a portion of its exempt-interest dividends may be an
item of tax preference to the extent such dividends represent interest received
from such municipal securities. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax.
Although exempt-interest dividends from the Fund generally may be treated by
shareholders as interest excluded from their gross income, each shareholder is
advised to consult his or her tax adviser with respect to whether
exempt-interest dividends retain this exclusion given the investor's tax
circumstances. For example, exempt-interest dividends may not be excluded if the
shareholder would be treated as a "substantial user" (or a "related person" of a
substantial user, as each term is defined by applicable federal income tax law)
of the facilities financed with respect to any of the tax-exempt obligations
held by the Fund.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the shareholder's taxable
year. If a shareholder receives an exempt-interest dividend with respect to any
shares and such shares are held for six months or less, any loss on the sale or
exchange of the shares will be disallowed to the extent of the amount of such
exempt-interest dividend.
While the Fund expects that a major portion of its net investment income
(consisting generally of tax-exempt interest, taxable income and net short-term
capital gains) will constitute tax-exempt interest, a significant portion of the
Fund's net investment income may consist of taxable income. Distributions of
such taxable income are taxable to shareholders as ordinary income to the extent
of the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains (which are the
excess of net long-term capital gains over net short-term capital losses) as
capital gain dividends, if any, are taxable to shareholders as long-term capital
gains, whether paid in cash or reinvested in additional shares, and regardless
of how long the shares of the Fund have been held by such shareholders. Such
capital gain dividends may be taxed at different rates depending on how long the
Fund held the securities. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming such shares are held as a capital asset). Although
distributions generally are treated as taxable in the year they are paid,
distributions declared in October, November or December, payable to shareholders
of record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt-interest dividends cannot exceed,
however, the excess of the amount of interest exempt from tax under Section 103
of the Code received by the Fund during the year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. Since the percentage of
dividends which are exempt-interest dividends is determined on an average annual
method for the taxable year, the percentage of income designated as tax-exempt
for any particular dividend may be substantially different from the percentage
of the Fund's income that was tax exempt during the period covered by the
dividend. Fund distributions generally will not qualify for the dividends
received deduction for corporations.
The sale or exchange of shares is a taxable transaction for federal income tax
purposes. Shareholders who sell their shares will generally recognize gain or
loss in an amount equal to the difference between their adjusted tax basis in
the shares and the amount received. If such shares are held as a capital asset,
the gain or loss will be a capital gain or loss. Any capital gains may be taxed
at different rates depending on how long the shareholder held its shares.
25
-
<PAGE> 90
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain required certifications
or who are otherwise subject to backup withholding.
The Fund intends to qualify as a regulated investment company under the federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its net investment income, the Fund will not be
required to pay federal income taxes on any income it distributed to
shareholders. If the Fund distributes less than the sum of 98% of its ordinary
income and 98% of its capital gain net income, then the Fund will be subject to
a 4% excise tax on the undistributed amounts.
The federal income tax discussion above is for general information only.
Prospective investors should consult their own tax advisers regarding the
specific federal tax consequences of purchasing, holding, exchanging or selling
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
26
-
<PAGE> 91
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, independent accountants, whose report,
along with the Fund's financial statements, is included in the Statement of
Additional Information and may be obtained by shareholders without charge by
calling the telephone number on the back cover of this prospectus. This
information should be read in conjunction with the financial statements and
notes thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
Class A Shares
Nine Months
Ended
September 30, Year Ended December 31,
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $18.294 $17.605 $17.736 $15.802 $18.286 $16.858
------- ------- ------- ------- ------- -------
Net Investment Income............. .638 .880 .857 .884 .912 .967
Net Realized and Unrealized
Gain/Loss....................... .498 .658 (.145) 1.938 (2.484) 1.441
------- ------- ------- ------- ------- -------
Total from Investment Operations... 1.136 1.538 .712 2.822 (1.572) 2.408
Less Distributions from Investment
Income............................ .662 .849 .843 .888 .912 .980
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period............................ $18.768 $18.294 $17.605 $17.736 $15.802 $18.286
======= ======= ======= ======= ======= =======
Total Return* (a).................. 6.38%** 8.93% 4.20% 18.28% (8.75%) 14.54%
Net Assets at End of the Period (In
millions)......................... $151.0 $140.7 $142.5 $147.6 $130.3 $151.1
Ratio of Expenses to Average Net
Assets*........................... .88% .96% 1.02% .89% .78% .69%
Ratio of Net Investment Income to
Average Net Assets*............... 4.66% 4.96% 4.94% 5.23% 5.46% 5.37%
Portfolio Turnover................. 21%** 46% 35% 42% 56% 36%
* If certain expenses had not been
reimbursed by the Adviser, total
return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets............................ N/A N/A 1.03% 1.05% 1.08% 1.01%
Ratio of Net Investment Income to
Average Net Assets................ N/A N/A 4.94% 5.07% 5.16% 5.05%
<CAPTION>
Class B Shares
From May 1, 1993
Nine Months (Commencement
Ended of Distribution) to
September 30, Year Ended December 31, December 31,
1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $18.289 $17.603 $17.736 $15.805 $18.266 $17.570
------- ------- ------- ------- ------- -------
Net Investment Income............. .526 .741 .720 .766 .785 .549
Net Realized and Unrealized
Gain/Loss....................... .506 .662 (.142) 1.926 (2.482) .705
------- ------- ------- ------- ------- -------
Total from Investment Operations... 1.032 1.403 .578 2.692 (1.697) 1.254
Less Distributions from Investment
Income............................ .563 .717 .711 .761 .764 .558
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period............................ $18.758 $18.289 $17.603 $17.736 $15.805 $18.266
======= ======= ======= ======= ======= =======
Total Return* (a).................. 5.76%** 8.19% 3.35% 17.33% (9.39%) 7.25%**
Net Assets at End of the Period (In
millions)......................... $40.1 $31.0 $28.6 $24.6 $17.1 $15.3
Ratio of Expenses to Average Net
Assets*........................... 1.64% 1.72% 1.79% 1.61% 1.52% 1.45%
Ratio of Net Investment Income to
Average Net Assets*............... 3.89% 4.18% 4.17% 4.51% 4.71% 4.06%
Portfolio Turnover................. 21%** 46% 35% 42% 56% 36%
* If certain expenses had not been
reimbursed by the Adviser, total
return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets............................ N/A N/A 1.79% 1.77% 1.82% 1.77%
Ratio of Net Investment Income to
Average Net Assets................ N/A N/A 4.16% 4.35% 4.41% 3.74%
<CAPTION>
Class C Shares
From
Nine Months August 13, 1993
Ended (Commencement
September 30, Year Ended December 31, of Distribution) to
1998 1997 1996 1995 1994 December 31, 1993
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $18.286 $17.602 $17.736 $15.798 $18.257 $18.010
------- ------- ------- ------- ------- -------
Net Investment Income............. .529 .727 .722 .758 .773 .307
Net Realized and Unrealized
Gain/Loss....................... .502 .674 (.145) 1.941 (2.468) .258
------- ------- ------- ------- ------- -------
Total from Investment Operations... 1.031 1.401 .577 2.699 (1.695) .565
Less Distributions from Investment
Income............................ .563 .717 .711 .761 .764 .318
------- ------- -------
Net Asset Value, End of the
Period............................ $18.754 $18.286 $17.602 $17.736 $15.798 $18.257
======= ======= =======
Total Return* (a).................. 5.70** 8.19% 3.35% 17.40% (9.40%) 3.17%**
Net Assets at End of the Period (In
millions)......................... $4.8 $3.8 $2.2 $1.8 $2.8 $4.0
Ratio of Expenses to Average Net
Assets*........................... 1.63% 1.71% 1.79% 1.60% 1.51% 1.45%
Ratio of Net Investment Income to
Average Net Assets*............... 3.87% 4.15% 4.16% 4.50% 4.71% 3.82%
Portfolio Turnover................. 21%** 46% 35% 42% 56% 36%
* If certain expenses had not been
reimbursed by the Adviser, total
return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets............................ N/A N/A 1.80% 1.75% 1.82% 1.76%
Ratio of Net Investment Income to
Average Net Assets................ N/A 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
27
<PAGE> 92
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or redemptions, call
the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUND INFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN CALIFORNIA INSURED TAX FREE FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen California Insured Tax Free Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO Box 1713
Boston, MA 02105-1713
Attn: Van Kampen California Insured Tax Free Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 93
VAN KAMPEN
CALIFORNIA INSURED
TAX FREE FUND
PROSPECTUS
JANUARY 28, 1999
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports,
which explain the market conditions and
investment strategies affecting the Fund's
recent performance.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling (800)
341-2911 from 7:00 a.m. to 7:00 p.m., Central
time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800) 421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC Public
Reference Room in Washington, DC or online at
the SEC's web site (http://www.sec.gov). For
more information, please call the SEC at (800)
SEC-0330. You can also request these materials
by writing the Public Reference Section of the
SEC, Washington DC, 20549-6009, and paying a
duplication fee.
[VAN KAMPEN FUNDS LOGO]
Investment Company Act File No.
811-4386. CAI PRO 1/99
<PAGE> 94
VAN KAMPEN
MUNICIPAL INCOME FUND
Van Kampen Municipal Income Fund is a mutual
fund with an investment objective to provide
investors with a high level of current income
exempt from federal income tax, consistent
with preservation of capital. The Fund's
management seeks to achieve the investment
objective by investing primarily in a
portfolio of investment grade municipal
securities.
Shares of the Fund have not been approved or
disapproved by the Securities and Exchange
Commission (SEC) or any state regulators, and
neither the SEC nor any state regulator has
ruled on the accuracy or adequacy of this
prospectus. It is a criminal offense to state
otherwise.
This prospectus is dated JANUARY 28, 1999.
[VAN KAMPEN FUNDS LOGO]
<PAGE> 95
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary................................ 3
Fees and Expenses of the Fund...................... 6
Investment Objective and Policies.................. 7
Investment Advisory Services....................... 14
Purchase of Shares................................. 15
Redemption of Shares............................... 21
Distributions from the Fund........................ 23
Shareholder Services............................... 23
Federal Income Taxation............................ 25
Financial Highlights............................... 27
</TABLE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus, in connection with the offer contained in this prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
<PAGE> 96
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund is a mutual fund with an investment objective to provide investors with
a high level of current income exempt from federal income tax, consistent with
preservation of capital. There can be no assurance that the Fund will achieve
its investment objective.
INVESTMENT STRATEGIES
Under normal market conditions, the Fund's management seeks to achieve the
investment objective by investing at least 80% of the Fund's total assets in a
portfolio of municipal securities rated investment grade at the time of purchase
or unrated municipal securities believed by the Fund's investment adviser to be
of comparable quality at the time of purchase. Investment grade securities are
securities rated BBB or higher by Standard and Poor's ("S&P") or Baa or higher
by Moody's Investors Service, Inc. ("Moody's") or an equivalent rating by
another nationally recognized statistical rating organization ("NRSRO") or
comparably rated short term securities. Under normal market conditions, up to
20% of the Fund's total assets may consist of municipal securities rated below
investment grade (but not rated lower than B- by S&P or B3 by Moody's) or
comparably rated short term securities and unrated municipal securities believed
by the Fund's investment adviser to be of comparable quality at the time of
purchase. Securities rated BB or below by S&P, Ba or below by Moody's or unrated
securities of comparable quality are commonly referred to as "junk bonds" and
involve special risks as compared to investments in higher-grade securities (see
sidebar for an explanation of quality ratings). The Fund may invest a
substantial portion of its assets in municipal securities that are subject to
federal alternative minimum tax. The Fund may purchase or sell certain
derivative instruments (such as options, futures and options on futures, and
interest rate swaps or other interest rate related transactions) for various
risk management and hedging purposes. The Fund may purchase or sell securities
on a when-issued or delayed delivery basis.
INVESTMENT RISKS
Because of the following risks, you could lose money on your investment in the
Fund over the short or long term:
MARKET RISK. The prices of income securities tend to fall as interest rates
rise. This "market risk" is usually greater among securities with longer
maturities. Because the Fund does not have a policy limiting the maturities of
its investments and the Fund may own securities with longer maturities, the Fund
will be subject to greater market risk than a fund that owns shorter-term
securities.
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased, as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitments for these securities, the greater the Fund's
exposure to market price fluctuation.
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest and principal. Under normal market conditions, the Fund invests at
least 80% of its total assets in investment grade securities and the Fund may
invest up to 20% of its total assets in securities with below investment grade
credit quality. Therefore, the Fund is subject to a higher level of credit risk
than a fund that buys only investment grade securities. The credit quality of
"noninvestment grade" securities is considered speculative by recognized rating
agencies with respect to the issuer's
UNDERSTANDING
QUALITY RATINGS
Bond ratings are based on the issuer's ability to pay interest and repay the
principal. Bonds with ratings above the line are considered "investment
grade," while those with ratings below the line are regarded as
"noninvestment grade," or "junk bonds." A detailed explanation of these
ratings can be found in the Fund's Statement of Additional Information.
Moody's S&P Meaning
- ------------------------------------------------------
Aaa AAA Highest quality
................................................................................
Aa AA High quality
................................................................................
A A Above-average quality
................................................................................
Baa BBB Average quality
- ------------------------------------------------------
Ba BB Below-average quality
................................................................................
B B Marginal quality
................................................................................
Caa CCC Poor quality
................................................................................
Ca CC Highly speculative
................................................................................
C C Lowest quality
................................................................................
-- D In default
................................................................................
3
<PAGE> 97
continuing ability to pay interest and principal. The credit risks and market
prices of lower-grade securities are more sensitive to negative issuer
developments, such as reduced revenues or increased expenditures, or adverse
economic conditions, such as a recession, than are higher grade securities.
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates, which can vary widely over the short and long term. If interest rates
drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of municipal
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would be reinvested by the Fund in securities with the new, lower
interest rates, resulting in a possible decline in the Fund's income and
distributions to shareholders.
MUNICIPAL SECURITIES RISK. The Fund invests primarily in municipal securities.
The yields of municipal securities may move differently and adversely compared
to the yields of the overall debt securities markets. While the interest
received from municipal securities generally is exempt from federal income tax,
the Fund may invest a substantial portion of its assets in municipal securities
subject to federal alternative minimum tax. The Fund may not be a suitable
investment for investors who are already subject to the federal alternative
minimum tax or who would become subject to the federal alternative minimum tax
as a result of an investment in the Fund. In addition, there could be changes in
applicable tax laws or tax treatments that reduce or eliminate the current
federal income tax exemption on municipal securities or otherwise adversely
affect the current federal or state tax status of municipal securities.
RISKS OF USING DERIVATIVE INVESTMENTS. In general terms, a derivative investment
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures and options on futures, interest
rate swaps and other interest rate-related transactions are examples of
derivatives. Such transactions involve risks different from the direct
investment in underlying securities such as imperfect correlation between the
value of the instruments and the underlying assets; risks of default by the
other party to certain transactions; risks that the transactions may incur
losses that partially or completely offset gains in portfolio positions; risks
that the transactions may not be liquid; and manager risk.
MANAGER RISK. As with any fund, the Fund's management may not be successful in
selecting the best-performing securities and the Fund's performance may lag
behind that of similar funds.
An investment in the Fund is not a deposit of any bank or other insured
depository institution. Your investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
INVESTOR PROFILE
In light of its objective and investment strategies, the Fund may be appropriate
for investors who:
- - Seek current income.
- - Are in a high federal income tax bracket.
- - Wish to add to their personal investment portfolios a fund that invests
primarily in investment grade municipal securities.
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program, and investors should consider
their long-term investment goals and financial needs when making an investment
decision about the Fund. An investment in the Fund is
UNDERSTANDING
MUNICIPAL SECURITIES
Municipal securities, including municipal bonds, notes or leases,
generally are issued by state and local governments or regional
governmental authorities to raise money for their daily operations or
special projects. The interest received from municipal securities
generally is exempt from federal income tax. In addition, the interest
may be exempt from certain state or local taxes when received from
issuers who are located in the investors' home state, municipality or
region. The interest from certain municipal securities is a preference item
subject to federal alternative minimum tax.
4
<PAGE> 98
intended to be a long-term investment, and the Fund should not be used as a
trading vehicle.
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance varies from year to year. The following chart shows the annual
returns of the Fund's Class A Shares over the past nine calendar years prior to
the date of this prospectus. Sales loads are not reflected in this chart. If
these sales loads had been included, the returns shown below would have been
lower. Remember that the past performance of the Fund is not indicative of its
future performance.
BAR GRAPH
<TABLE>
<CAPTION>
ANNUAL RETURN
-------------
<S> <C>
'1990' 2.57
'1991' 13.98
'1992' 9.69
'1993' 12.20
'1994' -6.37
'1995' 15.61
'1996' 4.07
'1997' 9.14
'1998' 5.16
</TABLE>
*The return for 1990 is for the period from August 1, 1990 (commencement of
investment operations) to December 31, 1990.
The annual return variability of the Fund's Class B Shares and Class C Shares
would be substantially similar to that shown for the Class A Shares because all
of the Fund's shares are invested in the same portfolio of securities; however,
the actual annual returns of the Class B Shares and Class C Shares would be
lower than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
During the nine-year period shown in the bar chart, the highest quarterly return
was 7.04% (for the quarter ended March 31, 1995) and the lowest quarterly return
was -6.87% (for the quarter ended March 31, 1994).
COMPARATIVE PERFORMANCE
This table shows how the Fund's performance compares with the Lehman Brothers
Municipal Bond Index, a broad-based market index that the Fund's management
believes is an applicable benchmark for the Fund. Average annual total returns,
assuming payment of the maximum sales charges, are shown for the one- and
five-year periods ended December 31, 1998 and the period from the inception date
for each class of shares to December 31, 1998 (the most recently completed
calendar year prior to the date of this prospectus). Remember that the past
performance of the Fund is not indicative of its future performance.
<TABLE>
<CAPTION>
Average Annual
Total Returns Past
for the 10 Years
Periods Ended Past Past or Since
December 31, 1998 1 Year 5 Years Inception
- -------------------------------------------------------
<S> <C> <C> <C>
Van Kampen
Municipal Income
Fund
.......................................................
Class A Shares 0.15% 4.25% 7.03%(1)
.......................................................
Class B Shares 0.43% 4.26% 5.60%(2)
.......................................................
Class C Shares 3.35% 4.48% 4.72%(3)
.......................................................
Lehman Brothers
Municipal Bond
Index 6.48% 6.22% 8.22%
.......................................................
</TABLE>
Inception dates: (1) 8/1/90, (2) 8/24/92, (3) 8/13/93.
The current yield for the thirty-day period ended September 30, 1998 is 3.94%
for Class A Shares, 3.34% for Class B Shares and 3.31% for Class C Shares.
Investors can obtain the current yield of the Fund for each class of shares by
calling (800) 341-2911.
5
<PAGE> 99
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum sales charge
(load) imposed on
purchases (as a
percentage of
offering price) 4.75%(1) None None
..............................................................
Maximum deferred
sales charge
(load)(as a
percentage of the
lesser of original
purchase price or
redemption proceeds) None(2) Year 1-4.00% Year 1-1.00%
Year 2-3.75% After-None
Year 3-3.50%
Year 4-2.50%
Year 5-1.50%
Year 6-1.00%
After-None
..............................................................
Maximum sales charge
(load) imposed on
reinvested dividends
(as a percentage of
offering price) None None None
..............................................................
Redemption fees (as a
percentage of amount None None None
redeemed)
..............................................................
Exchange fee None None None
..............................................................
</TABLE>
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares -- Class A Shares."
ANNUAL FUND
OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fees 0.48% 0.48% 0.48%
..............................................................
Distribution and/or
Service (12b-1) 0.23% 1.00%(2) 1.00%(2)
Fees(1)
..............................................................
Other Expenses 0.16% 0.17% 0.17%
..............................................................
Total Annual Fund
Operating Expenses 0.87% 1.65% 1.65%
..............................................................
</TABLE>
(1) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(2) Because Distribution and/or Service (12b-1) Fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges. Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by National Association of
Securities Dealers, Inc. rules.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% annual return each year and
that the Fund's operating expenses remain the same each year (except for the
ten-year amounts for Class B Shares which reflect the conversion of Class B
Shares to Class A Shares after eight years). Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $560 $739 $ 934 $1,497
......................................................................
Class B Shares $568 $870 $1,047 $1,746*
......................................................................
Class C Shares $268 $520 $ 897 $1,955
......................................................................
</TABLE>
6
-
<PAGE> 100
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $560 $739 $934 $1,497
.....................................................................
Class B Shares $168 $520 $897 $1,746*
.....................................................................
Class C Shares $168 $520 $897 $1,955
.....................................................................
</TABLE>
* Based on conversion to Class A shares after eight years.
To simplify comparison among funds, all funds are required by the SEC to assume
a 5% annual return. Class B Shares of the Fund acquired through the exchange
privilege are subject to the contingent deferred sales charge schedule of the
fund from which the shareholder's purchase of Class B Shares was originally
made. Accordingly, future expenses as projected could be higher than those
determined in the above table if the investor's Class B Shares were exchanged
from a fund with a higher contingent deferred sales charge. The Fund's actual
annual return and actual expenses for future periods may be greater or less than
those shown.
INVESTMENT OBJECTIVE
AND POLICIES
The Fund's investment objective is to provide investors with a high level of
current income exempt from federal income tax, consistent with preservation of
capital. The Fund's investment objective is a fundamental policy and may not be
changed without shareholder approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the Investment Company Act of 1940,
as amended (the "1940 Act"). There are risks inherent in all investments in
securities; accordingly there can be no assurance the Fund will achieve its
investment objective.
Under normal market conditions, the Fund's management seeks to achieve the
investment objective by investing at least 80% of the Fund's total assets in
municipal securities rated investment grade at the time of purchase or unrated
municipal securities believed by the Fund's investment adviser to be of
comparable quality at the time of purchase. Investment grade securities are
securities rated BBB or higher by S&P or Baa or higher by Moody's or an
equivalent rating by another NRSRO or comparably rated short term securities.
Under normal market conditions, up to 20% of the Fund's total assets may consist
of municipal securities rated below investment grade (but not rated lower than
B- by S&P or B3 by Moody's) or comparably rated short term securities and
unrated municipal securities believed by the Fund's investment adviser to be of
comparable quality at the time of purchase. Securities rated BB or below by S&P,
Ba or below by Moody's or unrated securities of comparable quality are commonly
referred to as "junk bonds" and involve special risks as compared to investments
in higher-grade securities. Securities below investment grade are considered
speculative by recognized rating agencies with respect to the issuers'
continuing ability to pay interest and principal. For a description of
security's ratings, see the Statement of Additional Information. The Fund may
invest a substantial portion of its total assets in municipal securities that
are subject to alternative minimum tax. From time to time, the Fund temporarily
may invest up to 10% of its total assets in tax exempt money market funds and
such instruments will be treated as investments in municipal securities.
The Fund's investment adviser will buy and sell securities for the Fund's
portfolio with a view to seeking a high level of current income exempt from
federal income tax and will select securities which the Fund's investment
adviser believes entail reasonable credit risk considered in relation to the
investment policies of the Fund. As a result, the Fund will not necessarily
invest in the highest yielding municipal securities permitted by its investment
policies if the Fund's investment adviser determines that market risks or credit
risks associated with such investments would subject the Fund's portfolio to
undue risk. The potential for realization of capital gains resulting from
possible changes in interest rates will not be a major consideration. Other than
for tax purposes, frequency of portfolio turnover generally will not be a
limiting factor if the Fund's investment adviser considers it advantageous to
purchase or sell securities.
MUNICIPAL SECURITIES
Municipal securities are obligations issued by or on behalf of states,
territories or possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest on
which, in the opinion of bond counsel or other counsel to the issuers of such
securities, is, at the time of issuance, exempt from federal income
7
-
<PAGE> 101
tax. Under normal market conditions, at least 80% of the Fund's total assets
will be invested in municipal securities. The policy stated in the foregoing
sentence is a fundamental policy of the Fund and may not be changed without
shareholder approval of the holders of a majority of the Fund's outstanding
voting securities, as defined in the 1940 Act. The Fund may invest a substantial
portion of its assets in municipal securities that are subject to federal
alternative minimum tax.
The issuers of municipal securities obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
securities may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to lend to other public
institutions and facilities. Certain types of municipal securities are issued to
obtain funding for privately operated facilities.
The yields of municipal securities depend on, among other things, general money
market conditions, general conditions of the municipal securities market, size
of a particular offering, the maturity of the obligation and rating of the
issue. The ratings of S&P and Moody's represent their opinions of the quality of
the municipal securities they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may
have different yields while municipal securities of the same maturity and coupon
with different ratings may have the same yield.
The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special delegation" securities. "General
obligation" securities are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. "Revenue" securities
are usually payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Industrial development bonds are usually
revenue securities, the credit quality of which is normally directly related to
the credit standing of the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, variable rate demand notes, municipal leases,
custodial receipts, participation certificates and derivative municipal
securities (which include terms or elements similar in to certain strategic
transactions described below). Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to reflect market
rates of interest. The Fund also may also invest in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest. Investment in such securities involve special risks as
compared to a fixed rate municipal security. The extent of increases and
decreases in the value of derivative variable rate securities and the
corresponding change to the net asset value of the Fund generally will be larger
than comparable changes in the value of an equal principal amount of a fixed
rate municipal security having similar credit quality, redemption provisions and
maturity. The markets for such securities may be less developed and have less
liquidity than the markets for conventional municipal securities. The Fund will
not invest more than 15% of its total assets in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Municipal notes include tax, revenue and
bond anticipation notes of short maturity, generally less than three years,
which are issued to obtain temporary funds for various public purposes. Variable
rate demand notes are obligations which contain a floating or variable interest
rate adjustment formula and which are subject to a right of demand for payment
of the principal balance plus accrued interest either at any time or at
specified intervals. The interest rate on a variable rate demand note may be
based on a known lending rate, such as a bank's prime rate, and may be adjusted
when such rate changes, or the interest rate may be a market rate that is
adjusted at specified intervals. The adjustment formula maintains the value of
the variable rate demand note at approximately the par value of such note at the
adjustment date. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Certain municipal lease obligations may include "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on
8
-
<PAGE> 102
a yearly basis. Custodial receipts are underwritten by securities dealers or
banks and evidence ownership of future interest payments, principal payments or
both on certain municipal securities. Participation certificates are obligations
issued by state or local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract. Municipal
securities may not be backed by the faith, credit and taxing power of the
issuer. Other than as set forth above, there is no limitation with respect to
the amount of the Fund's assets that may be invested in the foregoing types of
municipal securities. Certain of the municipal securities in which the Fund may
invest represent relatively recent innovations in the municipal securities
markets and the markets for such securities may be less developed than the
market for conventional fixed rate municipal securities. A more detailed
description of the types of municipal securities in which the Fund may invest is
included in the Statement of Additional Information.
Under normal market conditions, longer term municipal securities generally
provide a higher yield than shorter term municipal securities. The Fund has no
limitation as to the maturity of municipal securities in which it may invest.
The Fund's investment adviser may adjust the average maturity of the Fund's
portfolio from time to time depending on its assessment of the relative yields
available on securities of different maturities and its expectations of future
changes in interest rates.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund will invest primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities generally can be
expected to rise. Conversely, when interest rates rise, the value of a portfolio
invested in fixed income securities generally can be expected to decline. The
prices of longer term municipal securities generally are more volatile with
respect to changes in interest rates than the prices of shorter term municipal
securities. Volatility may be greater during periods of general economic
uncertainty.
Municipal securities, like other debt obligations, are subject to the credit
risk of non-payment. The ability of issuers of municipal securities to make
timely payments of interest and principal may be adversely impacted in general
economic downturns and as relative governmental cost burdens are allocated and
reallocated among federal, state and local governmental units. Such non-payment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal securities experiencing non-payment and
a potential decrease in the net asset value of the Fund. In addition, the Fund
may incur expenses to work out or restructure a distressed or defaulted
security. Securities below investment grade involve special risks compared to
higher grade securities. See "Lower Grade Municipal Securities" below.
The Fund may invest a substantial portion of its assets in municipal securities
that are subject to federal alternative minimum tax. The Fund may not be a
suitable investment for investors who are already subject to the federal
alternative minimum tax or who would become subject to the federal alternative
minimum tax as a result of an investment in the Fund.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the current federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected and the Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
The Fund generally considers investments in municipal securities not to be
subject to industry concentration policies (issuers of municipal securities as a
group are not an industry) and the Fund may invest in municipal securities
issued by entities having similar characteristics. The issuers may be located in
the same geographic area or may pay their interest obligations from revenue of
similar projects, such as hospitals, airports, utility systems and housing
finance agencies. This may make the Fund's investments more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation in the Fund's net asset value
also increases. The Fund may invest more than 25% of its total assets in a
segment of the municipal securities market with similar characteristics if the
Fund's investment adviser determines that the yields available from obligations
in a particular segment justify the additional risks of a larger investment in
such segment. The Fund may not,
9
-
<PAGE> 103
however, invest more than 25% of its total assets in industrial development
revenue bonds issued for companies in the same industry. Sizeable investments in
such obligations could involve increased risk to the Fund should any of such
issuers or any such related projects or facilities experience financial
difficulties.
The Fund has no fundamental policy limiting its investments in municipal
securities whose issuers are located in the same state. However, it is not the
present intention of the Fund to invest more than 25% of the value of its total
assets in issuers located in the same state. If the Fund were to invest more
than 25% of its total assets in issuers located in the same state, it would be
more susceptible to adverse economic, business, or regulatory conditions in that
state.
From time to time, the Fund's investments may include securities as to which the
Fund, by itself or together with other funds or accounts managed by the Fund's
investment adviser, holds a major portion or all of an issue of municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Fund's investment adviser believes it is advisable to do so.
LOWER GRADE MUNICIPAL SECURITIES
Under normal market conditions, the Fund may invest up to 20% of its total
assets in municipal securities rated below investment grade (but not lower than
B- by S&P or B3 by Moody's) or comparably rated short term securities and in
unrated municipal securities considered by the Fund's investment adviser to be
of comparable quality at the time of purchase. With respect to such investments,
the Fund has not established any limit on the percentage of its portfolio which
may be invested in securities in any one rating category. Securities rated BB or
below by S&P, Ba or below by Moody's or unrated securities of comparable quality
are commonly referred to as "junk bonds". Generally, lower grade securities
provide a higher yield than higher grade securities of similar maturity but are
subject to greater risks, such as greater credit risk, greater market risk and
volatility, greater liquidity concerns and potentially greater manager risk.
Investors should carefully consider the risks of owning shares of a fund which
invests in lower grade municipal securities before making an investment in the
Fund.
The higher yield on such securities held by the Fund reflects the greater credit
risk that the financial condition of the issuer or adverse changes in general
economic conditions, or both, may impair the ability of the issuer to make
payments of income and principal. Lower grade securities are considered
speculative with respect to the capacity of the issuer to make interest and
principal payments. The ratings of S&P and Moody's represent their opinions of
the quality of the securities they undertake to rate, but not the market value
risk of such securities. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. Credit ratings are also
subject to a risk that the rating agencies may fail to change such ratings to
reflect subsequent events in a timely fashion. See the Statement of Additional
Information for a description of security ratings.
The values of all debt securities fluctuate in response to changes in interest
rates, but lower grade securities generally are subject to more market risk and
volatility than higher grade securities. Lower grade securities tend to react to
short-term issuer or economic developments to a greater extent than higher grade
securities, which fluctuate primarily in response to the general level of
interest rates, assuming that there has been no change in the fundamental
quality of such securities. Yields on the Fund's portfolio securities can be
expected to fluctuate over time. A significant increase in interest rates or a
general economic downturn could severely disrupt the market for lower grade
municipal securities and adversely affect the market value of such securities.
Such events also could lead to a higher incidence of default by issuers of lower
grade municipal securities compared to higher grade securities. In addition,
changes in credit risks, changes in interest rates, the credit markets, or
periods of general economic uncertainty can be expected to result in increased
volatility in the market price of the Fund's lower grade municipal securities
and thus in the net asset value of the Fund. Lower grade securities may be more
susceptible to real or perceived adverse economic conditions than higher grade
securities. A projection of an economic downturn, for example, could cause a
decline in prices of lower grade securities because the advent of a recession
could lessen the ability of a such issuer to make principal and interest
payments on its securities or obtain additional financing when necessary. In
addition, recent and proposed legislation may have an adverse impact on the
market prices or liquidity for lower grade municipal securities.
10
-
<PAGE> 104
The amount of available information about the financial condition of municipal
securities issuers is generally less extensive than that for corporate issuers
with publicly traded securities and the market for municipal securities is
generally considered to be less liquid than the market for corporate debt
obligations. In addition, the markets for lower grade securities may be less
liquid than the markets for higher grade securities. Liquidity relates to the
ability of a fund to sell a security in a timely manner at a price which
reflects the value of that security. To the extent that there is no established
retail market for some of the lower grade municipal securities in which the Fund
may invest, trading in such securities may be relatively inactive. Prices of
lower grade debt securities may decline rapidly in the event a significant
number of holders decide to sell. Changes in expectations regarding an
individual issuer or lower grade debt securities generally could reduce market
liquidity for such securities and make their sale by the Fund more difficult, at
least in the absence of price concessions. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established retail market exists as compared with the effects on securities for
which such a market does exist. An economic downturn or an increase in interest
rates could severely disrupt the market for such securities and adversely affect
the value of outstanding bonds or the ability of the issuers to repay principal
and interest. Further, the Fund may have more difficulty selling such securities
in a timely manner and at their stated value than would be the case for
securities for which an established retail market does exist. Certain municipal
securities in which the Fund may invest, such as special obligation bonds, lease
obligations, participation certificates and variable rate instruments, may be
particularly less liquid. Although the issuer of some such municipal securities
may be obligated to redeem such securities at face value, such redemption could
result in capital losses to the Fund to the extent such municipal securities
were purchased by the Fund at a premium to face value.
The Fund's investment adviser is responsible for determining the net asset value
of the Fund, subject to the supervision of the Fund's Board of Trustees. During
periods of reduced market liquidity or in the absence of readily available
market quotations for lower grade municipal securities held in the Fund's
portfolio, the ability of the Fund's investment adviser to value the Fund's
securities becomes more difficult and the judgment of the Fund's investment
adviser may play a greater role in the valuation of the Fund's securities due to
the reduced availability of reliable objective data.
In the event that an issuer of securities held by the Fund experiences
difficulties in the timely payment of principal or interest and such issuer
seeks to restructure the terms of its borrowings, the Fund may incur additional
expenses and may determine to invest additional assets with respect to such
issuer or the project or projects to which the Fund's portfolio securities
relate. Further, the Fund may incur additional expenses to the extent that it is
required to seek recovery upon a default in the payment of interest or the
repayment of principal on its portfolio holdings, and the Fund may be unable to
obtain full recovery thereof.
The Fund's investment adviser seeks to minimize the risks involved in investing
in lower grade municipal securities through diversification, careful investment
analysis and attention to current developments and trends in the economy and
financial and credit markets. In purchasing and selling securities, the Fund's
investment adviser evaluates the issuers of such securities based on a number of
factors, including but not limited to the issuer's financial strength, its
sensitivity to economic conditions and trends, its revenues or earnings
potential, its operating history and management skills. Municipal securities
generally are not listed for trading on any national securities exchange, and
many issuers of lower grade municipal securities choose not to have a rating
assigned to their obligations by any nationally recognized statistical rating
organization. The amount of information available about the financial condition
of an issuer of unlisted or unrated securities generally is not as extensive as
that which is available with respect to issuers of listed or rated securities.
Thus, investment results of the Fund's lower grade securities may be more
dependent upon the investment adviser's credit analysis, judgment and experience
than a fund investing solely in higher grade securities.
Certain of the lower grade municipal securities in which the Fund may invest may
be, subsequent to the Fund's investment in such securities, downgraded or have
their rating withdrawn by Moody's or S&P or may be deemed by the Fund's
investment adviser to be of a lower quality as a result of impairment of the
creditworthiness of the issuer of such securities or of the project the revenues
from which are the source of payment of interest and repayment of principal with
respect to such securities. The Fund may, if deemed
11
-
<PAGE> 105
appropriate by the Fund's investment adviser, retain a security whose rating has
been downgraded or whose rating has been withdrawn. In such instances, the
secondary market for such municipal securities may become less liquid, with the
possibility that more than 15% of the Fund's net assets would be invested in
securities which are not readily marketable. In such event, the Fund will take
reasonable and appropriate steps to reduce the percentage of the Fund's
portfolio represented by securities that are not readily marketable to less than
15% of the Fund's net assets as soon as is reasonably practicable.
The table below sets forth the percentages of the Fund's assets invested during
the fiscal period ended September 30, 1998 in the various S&P's and Moody's
rating categories and in unrated securities determined by the Fund's investment
adviser to be of comparable quality. The percentages are based on the
dollar-weighted average of credit ratings of all municipal securities held by
the Fund during the 1998 fiscal period, computed on a monthly basis.
<TABLE>
<CAPTION>
Period Ended September 30, 1998
Unrated Securities of
Rated Securities Comparable Quality
(As a Percentage of (As a Percentage of
Rating Category Portfolio Value) Portfolio Value)
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA/Aaa 41.89% 0.00%
.......................................................................
AA/Aa 5.44% 0.52%
.......................................................................
A/A 14.94% 0.74%
.......................................................................
BBB/Baa 14.87% 6.38%
.......................................................................
BB/Ba 0.70% 10.54%
.......................................................................
B/B 0.00% 3.82%
.......................................................................
CCC/Caa 0.00% 0.00%
.......................................................................
CC/Ca 0.00% 0.16%
.......................................................................
C/C 0.00% 0.00%
.......................................................................
D 0.00% 0.00%
.......................................................................
Percentage of
Rated and
Unrated
Securities 77.84% 22.16%
.......................................................................
</TABLE>
The percentage of the Fund's assets invested in securities of various grades may
vary from time to time from those set forth above.
OTHER INVESTMENTS AND RISK FACTORS
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income indices and other financial instruments, purchase and sell
financial futures contracts and enter into various interest rate transactions
such as swaps, caps, floors or collars. Collectively, all of the above are
referred to as "Strategic Transactions." Strategic Transactions may be used to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the investment adviser's ability to predict pertinent market
movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. Strategic Transactions have risks associated with them including
possible default by the other party to the transaction, illiquidity and, to the
extent the investment adviser's view as to certain market movements is
incorrect, the risk that the use of such Strategic Transactions could result in
losses greater than if they had not been used. Use of put and call options may
result in losses to the Fund, force the sale of portfolio securities at
inopportune times or for prices other than at current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the risk management or hedging instrument may be greater than gains in the
value of the Fund's position. In addition, futures and options markets may not
be liquid in all circumstances and certain over-the-counter options may have no
markets. As a result, in certain markets, the Fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
12
-
<PAGE> 106
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and their risks are described more
fully in the Fund's Statement of Additional Information. Income earned or deemed
to be earned by the Fund from its Strategic Transactions, if any, generally will
be taxable income of the Fund.
The Fund may purchase and sell municipal securities on a "when-issued" or
"delayed delivery" basis whereby the Fund buys or sells a security with payment
and delivery taking place in the future. The payment obligation and the interest
rate are fixed at the time the Fund enters into the commitment. No income
accrues to the Fund on municipal securities in connection with such transactions
prior to the date the Fund actually takes delivery of such securities. These
transactions are subject to market risk as the value or yield of a municipal
security at delivery may be more or less than the purchase price or the yield
generally available on municipal securities when delivery occurs. In addition,
the Fund is subject to counterparty risk because it relies on the buyer or
seller, as the case may be, to consummate the transaction, and failure by the
other party to complete the transaction may result in the Fund missing the
opportunity of obtaining a price or yield considered to be advantageous. The
Fund will only make commitments to purchase such securities with the intention
of actually acquiring these securities, but the Fund may sell these securities
prior to settlement if it is deemed advisable. No specific limitation exists as
to the percentage of the Fund's assets which may be used to acquire securities
on a "when-issued" or "delayed delivery" basis.
The Fund may invest up to 15% of the Fund's net assets in illiquid and certain
restricted securities. Such securities may be difficult or impossible to sell at
the time and the price that the Fund would like. Thus, the Fund may have to sell
such securities at a lower price, sell other securities instead to obtain cash
or forego other investment opportunities.
The Fund may borrow amounts up to 5% of its total assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its total assets to
secure such borrowings.
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
Additional Information which can be obtained by investors free of charge as
described on the back cover of this prospectus.
Although the Fund does not intend to engage in substantial short-term trading,
it may sell securities without regard to the length of time they have been held
in order to take advantage of new investment opportunities or yield
differentials or otherwise. The Fund's portfolio turnover is shown under the
heading "Financial Highlights". The portfolio turnover rate may be expected to
vary from year to year. A high portfolio turnover rate (100% or more) increases
the Fund's transactions costs, including brokerage commissions or dealer costs,
and may result in the realization of more short-term capital gains than if the
Fund had a lower portfolio turnover. The turnover rate will not be a limiting
factor, however, if the Fund's investment adviser considers portfolio changes
appropriate.
When market conditions dictate a more "defensive" investment strategy, the Fund
may invest on a temporary basis a portion or all of its assets in high-quality,
short-term municipal obligations. If such high-quality, short-term securities
are not available or, in the investment adviser's judgment, do not afford
sufficient protection against adverse market conditions, the Fund may invest in
taxable obligations. Such taxable obligations may include in securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities, other
investment grade quality income securities, prime commercial paper, certificates
of deposit, bankers' acceptances and other obligations of domestic banks having
total assets of at least $500 million, and repurchase agreements. The effect of
taking such a defensive position may be that the Fund does not achieve its
investment objective.
YEAR 2000 RISKS. Like other mutual funds, financial and business organizations
and individuals around the world, the Fund could be adversely affected if the
computer systems used by the Fund's investment
13
-
<PAGE> 107
adviser and other service providers do not properly process and calculate
date-related information and data from and after January 1, 2000. This is
commonly known as the "Year 2000 Problem." The Fund's investment adviser is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to computer systems that it uses and to obtain reasonable
assurances that comparable steps are being taken by the Fund's other major
service providers. At this time, there can be no assurances that these steps
will be sufficient to avoid any adverse impact to the Fund. In addition, the
Year 2000 Problem may adversely affect the markets and the issuers of securities
in which the Fund may invest which, in turn, may adversely affect the net asset
value of the Fund. Improperly functioning trading systems may result in
settlement problems and liquidity issues. In addition, corporate and
governmental data processing errors may result in production problems for
individual companies or issuers and overall economic uncertainty. Earnings of
individual issuers will be affected by remediation costs, which may be
substantial and may be reported inconsistently in U.S. and foreign financial
statements. Accordingly, the Fund's investments may be adversely affected. The
statements above are subject to the Year 2000 Information and Readiness
Disclosure Act which Act may limit the legal rights regarding the use of such
statements in the case of a dispute.
INVESTMENT ADVISORY
SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp."). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $50 billion under management or supervision. Van
Kampen Investments' more than 50 open-end and 39 closed-end funds and more than
2,500 unit investment trusts are professionally distributed by leading financial
advisers nationwide. Van Kampen Funds Inc., the distributor of the Fund (the
"Distributor") and the sponsor of the funds mentioned above, is also a wholly
owned subsidiary of Van Kampen Investments. Van Kampen Investments is an
indirect wholly owned subsidiary of Morgan Stanley Dean Witter & Co. The
Adviser's principal office is located at 1 Parkview Plaza, PO Box 5555, Oakbrook
Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed based upon an annual rate applied to average daily net assets of the
Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
- -----------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.50%
.....................................................
Over $500 million 0.45%
.....................................................
</TABLE>
Applying this fee schedule, the Fund paid the Adviser an advisory fee at the
effective rate of 0.48% of the Fund's average net assets for the Fund's fiscal
period ended September 30, 1998.
Under the Advisory Agreement, the Fund also reimburses the Adviser for the cost
of the Fund's accounting services, which include maintaining its financial books
and records and calculating its daily net asset value. Other operating expenses
paid by the Fund include service fees, distribution fees, custodial fees, legal
and accounting fees, the costs of reports and proxies to shareholders, trustees'
fees (other than those who are affiliated persons of the Adviser, Distributor or
Van Kampen Investments) and all other business expenses not specifically assumed
by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes of
14
-
<PAGE> 108
Ethics permit directors, trustees, officers and employees to buy and sell
securities for their personal accounts subject to certain restrictions. Persons
with access to certain sensitive information are subject to pre-clearance and
other procedures designed to prevent conflicts of interest.
PORTFOLIO MANAGEMENT. David C. Johnson, a Senior Vice President of the Adviser,
has been primarily responsible for the day-to-day management of the Fund's
portfolio since August 1990. Mr. Johnson has been employed by the Adviser since
April 1989.
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each investor to choose the class of shares that is most beneficial given the
amount to be invested and the length of time the investor expects to hold the
shares. Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Both
minimums may be waived by the Distributor for plans involving periodic
investments.
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares bear the sales charge expenses at the time of redemption and any
expenses (including higher distribution fees and transfer agency costs)
resulting from such deferred sales charge arrangement, (ii) generally, each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan (described below) pursuant to which its
distribution fee or service fee is paid, (iii) each class of shares has
different exchange privileges, (iv) certain classes of shares are subject to a
conversion feature and (v) certain classes of shares have different shareholder
service options available.
The price of the Fund's shares is based upon the Fund's net asset value per
share. The net asset values per share of the Class A Shares, Class B Shares and
Class C Shares are generally expected to be substantially the same. In certain
circumstances, however, the per share net asset values of the classes of shares
may differ from one another, reflecting the daily expense accruals of the higher
distribution fees and transfer agency costs applicable to the Class B Shares and
Class C Shares and the differential in the dividends that may be paid on each
class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on:
customary business holidays, any day on which no purchase or redemption orders
are received or there is not a sufficient degree of trading in the Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Fund reserves the right to calculate the net asset
value per share and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable. Net asset value per share for
each class is determined by dividing the value of the Fund's portfolio
securities, cash and other assets (including accrued interest) attributable to
such class, less all liabilities (including accrued expenses) attributable to
such class, by the total number of shares of the class outstanding. Portfolio
securities are valued by using market quotations, prices provided by market
makers or estimates of market values determined in good faith based upon yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees of the Fund.
Securities with remaining maturities of 60 days or less are valued at amortized
cost when amortized cost is determined in good faith by or under the direction
of the Board of Trustees of the Fund to be representative of the fair value at
which it is expected such securities may be resold. Any securities or other
assets for which current market quotations are not readily available are valued
at their fair value as determined in good faith under procedures established by
and under the general supervision of the Board of Trustees of the Fund.
The Fund has adopted a distribution plan (the "Distribution Plan") with respect
to each class of its shares pursuant to Rule 12b-1 under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Fund also has adopted a service
plan (the "Service Plan") with respect to each class of its shares. The
Distribution Plan and the Service Plan provide that the Fund may pay
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders of each class.
15
-
<PAGE> 109
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. The net income attributable to a class of shares and the
dividends payable on such class of shares will be reduced by the amount of the
distribution fees and other expenses associated with such class of shares. To
assist investors in comparing classes of shares, the tables under the heading
"Fees and Expenses of the Fund" provide a summary of sales charges and expenses
and an example of the sales charges and expenses applicable to each class of
shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza, PO
Box 5555, Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through
members of the National Association of Securities Dealers, Inc. ("NASD") who are
acting as securities dealers ("dealers") and NASD members or eligible non-NASD
members who are acting as brokers or agents or investors ("brokers"). "Dealers"
and "brokers" are sometimes referred to herein as "authorized dealers."
Shares may be purchased on any business day by completing the application
accompanying this prospectus and forwarding the application, directly or through
an authorized dealer, to the Fund's shareholder service agent, Van Kampen
Investor Services Inc. ("Investor Services"), a wholly owned subsidiary of Van
Kampen Investments. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A Shares, Class B Shares or Class C Shares.
Sales personnel of authorized dealers distributing the Fund's shares are
entitled to receive compensation for selling such shares and may receive
differing compensation for selling Class A Shares, Class B Shares or Class C
Shares.
The price paid for shares purchased is based on the next calculation of net
asset value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers are priced
based on the date of receipt provided such order is transmitted to Investor
Services prior to Investor Services' close of business on such date. Orders
received by authorized dealers or transmitted to Investor Services after its
close of business are priced based on the date of the next computed net asset
value per share provided they are received by Investor Services prior to
Investor Services' close of business on such date. It is the responsibility of
authorized dealers to transmit orders received by them to the Investor Services
so they will be received in a timely manner. Orders of less than $500 generally
are mailed by the authorized dealer and processed at the offering price next
calculated after receipt by Investor Services.
Shares of the Fund may be sold in foreign countries where permissible. The Fund
and the Distributor reserve the right to refuse any order for the purchase of
shares. The Fund also reserves the right to suspend the sale of the Fund's
shares in response to conditions in the securities markets or for other reasons.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gains
distributions, unless the investor instructs the Fund otherwise. Investors
wishing to receive cash instead of additional shares should contact the Fund at
(800) 421-5666 or by writing to the Fund, c/o Van Kampen Investors Services
Inc., PO Box 418256, Kansas City, MO 64141-9256.
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 4.75% of the offering price (or 4.99% of the net amount
invested), reduced on investments of $100,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of
Size of Offering Net Amount
Investment Price Invested
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.75% 4.99%
..........................................................
$100,000 but less than
$250,000 3.75% 3.90%
..........................................................
$250,000 but less than
$500,000 2.75% 2.83%
..........................................................
$500,000 but less than
$1,000,000 2.00% 2.04%
..........................................................
$1,000,000 or more * *
..........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1.00% on certain redemptions
16
-
<PAGE> 110
made within one year of the purchase. The contingent deferred sales charge is
assessed on an amount equal to the lesser of the then current market value or
the cost of the shares being redeemed. Accordingly, no sales charge is imposed
on increases in net asset value above the initial purchase price.
The Fund may spend an aggregate amount up to 0.25% per year of the average daily
net assets attributable to the Class A Shares of the Fund pursuant to the
Distribution Plan and Service Plan. From such amount, the Fund may spend up to
0.25% per year of the Fund's average daily net assets attributable to the Class
A Shares pursuant to the Service Plan in connection with the ongoing provision
of services to holders of such shares by the Distributor and by brokers, dealers
or financial intermediaries and in connection with the maintenance of such
shareholders' accounts.
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
deferred sales charge if redeemed within six years of purchase as shown in the
table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
as a Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
- ------------------------------------------------
<S> <C>
First 4.00%
................................................
Second 3.75%
................................................
Third 3.50%
................................................
Fourth 2.50%
................................................
Fifth 1.50%
................................................
Sixth 1.00%
................................................
Seventh and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
It is presently the policy of the Distributor not to accept any order for Class
B Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for the purchase of Class B Shares
until the time of redemption of such shares. Solely for purposes of determining
the number of years from the time of any payment for the purchase of shares, all
payments during a month are aggregated and deemed to have been made on the last
day of the month.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and then of shares held the longest in the shareholder's account.
The Fund may spend up to 0.75% per year of the average daily net assets
attributable to the Class B Shares of the Fund pursuant to the Distribution
Plan. In addition, the Fund may spend up to 0.25% per year of the Fund's average
daily net assets attributable to the Class B Shares pursuant to the Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
deferred sales charge of 1.00% of the dollar amount subject to charge if
redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
It is presently the policy of the Distributor not to accept any order for Class
C Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
17
<PAGE> 111
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and then of shares held the longest in the shareholder's account.
The Fund may spend up to 0.75% per year of the average daily net assets
attributable to the Class C Shares of the Fund pursuant to the Distribution
Plan. In addition, the Fund may spend up to 0.25% per year of the Fund's average
daily net assets attributable to the Class C Shares pursuant to the Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment
plan shares received thereon, automatically convert to Class A Shares eight
years after the end of the calendar month in which the shares were purchased.
Class B Shares purchased before June 1, 1996, and any dividend reinvestment plan
shares received thereon, automatically convert to Class A Shares six years after
the end of the calendar month in which the shares were purchased. Class C Shares
purchased before January 1, 1997, and any dividend reinvestment plan shares
received thereon, automatically convert to Class A Shares ten years after the
end of the calendar month in which such shares were purchased. Such conversion
will be on the basis of the relative net asset values per share, without the
imposition of any sales load, fee or other charge. The conversion schedule
applicable to a share of the Fund acquired through the exchange privilege from
another Van Kampen fund is determined by reference to the Van Kampen fund from
which such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or distributions constituting
"preferential dividends" under the federal income tax law and (ii) the
conversion of shares does not constitute a taxable event under federal income
tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) in
connection with required minimum distributions from an individual retirement
account ("IRA") or certain other retirement plan distributions, (iii) pursuant
to the Fund's systematic withdrawal plan but limited to 12% annually of the
initial value of the account, (iv) in circumstances under which no commission or
transaction fee is paid to authorized dealers at the time of purchase of such
shares and (v) effected pursuant to the right of the Fund to involuntarily
liquidate a shareholder's account as described under the heading "Redemption of
Shares." The contingent deferred sales charge also is waived on redemptions of
Class C Shares as it relates to the reinvestment of redemption proceeds in
shares of the same class of the Fund within 180 days after redemption. For a
more complete description of contingent deferred sales charge waivers, please
refer to the Statement of Additional Information or contact your authorized
dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced sales charges. Investors, or their authorized
dealers, must notify the Fund at the time of the purchase order whenever a
quantity discount is applicable to purchases. Upon such notification, an
investor will receive the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
18
-
<PAGE> 112
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds which have been previously purchased and are
still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as out-lined in the Class A Shares sales
charge table. The size of investment shown in the Class A Shares sales charge
table also includes purchases of shares of the Participating Funds over a
13-month period based on the total amount of intended purchases plus the value
of all shares of the Participating Funds previously purchased and still owned.
An investor may elect to compute the 13-month period starting up to 90 days
before the date of execution of a Letter of Intent. Each investment made during
the period receives the reduced sales charge applicable to the total amount of
the investment goal. The initial purchase must be for an amount equal to at
least 5% of the minimum total purchase amount of the level selected. If trades
not initially made under a Letter of Intent subsequently qualify for a lower
sales charge through the 90-day back-dating provisions, an adjustment will be
made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustment in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. The Fund
initially will escrow shares totaling 5% of the dollar amount of the Letter of
Intent to be held by Investor Services in the name of the shareholder. In the
event the Letter of Intent goal is not achieved within the period, the investor
must pay the difference between the sales charge applicable to the purchases
made and the sales charges previously paid. Such payments may be made directly
to the Distributor or, if not paid, the Distributor will liquidate sufficient
escrowed shares to obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges in
connection with the unit investment trust reinvestment program and purchases by
registered representatives of selling firms or purchases by persons affiliated
with the Fund or the Distributor. The Fund reserves the right to modify or
terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund, at net asset value per share and with no minimum initial or
subsequent investment requirement, if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by the Fund and the Distributor. The total sales charge for all other
investments made from unit trust distributions will be 1.00% of the offering
price (1.01% of net asset value). Of this amount, the Distributor will pay to
the authorized dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their authorized dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each participating investor in a computerized format fully
compatible with Investor Services' processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants
19
-
<PAGE> 113
on a quarterly basis only, even if their investments are made more frequently.
The Fund reserves the right to modify or terminate this program at any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value, upon written assurance that the purchase is made for investment
purposes and that the shares will not be resold except through redemption by the
Fund, by:
(1) Current or retired trustees or directors of funds advised by Asset
Management or Advisory Corp. and such persons' families and their beneficial
accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries, employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser, and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21 years
of age when purchasing for any accounts they beneficially own, or, in the
case of any such financial institution, when purchasing for retirement plans
for such institution's employees; provided that such purchases are otherwise
permitted by such institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers through
which purchases are made an amount up to 0.50% of the amount invested, over
a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor and
which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Statement of Additional
Information for further details with respect to such alliance programs.
(6) Beneficial owners of shares of Participating Funds held by a retirement plan
or held in a tax-advantaged retirement account who purchase shares of the
Fund with proceeds from distributions from such a plan or retirement account
other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit plans
qualified under Section 401(a) of the Code, or custodial accounts held by a
bank created pursuant to Section 403(b) of the Code and sponsored by
non-profit organizations defined under Section 501(c)(3) of the Code and
assets held by an employer or trustee in connection with an eligible
deferred compensation plan under Section 457 of the Code. Such plans will
qualify for purchases at net asset value provided, for plans initially
establishing accounts with the Distributor in the Participating Funds after
February 1, 1997, that (1) the initial amount invested in the Participating
Funds is at least $500,000 or (2) such shares are purchased by an employer
sponsored plan with more than 100 eligible employees. Such plans that have
been established with a Participating Fund or have received proposals from
the Distributor prior to February 1, 1997 based on net asset value purchase
privileges previously in effect will be qualified to purchase shares of the
Participating Funds at net asset value for accounts established on or before
May 1, 1997. Section 403(b) and similar accounts for which Van Kampen Trust
Company serves as custodian will not be eligible for net asset value
purchases based on the aggregate investment made by the plan or the number
of eligible employees, except under certain uniform criteria established by
the Distributor from time to time. Prior to February 1, 1997, a commission
will be paid to authorized dealers who initiate and are responsible for such
purchases within a rolling twelve-month period as follows: 1.00% on sales to
$5 million, plus 0.50% on the next $5 million, plus 0.25% on the excess over
$10 million. For purchases on February 1, 1997 and thereafter, a commission
will be paid as follows: 1.00% on sales to $2 million, plus 0.80% on the
next $1 million, plus 0.50% on the next $47 million, plus 0.25% on the
excess over $50 million.
(9) Individuals who are members of a "qualified group." For this purpose, a
qualified group is
20
-
<PAGE> 114
one which (i) has been in existence for more than six months, (ii) has a
purpose other than to acquire shares of the Fund or similar investments,
(iii) has given and continues to give its endorsement or authorization, on
behalf of the group, for purchase of shares of the Fund and Participating
Funds, (iv) has a membership that the authorized dealer can certify as to
the group's members and (v) satisfies other uniform criteria established by
the Distributor for the purpose of realizing economies of scale in
distributing such shares. A qualified group does not include one whose sole
organizational nexus, for example, is that its participants are credit card
holders of the same institution, policy holders of an insurance company,
customers of a bank or broker-dealer, clients of an investment adviser or
other similar groups. Shares purchased in each group's participants account
in connection with this privilege will be subject to a contingent deferred
sales charge of 1.00% in the event of redemption within one year of
purchase, and a commission will be paid to authorized dealers who initiate
and are responsible for such sales to each individual as follows: 1.00% on
sales to $2 million, plus 0.80% on the next $1 million and 0.50% on the
excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust department, provided that
Investor Services receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described on
purchases made as described in (3) through (9) above. The Fund may terminate, or
amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
REDEMPTION OF
SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the heading "Purchase of Shares," redemptions of Class B Shares
and Class C Shares may be subject to a contingent deferred sales charge. In
addition, certain redemptions of Class A Shares for shareholder accounts of $1
million or more may be subject to a contingent deferred sales charge.
Redemptions completed through an authorized dealer or a custodian of a
retirement plan account may involve additional fees charged by the dealer or
custodian.
Except as specified below under "Telephone Redemption Requests" payment for
shares redeemed generally will be made by check mailed within seven days after
acceptance by Investor Services of the request and any other necessary documents
in proper order. Such payment may be postponed or the right of redemption
suspended as provided by the rules of the SEC. Such payment may, under certain
circumstances, be paid wholly or in part by a distribution-in-kind of portfolio
securities. If the shares to be redeemed have been recently purchased by check,
Investor Services may delay the redemption until it confirms the purchase check
has cleared, which may take up to 15 days. A taxable gain or loss will be
recognized by the shareholder upon redemption of shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 418256, Kansas City, MO 64141-9256. The request for redemption
should indicate the number of shares to be redeemed, the class designation of
such shares and the shareholder's account number. The redemption request must be
signed by all persons in whose names the shares are registered. Signatures must
conform exactly to the account registration. If the proceeds of the redemption
exceed $50,000, or if the proceeds are not to be paid to the record owner at the
record address, or if the record address has changed within the previous 30
days, signature(s) must be guaranteed by one of the following: a bank or trust
company; a broker-dealer; a credit union; a national securities exchange,
registered securities association or clearing
21
-
<PAGE> 115
agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. In the case of shareholders holding
certificates, the certificates for the shares being redeemed properly endorsed
for transfer must accompany the redemption request. In the event the redemption
is requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the authorized signer and
certified within the prior 120 days must accompany the redemption request. IRA
redemption requests should be sent to the IRA custodian to be forwarded to
Investor Services. Contact the IRA custodian for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. Orders sent through authorized dealers
must be at least $500 (unless transmitted by your authorized dealer via the
FUNDSERV network). The redemption price for such shares is the net asset value
per share next calculated after an order in proper form is received by an
authorized dealer provided such order is transmitted to the Distributor prior to
the Distributor's close of business on such day. It is the responsibility of
authorized dealers to transmit redemption requests received by them to the
Distributor so they will be received prior to such time. Redemptions completed
through an authorized dealer may involve additional fees charged by the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application form accompanying this prospectus or call the Fund at (800) 341-2911
to request that a copy of the Telephone Redemption Authorization form be sent to
them for completion. To redeem shares, contact the telephone transaction line at
(800) 421-5684. Van Kampen Investments, Investor Services and the Fund employ
procedures considered by them to be reasonable to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring certain
personal identification information prior to acting upon telephone instructions,
tape recording telephone communications and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen Investments, Investor Services nor the Fund will be liable
for following telephone instructions which it reasonably believes to be genuine.
Telephone redemptions may not be available if the shareholder cannot reach
Investor Services by telephone, whether because all telephone lines are busy or
for any other reason; in such case, a shareholder would have to use the Fund's
other redemption procedure previously described. Requests received by Investor
Services prior to 4:00 p.m., New York time, will be processed at the next
determined net asset value per share. These privileges are available for all
accounts other than retirement accounts or accounts with shares represented by
certificates. If an account has multiple owners, Investor Services may rely on
the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions payable by wire transfer are expected to be wired on the next
business day following the date of redemption. The Fund reserves the right at
any time to terminate, limit or otherwise modify this redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account with a
value on the date of the notice of redemption less than the minimum initial
investment as specified in this prospectus. At least 60 days advance written
notice of any such involuntary redemption will be given and the shareholder will
be given an opportunity to
22
-
<PAGE> 116
purchase the required value of additional shares at the next determined net
asset value without sales charge. Any involuntary redemption may only occur if
the shareholder account is less than the minimum initial investment due to
shareholder redemptions.
DISTRIBUTIONS FROM
THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends and
capital gains distributions. Investors will be entitled to begin receiving
dividends on their shares on the business day after Investor Services receives
payment for such shares. However, shares become entitled to dividends on the day
Investor Services receives payment for the shares either through a fed wire or
NSCC settlement. Shares remain entitled to dividends through the day such shares
are processed for payment on redemption.
DIVIDENDS. Interest earned from investments is the Fund's main source of income.
Under the Fund's present policy, which may be changed at any time by the Board
of Trustees, distributions of all or substantially all of this income, less
expenses, are declared daily and paid monthly as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than purchase prices. Net realized capital gains represent the total
profit from sales of securities minus total losses from sales of securities
including losses carried forward from prior years. The Fund distributes any
taxable net realized capital gains to shareholders at least annually. As in the
case of dividends, capital gains distributions are automatically reinvested in
additional shares of the Fund at net asset value unless the shareholder
instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value per share (without sales
charge) on the applicable payable date of the dividend or capital gains
distribution. Unless the shareholder instructs otherwise, the reinvestment plan
is automatic. This instruction may be made by telephone by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired) or by writing to Investor
Services. The investor may, on the initial application or prior to any
declaration, instruct that dividends be paid in cash and capital gains
distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to charge a bank account on a
regular basis to invest pre-determined amounts in the Fund. Additional
information is available from the Distributor or your authorized dealer.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint Investor Services as agent by completing the Authorization for
Redemption by Check form and the appropriate section of the application and
returning the form and the application to Investor Services. Once the form is
properly completed, signed and returned to the agent, a supply of checks drawn
on State Street Bank and Trust Company (the "Bank") will be sent to the Class A
shareholder. These checks may be made payable by the Class A
23
-
<PAGE> 117
shareholder to the order of any person in any amount of $100 or more.
When a check is presented to the Bank for payment, full and fractional Class A
Shares required to cover the amount of the check are redeemed from the
shareholder's Class A account by Investor Services at the next determined net
asset value per share. Check writing redemptions represent the sale of Class A
Shares. Any gain or loss realized on the sale of shares is a taxable event.
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A account, the check will
be returned and the shareholder may be subject to additional charges. A Class A
shareholder may not liquidate the entire account by means of a check. The check
writing privilege may be terminated or suspended at any time by the Fund or the
Bank. Retirement plans and accounts that are subject to backup withholding are
not eligible for the privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next computed net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. Under normal circumstances, it is
the policy of the Adviser not to approve such requests.
When Class B Shares and Class C Shares are exchanged among Participating Funds,
the holding period for purposes of computing the contingent deferred sales
charge is based upon the date of the initial purchase of such shares from a
Participating Fund. If such Class B Shares or Class C Shares are redeemed and
not exchanged for shares of another Participating Fund, Class B Shares and Class
C Shares are subject to the contingent deferred sales charge schedule imposed by
the Participating Fund from which such shares were originally purchased.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is carried over and included in the
tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanying the prospectus. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, neither Van Kampen Investments, Investor Services nor
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gains options (except dividend
diversification) and authorized dealer of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or reinvest dividends
from the new account into another fund, however, an exchanging shareholder must
submit a specific request. The Fund reserves the right to reject any order to
acquire its shares through exchange. In addition, the Fund may modify, restrict
or terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
24
-
<PAGE> 118
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these Participating Funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund prior to investing.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instruction. Van Kampen Investments, Investor
Services and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated through the internet are genuine. Such
procedures include requiring use of a personal identification number prior to
acting upon internet instructions and providing written confirmation of
instructions communicated through the internet. If reasonable procedures are
employed, neither Van Kampen Investments, Investor Services nor the Fund will be
liable for following instructions through the internet which it reasonably
believes to be genuine. If an account has multiple owners, Investor Services may
rely on the instructions of any one owner.
FEDERAL INCOME TAXATION
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined under applicable
federal income tax law). Exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. Exempt-interest dividends are included in determining what
portion, if any, of a person's social security and railroad retirement benefits
will be includable in gross income subject to federal income tax.
Under applicable federal income tax law, the interest on certain municipal
securities may be an item of tax preference subject to the alternative minimum
tax. The Fund may invest a portion of its assets in municipal securities subject
to this provision so that a portion of its exempt-interest dividends may be an
item of tax preference to the extent such dividends represent interest received
from such municipal securities. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax.
Although exempt-interest dividends from the Fund generally may be treated by
shareholders as interest excluded from their gross income, each shareholder is
advised to consult his or her tax adviser with respect to whether
exempt-interest dividends retain this exclusion given the investor's tax
circumstances. For example, exempt-interest dividends may not be excluded if the
shareholder would be treated as a "substantial user" (or a "related person" of a
substantial user, as each term is defined by applicable federal income tax law)
of the facilities financed with respect to any of the tax-exempt obligations
held by the Fund.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the shareholder's taxable
year. If a shareholder receives
25
-
<PAGE> 119
an exempt-interest dividend with respect to any shares and such shares are held
for six months or less, any loss on the sale or exchange of the shares will be
disallowed to the extent of the amount of such exempt-interest dividend.
While the Fund expects that a major portion of its net investment income
(consisting generally of tax-exempt interest, taxable income and net short-term
capital gains) will constitute tax-exempt interest, a significant portion of the
Fund's net investment income may consist of taxable income. Distributions of
such taxable income are taxable to shareholders as ordinary income to the extent
of the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains (which are the
excess of net long-term capital gains over net short-term capital losses) as
capital gain dividends, if any, are taxable to shareholders as long-term capital
gains, whether paid in cash or reinvested in additional shares, and regardless
of how long the shares of the Fund have been held by such shareholders. Such
capital gain dividends may be taxed at different rates depending on how long the
Fund held the securities. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming such shares are held as a capital asset). Although
distributions generally are treated as taxable in the year they are paid,
distributions declared in October, November or December, payable to shareholders
of record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt interest dividends cannot exceed,
however, the excess of the amount of interest exempt from tax under Section 103
of the Code received by the Fund during the year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. Since the percentage of
dividends which are exempt-interest dividends is determined on an average annual
method for the taxable year, the percentage of income designated as tax-exempt
for any particular dividend may be substantially different from the percentage
of the Fund's income that was tax exempt during the period covered by the
dividend. Fund distributions generally will not qualify for the dividends
received deduction for corporations.
The sale or exchange of shares is a taxable transaction for federal income tax
purposes. Shareholders who sell their shares will generally recognize gain or
loss in an amount equal to the difference between their adjusted tax basis in
the shares and the amount received. If such shares are held as a capital asset,
the gain or loss will be a capital gain or loss. Any capital gains may be taxed
at different rates depending on how long the shareholder held its shares.
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain required certifications
or who are otherwise subject to backup withholding.
The Fund intends to qualify as a regulated investment company under the federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its net investment income, the Fund will not be
required to pay federal income taxes on any income it distributed to
shareholders. If the Fund distributes less than the sum of 98% of its ordinary
income and 98% of its capital gain net income, then the Fund will be subject to
a 4% excise tax on the undistributed amounts.
The federal income tax discussion above is for general information only. The
exemption of interest income for federal income tax purposes may not result in
similar exemptions under the laws of a particular state or local taxing
authority. Income distributions may be taxable to shareholders under state or
local law as dividend income even though a portion of such distributions may be
derived from interest on tax-exempt obligations which, if realized directly,
would be exempt from such income taxes. The Fund will report annually to its
shareholders the percentage and source, on a state-by-state basis, of interest
income earned on municipal securities received by the Fund during the preceding
calendar year. Dividends and distributions paid by the Fund from sources other
than tax-exempt interest are generally subject to taxation at the state and
local levels. Prospective investors should consult their own tax advisers
regarding the specific federal tax consequences of purchasing, holding,
exchanging or selling shares, as well as the effects of state, local and foreign
tax law and any proposed tax law changes.
26
-
<PAGE> 120
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, independent accountants, whose report,
along with the Fund's financial statements, is included in the Statement of
Additional Information and may be obtained by shareholders without charge by
calling the telephone number on the back cover of this prospectus. This
information should be read in conjunction with the financial statements and
notes thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
Class A Shares Class B Shares
Year
Nine Months Nine Months Ended
Ended Ended December
September 30, Year Ended December 31, September 30, 31,
1998 1997 1996 1995 1994 1993 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of
the Period............... $15.767 $15.267 $15.549 $14.261 $16.164 $15.310 $15.764 $15.267
------- ------- ------- ------- ------- ------- ------- -------
Net Investment Income.... .664 .852 .898 .874 .886 .964 .572 .734
Net Realized and
Unrealized
Gain/Loss.............. .195 .500 (.298) 1.296 (1.907) .862 .195 .501
------- ------- ------- ------- ------- ------- ------- -------
Total from Investment
Operations............... .859 1.352 .600 2.170 (1.021) 1.826 .767 1.235
Less Distributions from
Net Investment Income.... .635 .852 .882 .882 .882 .972 .549 .738
------- ------- ------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period............... $15.991 $15.767 $15.267 $15.549 $14.261 $16.164 $15.982 $15.764
======= ======= ======= ======= ======= ======= ======= =======
Total Return(a)........... 5.62%* 9.14% 4.07% 15.61% (6.37%) 12.20% 5.05%* 8.27%
Net Assets at End of the
Period (In millions)..... $788.7 $766.2 $792.3 $839.7 $495.8 $597.6 $197.9 $211.2
Ratio of Expenses to
Average Net Assets(b).... .87% .89% .94% .99% .99% .87% 1.65% 1.65%
Ratio of Net Investment
Income to Average Net
Assets(b)................ 5.63% 5.54% 5.93% 5.86% 5.93% 6.08% 4.85% 4.78%
Portfolio Turnover........ 89%* 104% 73% 61% 75% 82% 89%* 104%
<CAPTION>
Class B Shares
1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning
of
the Period............... $15.549 $14.261 $16.139 $15.308
------- ------- ------- -------
Net Investment Income.... .783 .762 .780 .852
Net Realized and
Unrealized
Gain/Loss.............. (.297) 1.294 (1.890) .845
------- ------- ------- -------
Total from Investment
Operations............... .486 2.056 (1.110) 1.697
Less Distributions from
Net Investment Income.... .768 .768 .768 .866
------- ------- ------- -------
Net Asset Value, End of
the Period............... $15.267 $15.549 $14.261 $16.139
======= ======= ======= =======
Total Return(a)........... 3.29% 14.74% (6.96%) 11.33%
Net Assets at End of the
Period (In millions)..... $211.0 $216.6 $158.7 $168.2
Ratio of Expenses to
Average Net Assets(b).... 1.70% 1.73% 1.70% 1.65%
Ratio of Net Investment
Income to Average Net
Assets(b)................ 5.17% 5.09% 5.22% 5.19%
Portfolio Turnover........ 73% 61% 75% 82%
<CAPTION>
Class C Shares
August 13, 1993
Nine Months (Commencement
Ended of Distribution) to
September 30, Year Ended December 31, December 31,
1998 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of
the Period............... $15.747 $15.254 $15.545 $14.262 $16.141 $15.990
------- ------- ------- ------- ------- -------
Net Investment Income.... .570 .730 .782 .771 .783 .300
Net Realized and
Unrealized
Gain/Loss.............. .196 .501 (.305) 1.280 (1.894) .171
------- ------- ------- ------- ------- -------
Total from Investment
Operations............... .766 1.231 .477 2.051 (1.111) .471
Less Distributions from
Net Investment Income.... .549 .738 .768 .768 .768 .320
------- ------- ------- ------- ------- -------
Net Asset Value, End of
the Period............... $15.964 $15.747 $15.254 $15.545 $14.262 $16.141
======= ======= ======= ======= ======= =======
Total Return(a)........... 4.99%* 8.34% 3.16% 14.74% (6.97%) 2.96%*
Net Assets at End of the
Period (In millions)..... $15.6 $15.3 $12.9 $11.2 $3.9 $4.1
Ratio of Expenses to
Average Net Assets(b).... 1.65% 1.66% 1.70% 1.72% 1.74% 1.85%
Ratio of Net Investment
Income to Average Net
Assets(b)................ 4.86% 4.75% 5.17% 5.24% 5.19% 3.95%
Portfolio Turnover........ 89%* 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 the
Adviser's reimbursement of certain expenses was less than 0.01%. For the
year ended December 31, 1993, if certain expenses had not been assumed by
the Adviser, the Ratios of Expenses to Average Net Assets and Net Investment
Income to Average Net Assets would have been 0.98% and 5.97%, respectively,
for Class A Shares. For the year ended December 31, 1993, if certain
expenses had not been assumed by the Adviser, the Ratios of Expenses to
Average Net Assets and Net Investment Income to Average Net Assets would
have been 1.73% and 5.97%, respectively, for Class B Shares.
* Non-Annualized
27
<PAGE> 121
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or redemptions, call
the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUND INFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN MUNICIPAL INCOME FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen Municipal Income Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Municipal Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 122
VAN KAMPEN
MUNICIPAL INCOME FUND
PROSPECTUS
JANUARY 28, 1999
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports,
which explain the market conditions and
investment strategies affecting the Fund's
recent performance.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling (800)
341-2911 from 7:00 a.m. to 7:00 p.m., Central
time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800) 421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC Public
Reference Room in Washington, DC or online at
the SEC's web site (http://www.sec.gov). For
more information, please call the SEC at (800)
SEC-0330. You can also request these materials
by writing the Public Reference Section of the
SEC, Washington DC, 20549-6009, and paying a
duplication fee.
[VAN KAMPEN FUNDS LOGO]
Investment Company Act File No.
811-4386.
MIF PRO 1/99
<PAGE> 123
VAN KAMPEN
INTERMEDIATE TERM MUNICIPAL INCOME FUND
Van Kampen Intermediate Term Municipal Income
Fund is a mutual fund with an investment
objective to provide investors with a high
level of current income exempt from federal
income tax, consistent with preservation of
capital. The Fund's management seeks to
achieve the investment objective by investing
primarily in a portfolio of municipal
securities that are rated investment grade at
the time of purchase, and the Fund's
management seeks to maintain the
dollar-weighted average life of the portfolio
between three and ten years.
Shares of the Fund have not been approved or
disapproved by the Securities and Exchange
Commission (SEC) or any state regulators, and
neither the SEC nor any state regulator has
ruled on the accuracy or adequacy of this
prospectus. It is a criminal offense to state
otherwise.
This prospectus is dated JANUARY 28, 1999.
[VAN KAMPEN FUNDS LOGO]
<PAGE> 124
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary................................ 3
Fees and Expenses of the Fund...................... 6
Investment Objective and Policies.................. 7
Investment Advisory Services....................... 14
Purchase of Shares................................. 15
Redemption of Shares............................... 21
Distributions from the Fund........................ 23
Shareholder Services............................... 23
Federal Income Taxation............................ 25
Financial Highlights............................... 28
Appendix--Description of Securities Ratings........ 29
</TABLE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus, in connection with the offer contained in this prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
<PAGE> 125
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund is a mutual fund with an investment objective to provide investors with
a high level of current income exempt from federal income tax, consistent with
preservation of capital. There can be no assurance that the Fund will achieve
its investment objective.
INVESTMENT STRATEGIES
Under normal market conditions, the Fund's management seeks to achieve the
investment objective by investing at least 65% of the Fund's total assets in a
portfolio of municipal securities that are rated investment grade at the time of
purchase. Investment grade securities are securities rated BBB or higher by
Standard and Poor's ("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's") or an equivalent rating by another nationally recognized statistical
rating organization ("NRSRO") and comparably rated short term securities. The
remainder of the Fund's total assets may consist of municipal securities rated
below investment grade or comparably rated short term securities and unrated
municipal securities believed by the Fund's investment adviser to be of
comparable quality at the time of purchase. Securities rated BB or below by S&P,
Ba or below by Moody's or unrated securities of comparable quality are commonly
referred to as "junk bonds" and involve special risks as compared to investments
in higher-grade securities (see sidebar for an explanation of quality ratings).
Under normal market conditions, the Fund's management seeks to maintain the
dollar-weighted average life of the portfolio between three and ten years. The
Fund may invest a substantial portion of its assets in municipal securities that
are subject to federal alternative minimum tax. The Fund may purchase or sell
certain derivative instruments (such as options, futures and options on futures,
and interest rate swaps or other interest rate related transactions) for various
risk management and hedging purposes. The Fund may purchase or sell securities
on a when-issued or delayed delivery basis.
INVESTMENT RISKS
Because of the following risks, you could lose money on your investment in the
Fund over the short or long term:
MARKET RISK. The prices of income securities tend to fall as interest rates
rise. This "market risk" is usually greater among securities with longer
maturities. Because the Fund's management seeks to maintain the dollar-weighted
average life of the portfolio between three and ten years, the Fund generally
will be subject to greater market risk than a fund that owns only shorter-term
securities but less market risk than a fund that owns only longer-term
securities.
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased, as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitment for these securities, the greater the Fund's
exposure to market price fluctuation.
Lower grade securities, especially those with long maturities or that do not
make regular interest payments, may fluctuate more in price in response to
negative issuer or general economic news than higher grade securities.
UNDERSTANDING
QUALITY RATINGS
Bond ratings are based on the issuer's ability to pay interest and repay the
principal. Bonds with ratings above the line are considered "investment
grade," while those with ratings below the line are regarded as
"noninvestment grade," or "junk bonds." A detailed explanation of these
ratings can be found in the appendix to this prospectus.
Moody's S&P Meaning
- ------------------------------------------------------
Aaa AAA Highest quality
................................................................................
Aa AA High quality
................................................................................
A A Above-average quality
................................................................................
Baa BBB Average quality
- ------------------------------------------------------
Ba BB Below-average quality
................................................................................
B B Marginal quality
................................................................................
Caa CCC Poor quality
................................................................................
Ca CC Highly speculative
................................................................................
C C Lowest quality
................................................................................
-- D In default
................................................................................
3
<PAGE> 126
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest and principal. Under normal market conditions, the Fund invests at
least 65% of its total assets in investment grade securities and the Fund may
invest up to 35% of its total assets in securities with below investment grade
credit quality. Therefore, the Fund is subject to a higher level of credit risk
than a fund that buys only investment grade securities. The credit quality of
"noninvestment grade" securities is considered speculative by recognized rating
agencies with respect to the issuer's continuing ability to pay interest and
principal. Lower grade securities may have less liquidity, a higher incidence of
default, the Fund may incur higher expenditures to protect the Fund's interest
in such securities than investments in higher-grade securities. The credit risks
and market prices of lower-grade securities are more sensitive to negative
issuer developments, such as reduced revenues or increased expenditures, or
adverse economic conditions, such as a recession, than are higher grade
securities.
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates, which can vary widely over the short and long term. If interest rates
drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of municipal
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would be reinvested by the Fund in securities with the new, lower
interest rates, resulting in a possible decline in the Fund's income and
distributions to shareholders.
MUNICIPAL SECURITIES RISK. The Fund invests primarily in municipal securities.
The yields of municipal securities may move differently and adversely compared
to the yields of the overall debt securities markets. While the interest
received from municipal securities generally is exempt from federal income tax,
the Fund may invest a substantial portion of its assets in municipal securities
subject to federal alternative minimum tax. The Fund may not be a suitable
investment for investors who are already subject to the federal alternative
minimum tax or who would become subject to the federal alternative minimum tax
as a result of an investment in the Fund. In addition, there could be changes in
applicable tax laws or tax treatments that reduce or eliminate the current
federal income tax exemption on municipal securities or otherwise adversely
affect the current federal or state tax status of municipal securities.
RISKS OF USING DERIVATIVE INVESTMENTS. In general terms, a derivative investment
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures and options on futures, interest
rate swaps and other interest rate-related transactions are examples of
derivatives. Such transactions involve risks different from the direct
investment in underlying securities such as imperfect correlation between the
value of the instruments and the underlying assets; risks of default by the
other party to certain transactions; risks that the transactions may incur
losses that partially or completely offset gains in portfolio positions; risks
that the transactions may not be liquid; and manager risk.
MANAGER RISK. As with any fund, the Fund's management may not be successful in
selecting the best-performing securities and the Fund's performance may lag
behind that of similar funds.
An investment in the Fund is not a deposit of any bank or other insured
depository institution. Your investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
INVESTOR PROFILE
In light of its objective and investment strategies, the Fund may be appropriate
for investors who:
- - Seek current income.
- - Are in a high federal income tax bracket.
-
UNDERSTANDING
MUNICIPAL SECURITIES
Municipal securities, including municipal bonds, notes or leases,
generally are issued by state and local governments or regional
governmental authorities to raise money for their daily operations or
special projects. The interest received from municipal securities
generally is exempt from federal income tax. In addition, the interest
may be exempt from certain state or local taxes when received from
issuers who are located in the investors' home state, municipality or
region. The interest from certain municipal securities is a preference item
subject to federal alternative minimum tax.
4
<PAGE> 127
- - Wish to add to their personal investment portfolios a fund that invests
primarily in municipal securities and seeks to maintain an average portfolio
life of intermediate term.
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program, and investors should consider
their long-term investment goals and financial needs when making an investment
decision about the Fund. An investment in the Fund is intended to be a long-term
investment, and the Fund should not be used as a trading vehicle.
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance varies from year to year. The following chart shows the annual
returns of the Fund's Class A Shares over the past six calendar years prior to
the date of this prospectus. Sales loads are not reflected in this chart. If
these sales loads had been included, the returns shown below would have been
lower. Remember that the past performance of the Fund is not indicative of its
future performance.
BAR CHART
<TABLE>
<CAPTION>
ANNUAL RETURN
-------------
<S> <C>
'1993' 7.75
'1994' (3.32)
'1995' 15.31
'1996' 4.27
'1997' 8.08
'1998' 5.97
</TABLE>
*The return for 1993 is for the period from May 28, 1993 (commencement of
investment operations) to December 31, 1993.
The annual return variability of the Fund's Class B Shares and Class C Shares
would be substantially similar to that shown for the Class A Shares because all
of the Fund's shares are invested in the same portfolio of securities; however,
the actual annual returns of the Class B Shares and Class C Shares would be
lower than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
During the six-year period shown in the bar chart, the highest quarterly return
was 6.43% (for the quarter ended March 31, 1995) and the lowest quarterly return
was -4.02% (for the quarter ended March 31, 1994).
COMPARATIVE PERFORMANCE
This table shows how the Fund's performance compares with the Lehman Brothers
Municipal Bond Index, a broad-based market index that the Fund's management
believes is an applicable benchmark for the Fund. Average annual total returns,
assuming payment of the maximum sales charges, are shown for the one- and
five-year periods ended December 31, 1998 and the period from inception of each
class of shares to December 31, 1998 (the most recently completed calendar year
prior to the date of this prospectus). Remember that the past performance of the
Fund is not indicative of its future performance.
<TABLE>
<CAPTION>
Average Annual
Total Returns Past
for the 10 Years
Periods Ended Past Past or Since
December 31, 1998 1 Year 5 Years Inception
- -------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Van Kampen
Intermediate Term
Municipal Income
Fund
.......................................................
Class A Shares 2.56% 5.20% 6.03%(1)
.......................................................
Class B Shares 2.16% 5.13% 5.89%(1)
.......................................................
Class C Shares 4.16% 5.15% 4.93%(2)
.......................................................
Lehman Brothers
Municipal Bond
Index 6.48% 6.22% 8.22%
.......................................................
</TABLE>
Inception dates: (1) 5/28/93, (2) 10/28/93.
The current yield for the thirty-day period ended September 30, 1998 is 3.69%
for Class A Shares, 3.10% for Class B Shares and 3.06% for Class C Shares.
Investors can obtain the current yield of the Fund for each class of shares by
calling (800) 341-2911.
5
-
<PAGE> 128
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum sales charge
(load) imposed on
purchases (as a
percentage of
offering price) 3.25%(1) None None
..............................................................
Maximum deferred
sales charge (load)
(as a percentage of
the lesser of
original purchase
price or redemption
proceeds) None(2) Year 1-3.00% Year 1-1.00%
Year 2-2.50% After-None
Year 3-2.00%
Year 4-1.00%
After-None
..............................................................
Maximum sales charge
(load) imposed on
reinvested dividends
(as a percentage of
offering price) None None None
..............................................................
Redemption fees (as a
percentage of amount None None None
redeemed)
..............................................................
Exchange fee None None None
..............................................................
</TABLE>
(1) Reduced for purchases of $25,000 and over. See "Purchase of Shares--Class A
Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares--Class A Shares."
ANNUAL FUND
OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fees 0.50% 0.50% 0.50%
..............................................................
Distribution and/or 0.25% 1.00%(2) 1.00%(2)
Service (12b-1)
Fees(1)
..............................................................
Other Expenses 0.55% 0.56% 0.56%
..............................................................
Total Annual Fund 1.30% 2.06% 2.06%
Operating Expenses
..............................................................
</TABLE>
(1) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(2) Because Distribution and/or Service (12b-1) Fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges. Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by National Association of
Securities Dealers, Inc. rules.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% annual return each year and
that the Fund's operating expenses remain the same each year (except for the
ten-year amounts for Class B Shares which reflect the conversion of Class B
Shares to Class A Shares after eight years). Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $453 $724 $1,016 $1,844
......................................................................
Class B Shares $509 $846 $1,109 $2,197*
......................................................................
Class C Shares $257 $487 $ 841 $1,837
......................................................................
</TABLE>
6
<PAGE> 129
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $453 $724 $1,016 $1,844
......................................................................
Class B Shares $209 $646 $1,109 $2,197*
......................................................................
Class C Shares $157 $487 $ 841 $1,837
......................................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
To simplify comparison among funds, all funds are required by the SEC to assume
a 5% annual return. Class B Shares of the Fund acquired through the exchange
privilege are subject to the contingent deferred sales charge schedule of the
fund from which the shareholder's purchase of Class B Shares was originally
made. Accordingly, future expenses as projected could be higher than those
determined in the above table if the investor's Class B Shares were exchanged
from a fund with a higher contingent deferred sales charge. The Fund's actual
annual return and actual expenses for future periods may be greater or less than
those shown.
INVESTMENT OBJECTIVE
AND POLICIES
The Fund's investment objective is to provide investors with a high level of
current income exempt from federal income tax, consistent with preservation of
capital. The Fund's investment objective is a fundamental policy and may not be
changed without shareholder approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the Investment Company Act of 1940,
as amended (the "1940 Act"). There are risks inherent in all investments in
securities; accordingly there can be no assurance the Fund will achieve its
investment objective.
Under normal market conditions, the Fund's management seeks to achieve the
investment objective by investing at least 65% of the Fund's total assets in
municipal securities that are rated investment grade at the time of purchase.
Investment grade securities are securities rated BBB or higher by S&P or Baa or
higher by Moody's or an equivalent rating by another NRSRO and comparably rated
short term securities. Under normal market conditions, the remainder of the
Fund's total assets may consist of municipal securities rated below investment
grade or comparably rated short term securities and unrated municipal securities
believed by the Fund's investment adviser to be of comparable quality at the
time of purchase. Securities rated BB or below by S&P, Ba or below by Moody's or
unrated securities of comparable quality are commonly referred to as "junk
bonds" and involve special risks as compared to investments in higher-grade
securities. Securities below investment grade are considered speculative by
recognized rating agencies with respect to the issuers' continuing ability to
pay interest and principal. For a description of securities ratings, see the
Appendix. The Fund may invest a substantial portion of its assets in municipal
securities that are subject to alternative minimum tax. From time to time, the
Fund temporarily may invest up to 10% of its total assets in tax exempt money
market funds and such instruments will be treated as investments in municipal
securities.
Under normal market conditions, the Fund's management seeks to maintain the
dollar-weighted average life of the portfolio between three and ten years. The
Fund has no limitations as to the expected life or stated maturity of individual
municipal securities in which the Fund may invest. Generally, a portfolio of
municipal securities having intermediate dollar-weighted average life tends to
produce a higher level of income than a portfolio of municipal securities having
a shorter dollar-weighted average life and has less net asset value volatility
than a portfolio of municipal securities having a longer dollar-weighted average
life, although such differences cannot be assured. In addition, market prices of
municipal securities with intermediate lives generally fluctuate more in
response to changes in interest rates than do market prices of municipal
securities with shorter lives but generally fluctuate less than market prices of
municipal securities with longer lives. Based on the foregoing, the Fund's
investment adviser believes that under current market conditions the yield and
price characteristics of a municipal securities portfolio with a dollar-weighted
average maturity of three to ten years generally offer an attractive balance
between income and interest rate risk. In certain market conditions, however,
such a portfolio may be less attractive because of differences in yield between
municipal securities of different maturities due to supply and demand forces,
monetary and tax policies and investor expectations. In the event of sustained
market conditions that make it less desirable to maintain a dollar-weighted
average portfolio life of three to ten years, the Board of Trustees of the Fund,
7
<PAGE> 130
in consultation with the Fund's investment adviser, may change the investment
policy of the Fund with respect to the dollar-weighted average life of the
portfolio.
The Fund's investment adviser will buy and sell securities for the Fund's
portfolio with a view to seeking a high level of current income exempt from
federal income tax and will select securities which the Fund's investment
adviser believes entail reasonable credit risk considered in relation to the
investment policies of the Fund. As a result, the Fund will not necessarily
invest in the highest yielding municipal securities permitted by its investment
policies if the Fund's investment adviser determines that market risks or credit
risks associated with such investments would subject the Fund's portfolio to
undue risk. The potential for realization of capital gains resulting from
possible changes in interest rates will not be a major consideration. Other than
for tax purposes, frequency of portfolio turnover generally will not be a
limiting factor if the Fund's investment adviser considers it advantageous to
purchase or sell securities.
MUNICIPAL SECURITIES
Municipal securities are obligations issued by or on behalf of states,
territories or possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest on
which, in the opinion of bond counsel or other counsel to the issuers of such
securities, is, at the time of issuance, exempt from federal income tax. Under
normal market conditions, at least 80% of the Fund's net assets will be invested
in municipal securities. The policy stated in the foregoing sentence is a
fundamental policy of the Fund and may not be changed without shareholder
approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the 1940 Act. The Fund may invest a substantial
portion of its assets in municipal securities that are subject to federal
alternative minimum tax.
The issuers of municipal securities obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
securities may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to lend to other public
institutions and facilities. Certain types of municipal securities are issued to
obtain funding for privately operated facilities.
The yields of municipal securities depend on, among other things, general money
market conditions, general conditions of the municipal securities market, size
of a particular offering, the maturity of the obligation and rating of the
issue. The ratings of S&P and Moody's represent their opinions of the quality of
the municipal securities they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may
have different yields while municipal securities of the same maturity and coupon
with different ratings may have the same yield.
The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special delegation" securities. "General
obligation" securities are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. "Revenue" securities
are usually payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Industrial development bonds are usually
revenue securities, the credit quality of which is normally directly related to
the credit standing of the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, variable rate demand notes, municipal leases,
custodial receipts, participation certificates and derivative municipal
securities (which include terms or elements similar in to certain strategic
transactions described below). Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to reflect market
rates of interest. The Fund also may also invest in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest. Investment in such securities involve special risks as
compared to a fixed rate municipal security. The extent of increases and
decreases in the value of derivative variable rate securities and the
corresponding change to the net asset value of the Fund generally will be larger
than comparable changes in the value of an equal principal amount of a fixed
rate municipal security having
8
-
<PAGE> 131
similar credit quality, redemption provisions and maturity. The markets for such
securities may be less developed and have less liquidity than the markets for
conventional municipal securities. The Fund will not invest more than 15% of its
total assets in derivative variable rate securities, such as inverse floaters
whose rates vary inversely with changes in market rates of interest or range
floaters or capped floaters whose rates are subject to periodic or lifetime
caps. Municipal notes include tax, revenue and bond anticipation notes of short
maturity, generally less than three years, which are issued to obtain temporary
funds for various public purposes. Variable rate demand notes are obligations
which contain a floating or variable interest rate adjustment formula and which
are subject to a right of demand for payment of the principal balance plus
accrued interest either at any time or at specified intervals. The interest rate
on a variable rate demand note may be based on a known lending rate, such as a
bank's prime rate, and may be adjusted when such rate changes, or the interest
rate may be a market rate that is adjusted at specified intervals. The
adjustment formula maintains the value of the variable rate demand note at
approximately the par value of such note at the adjustment date. Municipal
leases are obligations issued by state and local governments or authorities to
finance the acquisition of equipment and facilities. Certain municipal lease
obligations may include "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis.
Custodial receipts are underwritten by securities dealers or banks and evidence
ownership of future interest payments, principal payments or both on certain
municipal securities. Participation certificates are obligations issued by state
or local governments or authorities to finance the acquisition of equipment and
facilities. They may represent participations in a lease, an installment
purchase contract, or a conditional sales contract. Municipal securities may not
be backed by the faith, credit and taxing power of the issuer. Other than as set
forth above, there is no limitation with respect to the amount of the Fund's
assets that may be invested in the foregoing types of municipal securities.
Certain of the municipal securities in which the Fund may invest represent
relatively recent innovations in the municipal securities markets and the
markets for such securities may be less developed than the market for
conventional fixed rate municipal securities. A more detailed description of the
types of municipal securities in which the Fund may invest is included in the
Statement of Additional Information.
Under normal market conditions, longer term municipal securities generally
provide a higher yield than shorter term municipal securities. Under normal
market conditions, the Fund's management seeks to maintain a dollar-weighted
average life of the portfolio between three and ten years. The Fund has no
limitation as to the expected life or started maturity of individual municipal
securities in which it may invest. As previously discussed, the Fund may adjust
the average life of the Fund's portfolio from time to time depending on its
assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund will invest primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities generally can be
expected to rise. Conversely, when interest rates rise, the value of a portfolio
invested in fixed income securities generally can be expected to decline. The
prices of longer term municipal securities generally are more volatile with
respect to changes in interest rates than the prices of shorter term municipal
securities. Volatility may be greater during periods of general economic
uncertainty.
Municipal securities, like other debt obligations, are subject to the credit
risk of non-payment. The ability of issuers of municipal securities to make
timely payments of interest and principal may be adversely impacted in general
economic downturns and as relative governmental cost burdens are allocated and
reallocated among federal, state and local governmental units. Such non-payment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal securities experiencing non-payment and
a potential decrease in the net asset value of the Fund. In addition, the Fund
may incur expenses to work out or restructure a distressed or defaulted
security. Securities below investment grade involve special risks compared to
higher grade securities. See "Lower Grade Municipal Securities" below.
9
-
<PAGE> 132
The Fund may invest a substantial portion of its assets in municipal securities
that are subject to federal alternative minimum tax. The Fund may not be a
suitable investment for investors who are already subject to the federal
alternative minimum tax or who would become subject to the federal alternative
minimum tax as a result of an investment in the Fund.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the current federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected and the Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
The Fund generally considers investments in municipal securities not to be
subject to industry concentration policies (issuers of municipal securities as a
group are not an industry) and the Fund may invest in municipal securities
issued by entities having similar characteristics. The issuers may be located in
the same geographic area or may pay their interest obligations from revenue of
similar projects, such as hospitals, airports, utility systems and housing
finance agencies. This may make the Fund's investments more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation in the Fund's net asset value
also increases. The Fund may invest more than 25% of its total assets in a
segment of the municipal securities market with similar characteristics if the
Fund's investment adviser determines that the yields available from obligations
in a particular segment justify the additional risks of a larger investment in
such segment. The Fund may not, however, invest more than 25% of its total
assets in industrial development revenue bonds issued for companies in the same
industry. Sizeable investments in such obligations could involve increased risk
to the Fund should any of such issuers or any such related projects or
facilities experience financial difficulties.
The Fund has no fundamental policy limiting its investments in municipal
securities whose issuers are located in the same state. However, it is not the
present intention of the Fund to invest more than 25% of the value of its total
assets in issuers located in the same state. If the Fund were to invest more
than 25% of its total assets in issuers located in the same state, it would be
more susceptible to adverse economic, business, or regulatory conditions in that
state.
From time to time, the Fund's investments may include securities as to which the
Fund, by itself or together with other funds or accounts managed by the Fund's
investment adviser, holds a major portion or all of an issue of municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Fund's investment adviser believes it is advisable to do so.
LOWER GRADE MUNICIPAL SECURITIES
Under normal market conditions, the Fund may invest up to 35% of its total
assets in municipal securities rated below investment grade or comparably rated
short term securities and in unrated municipal securities considered by the
Fund's investment adviser to be of comparable quality at the time of purchase.
With respect to such investments, the Fund has not established any limit on the
percentage of its portfolio which may be invested in securities in any one
rating category. Securities rated BB or below by S&P, Ba or below by Moody's or
unrated securities of comparable quality are commonly referred to as "junk
bonds". Generally, lower grade securities provide higher yields than higher
grade securities of similar maturity but are subject to greater risks, such as
greater credit risk, greater market risk and volatility, greater liquidity
concerns and potentially greater manager risk. Investors should carefully
consider the risks of owning shares of a fund which invests in lower grade
municipal securities before making an investment in the Fund.
The higher yield on such securities held by the Fund reflects the greater credit
risk that the financial condition of the issuer or adverse changes in general
economic conditions, or both, may impair the ability of the issuer to make
payments of income and principal. Lower grade securities are considered
speculative by the rating agencies with respect to the capacity of the issuer to
make interest and principal payments and are more susceptible to nonpayment or
default than higher grade securities. An economic downturn or increase in
interest rates could severely impact the ability of such issuers to pay
principal and interest or obtain other financing. The ratings of S&P and Moody's
represent their opinions of the quality of the securities they undertake to
rate, but not the
10
-
<PAGE> 133
market value risk of such securities. It should be emphasized, however, that
ratings are general and are not absolute standards of quality. Credit ratings
are also subject to a risk that the rating agencies may fail to change such
ratings to reflect subsequent events in a timely fashion. See the Appendix for a
description of security ratings.
The values of all debt securities fluctuate in response to changes in interest
rates, but lower grade securities generally are subject to more market risk and
volatility than higher grade securities. Lower grade securities tend to react to
short-term issuer or economic developments to a greater extent than higher grade
securities, which fluctuate primarily in response to the general level of
interest rates, assuming that there has been no change in the fundamental
quality of such securities. Yields on the Fund's portfolio securities can be
expected to fluctuate over time. A significant increase in interest rates or a
general economic downturn could severely disrupt the market for lower grade
municipal securities and adversely affect the market value of such securities.
Such events also could lead to a higher incidence of default by issuers of lower
grade municipal securities compared to higher grade securities. In addition,
changes in credit risks, changes in interest rates, the credit markets or
periods of general economic uncertainty can be expected to result in increased
volatility in the market price of the Fund's lower grade municipal securities
and thus in the net asset value of the Fund. Lower grade securities may be more
susceptible to real or perceived adverse economic conditions than higher grade
securities. A projection of an economic downturn, for example, could cause a
decline in prices of lower grade securities because the advent of a recession
could lessen the ability of a such issuer to make principal and interest
payments on its securities or obtain additional financing when necessary. In
addition, recent and proposed legislation may have an adverse impact on the
market prices or liquidity for lower grade municipal securities.
The amount of available information about the financial condition of municipal
securities issuers is generally less extensive than that for corporate issuers
with publicly traded securities and the market for municipal securities is
generally considered to be less liquid than the market for corporate debt
obligations. In addition, the markets for lower grade securities may be less
liquid than the markets for higher grade securities. Liquidity relates to the
ability of a fund to sell a security in a timely manner at a price which
reflects the value of that security. To the extent that there is no established
retail market for some of the lower grade municipal securities in which the Fund
may invest, trading in such securities may be relatively inactive. Prices of
lower grade debt securities may decline rapidly in the event a significant
number of holders decide to sell. Changes in expectations regarding an
individual issuer or lower grade debt securities generally could reduce market
liquidity for such securities and make their sale by the Fund more difficult, at
least in the absence of price concessions. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established retail market exists as compared with the effects on securities for
which such a market does exist. An economic downturn or an increase in interest
rates could severely disrupt the market for such securities and adversely affect
the value of outstanding bonds or the ability of the issuers to repay principal
and interest. Further, the Fund may have more difficulty selling such securities
in a timely manner and at their stated value than would be the case for
securities for which an established retail market does exist. Certain municipal
securities in which the Fund may invest, such as special obligation bonds, lease
obligations, participation certificates and variable rate instruments, may be
particularly less liquid. Although the issuer of some such municipal securities
may be obligated to redeem such securities at face value, such redemption could
result in capital losses to the Fund to the extent such municipal securities
were purchased by the Fund at a premium to face value.
The Fund's investment adviser is responsible for determining the net asset value
of the Fund, subject to the supervision of the Fund's Board of Trustees. During
periods of reduced market liquidity or in the absence of readily available
market quotations for lower grade municipal securities held in the Fund's
portfolio, the ability of the Fund's investment adviser to value the Fund's
securities becomes more difficult and the judgment of the Fund's investment
adviser may play a greater role in the valuation of the Fund's securities due to
the reduced availability of reliable objective data.
In the event that an issuer of securities held by the Fund experiences
difficulties in the timely payment of principal or interest and such issuer
seeks to restructure the terms of its borrowings, the Fund may incur additional
expenses and may determine to invest additional assets with respect to such
issuer or the project or projects to which the Fund's portfolio
11
-
<PAGE> 134
securities relate. Further, the Fund may incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of interest
or the repayment of principal on its portfolio holdings, and the Fund may be
unable to obtain full recovery thereof.
The Fund's investment adviser seeks to minimize the risks involved in investing
in lower grade municipal securities through diversification, careful investment
analysis and attention to current developments and trends in the economy and
financial and credit markets. In purchasing and selling securities, the Fund's
investment adviser evaluates the issuers of such securities based on a number of
factors, including but not limited to the issuer's financial strength, its
sensitivity to economic conditions and trends, its revenues or earnings
potential, its operating history and management skills. Municipal securities
generally are not listed for trading on any national securities exchange, and
many issuers of lower grade municipal securities choose not to have a rating
assigned to their obligations by any nationally recognized statistical rating
organization. The amount of information available about the financial condition
of an issuer of unlisted or unrated securities generally is not as extensive as
that which is available with respect to issuers of listed or rated securities.
Thus, investment results of the Fund's lower grade securities may be more
dependent upon the investment adviser's credit analysis, judgment and experience
than a fund investing solely in higher grade securities.
Certain of the lower grade municipal securities in which the Fund may invest may
be, subsequent to the Fund's investment in such securities, downgraded or have
their rating withdrawn by Moody's or S&P or may be deemed by the Fund's
investment adviser to be of a lower quality as a result of impairment of the
creditworthiness of the issuer of such securities or of the project the revenues
from which are the source of payment of interest and repayment of principal with
respect to such securities. The Fund may, if deemed appropriate by the Fund's
investment adviser, retain a security whose rating has been downgraded or whose
rating has been withdrawn. In such instances, the secondary market for such
municipal securities may become less liquid, with the possibility that more than
15% of the Fund's net assets would be invested in securities which are not
readily marketable. In such event, the Fund will take reasonable and appropriate
steps to reduce the percentage of the Fund's portfolio represented by securities
that are not readily marketable to less than 15% of the Fund's net assets as
soon as is reasonably practicable.
The table below sets forth the percentages of the Fund's assets invested during
the fiscal period ended September 30, 1998 in the various S&P's and Moody's
rating categories and in unrated securities determined by the Fund's investment
adviser to be of comparable quality. The percentages are based on the
dollar-weighted average of credit ratings of all municipal securities held by
the Fund during the 1998 fiscal period computed on a monthly basis.
<TABLE>
<CAPTION>
Period Ended
September 30, 1998
-----------------------------------------
Unrated
Securities of
Rated Securities Comparable Quality
Rating (as a Percentage of (as a Percentage of
Category Portfolio Value) Portfolio Value)
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA/Aaa 35.55% 0%
..........................................................................
AA/Aa 5.05% 0%
..........................................................................
A/A 7.63% 0%
..........................................................................
BBB/Baa 20.85% 8.99%
..........................................................................
BB/Ba 3.16% 13.60%
..........................................................................
B/B 0% 5.17%
..........................................................................
CCC/Caa 0% 0%
..........................................................................
CC/Ca 0% 0%
..........................................................................
C/C 0% 0%
..........................................................................
D 0% 0%
..........................................................................
Percentage of Rated and
Unrated Securities 72.24% 27.76%
..........................................................................
</TABLE>
The percentage of the Fund's assets invested in securities of various grades may
vary from time to time from those set forth above.
OTHER INVESTMENTS AND RISK FACTORS
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income indices and other financial instruments, purchase and sell
financial futures contracts and enter into various interest rate transactions
such as swaps, caps, floors or collars. Collectively, all of the above are
referred to as "Strategic Transactions." Strategic Transactions may be used to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from
12
-
<PAGE> 135
securities markets fluctuations, to protect the Fund's unrealized gains in the
value of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of the Fund's
portfolio, or to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. Any or all of these
investment techniques may be used at any time and there is no particular
strategy that dictates the use of one technique rather than another, as use of
any Strategic Transaction is a function of numerous variables including market
conditions. The ability of the Fund to utilize these Strategic Transactions
successfully will depend on the investment adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions have risks associated with
them including possible default by the other party to the transaction,
illiquidity and, to the extent the investment adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale of
portfolio securities at inopportune times or for prices other than at current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the risk management or hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and their risks are described more fully in the Fund's Statement of
Additional Information. Income earned or deemed to be earned by the Fund from
its Strategic Transactions, if any, generally will be taxable income of the
Fund.
The Fund may purchase and sell municipal securities on a "when-issued" or
"delayed delivery" basis whereby the Fund buys or sells a security with payment
and delivery taking place in the future. The payment obligation and the interest
rate are fixed at the time the Fund enters into the commitment. No income
accrues to the Fund on municipal securities in connection with such transactions
prior to the date the Fund actually takes delivery of such securities. These
transactions are subject to market risk as the value or yield of a municipal
security at delivery may be more or less than the purchase price or the yield
generally available on municipal securities when delivery occurs. In addition,
the Fund is subject to counterparty risk because it relies on the buyer or
seller, as the case may be, to consummate the transaction, and failure by the
other party to complete the transaction may result in the Fund missing the
opportunity of obtaining a price or yield considered to be advantageous. The
Fund will only make commitments to purchase such securities with the intention
of actually acquiring these securities, but the Fund may sell these securities
prior to settlement if it is deemed advisable. No specific limitation exists as
to the percentage of the Fund's assets which may be used to acquire securities
on a "when-issued" or "delayed delivery" basis.
The Fund may invest up to 15% of the Fund's net assets in illiquid and certain
restricted securities. Such securities may be difficult or impossible to sell at
the time and the price that the Fund would like. Thus, the Fund may have to sell
such securities at a lower price, sell other securities instead to obtain cash
or forego other investment opportunities.
The Fund may borrow amounts up to 5% of its total assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its total assets to
secure such borrowings.
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
13
-
<PAGE> 136
Additional Information which can be obtained by investors free of charge as
described on the back cover of this prospectus.
Although the Fund does not intend to engage in substantial short-term trading,
it may sell securities without regard to the length of time they have been held
in order to take advantage of new investment opportunities or yield
differentials or otherwise. The Fund's portfolio turnover is shown under the
heading "Financial Highlights". The portfolio turnover rate may be expected to
vary from year to year. A high portfolio turnover rate (100% or more) increases
the Fund's transactions costs, including brokerage commissions or dealer costs,
and may result in the realization of more short-term capital gains than if the
Fund had a lower portfolio turnover. The turnover rate will not be a limiting
factor, however, if the Fund's investment adviser considers portfolio changes
appropriate.
When market conditions dictate a more "defensive" investment strategy, the Fund
may invest on a temporary basis a portion or all of its assets in high-quality,
short-term municipal obligations. If such high-quality, short-term securities
are not available or, in the investment adviser's judgment, do not afford
sufficient protection against adverse market conditions, the Fund may invest in
taxable obligations. Such taxable obligations may include in securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities, other
investment grade quality income securities, prime commercial paper, certificates
of deposit, bankers' acceptances and other obligations of domestic banks having
total assets of at least $500 million, and repurchase agreements. The effect of
taking such a defensive position may be that the Fund does not achieve its
investment objective.
YEAR 2000 RISKS. Like other mutual funds, financial and business organizations
and individuals around the world, the Fund could be adversely affected if the
computer systems used by the Fund's investment adviser and other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." The Fund's investment adviser is taking steps that it believes are
reasonably designed to address the Year 2000 Problem with respect to computer
systems that it uses and to obtain reasonable assurances that comparable steps
are being taken by the Fund's other major service providers. At this time, there
can be no assurances that these steps will be sufficient to avoid any adverse
impact to the Fund. In addition, the Year 2000 Problem may adversely affect the
markets and the issuers of securities in which the Fund may invest which, in
turn, may adversely affect the net asset value of the Fund. Improperly
functioning trading systems may result in settlement problems and liquidity
issues. In addition, corporate and governmental data processing errors may
result in production problems for individual companies or issuers and overall
economic uncertainty. Earnings of individual issuers will be affected by
remediation costs, which may be substantial and may be reported inconsistently
in U.S. and foreign financial statements. Accordingly, the Fund's investments
may be adversely affected. The statements above are subject to the Year 2000
Information and Readiness Disclosure Act which Act may limit the legal rights
regarding the use of such statements in the case of a dispute.
INVESTMENT ADVISORY
SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp"). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $50 billion under management or supervision. Van
Kampen Investments' more than 50 open-end and 39 closed-end funds and more than
2,500 unit investment trusts are professionally distributed by leading financial
advisers nationwide. Van Kampen Funds Inc., the distributor of the Fund (the
"Distributor") and the sponsor of the funds mentioned above, is also a wholly
owned subsidiary of Van Kampen Investments. Van Kampen Investments is an
indirect wholly owned subsidiary of Morgan Stanley Dean Witter & Co. The
Adviser's principal office is located at 1 Parkview Plaza, PO Box 5555, Oakbrook
Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory
14
-
<PAGE> 137
Agreement"), the Fund pays the Adviser a monthly fee computed based upon an
annual rate applied to average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
- -----------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.50%
.....................................................
Over $500 million 0.45%
.....................................................
</TABLE>
Applying this fee schedule, the Fund paid the Adviser an advisory fee at the
effective rate of 0.50% of the Fund's average net assets for the Fund's fiscal
period ended September 30, 1998.
Under the Advisory Agreement, the Fund also reimburses the Adviser for the cost
of the Fund's accounting services, which include maintaining its financial books
and records and calculating its daily net asset value. Other operating expenses
paid by the Fund include service fees, distribution fees, custodial fees, legal
and accounting fees, the costs of reports and proxies to shareholders, trustees'
fees (other than those who are affiliated persons of the Adviser, Distributor or
Van Kampen Investments) and all other business expenses not specifically assumed
by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes of Ethics permit directors, trustees,
officers and employees to buy and sell securities for their personal accounts
subject to certain restrictions. Persons with access to certain sensitive
information are subject to pre-clearance and other procedures designed to
prevent conflicts of interest.
PORTFOLIO MANAGEMENT. Timothy D. Haney, a Vice President of the Adviser, has
been primarily responsible for the day-to-day management of the Fund's portfolio
since January 1997. Mr. Haney has been employed by the Adviser since August
1988.
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each investor to choose the class of shares that is most beneficial given the
amount to be invested and the length of time the investor expects to hold the
shares. Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Both
minimums may be waived by the Distributor for plans involving periodic
investments.
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares bear the sales charge expenses at the time of redemption and any
expenses (including higher distribution fees and transfer agency costs)
resulting from such deferred sales charge arrangement, (ii) generally, each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan (described below) pursuant to which its
distribution fee or service fee is paid, (iii) each class of shares has
different exchange privileges, (iv) certain classes of shares are subject to a
conversion feature and (v) certain classes of shares have different shareholder
service options available.
The price of the Fund's shares is based upon the Fund's net asset value per
share. The net asset values per share of the Class A Shares, Class B Shares and
Class C Shares are generally expected to be substantially the same. In certain
circumstances, however, the per share net asset values of the classes of shares
may differ from one another, reflecting the daily expense accruals of the higher
distribution fees and transfer agency costs applicable to the Class B Shares and
Class C Shares and the differential in the dividends that may be paid on each
class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of 5:00 p.m. Eastern time Monday through Friday, except
15
-
<PAGE> 138
on: customary business holidays, any day on which no purchase or redemption
orders are received or there is not a sufficient degree of trading in the Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Fund reserves the right to calculate the net asset
value per share and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable. Net asset value per share for
each class is determined by dividing the value of the Fund's portfolio
securities, cash and other assets (including accrued interest) attributable to
such class, less all liabilities (including accrued expenses) attributable to
such class, by the total number of shares of the class outstanding. Portfolio
securities are valued by using market quotations, prices provided by market
makers or estimates of market values determined in good faith based upon yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees of the Fund.
Securities with remaining maturities of 60 days or less are valued at amortized
cost when amortized cost is determined in good faith by or under the direction
of the Board of Trustees of the Fund to be representative of the fair value at
which it is expected such securities may be resold. Any securities or other
assets for which current market quotations are not readily available are valued
at their fair value as determined in good faith under procedures established by
and under the general supervision of the Board of Trustees of the Fund.
The Fund has adopted a distribution plan (the "Distribution Plan") with respect
to each class of its shares pursuant to Rule 12b-1 under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Fund also has adopted a service
plan (the "Service Plan") with respect to each class of its shares. The
Distribution Plan and the Service Plan provide that the Fund may pay
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders of each class.
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. The net income attributable to a class of shares and the
dividends payable on such class of shares will be reduced by the amount of the
distribution fees and other expenses associated with such class of shares. To
assist investors in comparing classes of shares, the tables under the heading
"Fees and Expenses of the Fund" provide a summary of sales charges and expenses
and an example of the sales charges and expenses applicable to each class of
shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza, PO
Box 5555, Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through
members of the National Association of Securities Dealers, Inc. ("NASD") who are
acting as securities dealers ("dealers") and NASD members or eligible non-NASD
members who are acting as brokers or agents or investors ("brokers"). "Dealers"
and "brokers" are sometimes referred to herein as "authorized dealers."
Shares may be purchased on any business day by completing the application
accompanying this prospectus and forwarding the application, directly or through
an authorized dealer, to the Fund's shareholder service agent, Van Kampen
Investor Services Inc. ("Investor Services"), a wholly owned subsidiary of Van
Kampen Investments. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A Shares, Class B Shares or Class C Shares.
Sales personnel of authorized dealers distributing the Fund's shares are
entitled to receive compensation for selling such shares and may receive
differing compensation for selling Class A Shares, Class B Shares or Class C
Shares.
The price paid for shares purchased is based on the next calculation of net
asset value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers are priced
based on the date of receipt provided such order is transmitted to Investor
Services prior to Investor Services' close of business on such date. Orders
received by authorized dealers or transmitted to Investor Services after its
close of business are priced based on the date of the next computed net asset
value per share provided they are received by Investor Services prior to
Investor Services' close of business on such date. It is the responsibility of
authorized dealers to transmit orders received by them to Investor Services so
they will be received in a timely manner. Orders of less than $500
16
-
<PAGE> 139
generally are mailed by the authorized dealer and processed at the offering
price next calculated after receipt by Investor Services.
Shares of the Fund may be sold in foreign countries where permissible. The Fund
and the Distributor reserve the right to refuse any order for the purchase of
shares. The Fund also reserves the right to suspend the sale of the Fund's
shares in response to conditions in the securities markets or for other reasons.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gains
distributions, unless the investor instructs the Fund otherwise. Investors
wishing to receive cash instead of additional shares should contact the Fund at
(800) 341-2911 or by writing to the Fund, c/o Van Kampen Investors Services
Inc., PO Box 418256, Kansas City, MO 64141-9256.
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 3.25% of the offering price (or 3.36% of the net amount
invested), reduced on investments of $25,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of
Size of Offering Net Amount
Investment Price Invested
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $25,000 3.25% 3.36%
..........................................................
$25,000 but less than
$250,000 2.75% 2.83%
..........................................................
$250,000 but less than
$500,000 1.75% 1.78%
..........................................................
$500,000 but less than
$1,000,000 1.50% 1.52%
..........................................................
$1,000,000 or more * *
..........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1.00% on certain redemptions made within one year of
the purchase. The contingent deferred sales charge is assessed on an amount
equal to the lesser of the then current market value or the cost of the shares
being redeemed. Accordingly, no sales charge is imposed on increases in net
asset value above the initial purchase price.
The Fund may spend an aggregate amount up to 0.25% per year of the average daily
net assets attributable to the Class A Shares of the Fund pursuant to the
Distribution Plan and Service Plan. From such amount, the Fund may spend up to
0.25% per year of the Fund's average daily net assets attributable to the Class
A Shares pursuant to the Service Plan in connection with the ongoing provision
of services to holders of such shares by the Distributor and by brokers, dealers
or financial intermediaries and in connection with the maintenance of such
shareholders' accounts.
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
deferred sales charge if redeemed within four years of purchase as shown in the
table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
as a Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
- ------------------------------------------------
<S> <C> <C> <C>
First 3.00%
................................................
Second 2.50%
................................................
Third 2.00%
................................................
Fourth 1.00%
................................................
Fifth and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
It is presently the policy of the Distributor not to accept any order for Class
B Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for the purchase of Class B Shares
until the time of redemption of such shares. Solely for purposes of determining
the number of years from the time of any payment for the purchase of shares, all
payments during a month are aggregated and deemed to have been made on the last
day of the month.
17
-
<PAGE> 140
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and then of shares held the longest in the shareholder's account.
The Fund may spend up to 0.75% per year of the average daily net assets
attributable to the Class B Shares of the Fund pursuant to the Distribution
Plan. In addition, the Fund may spend up to 0.25% per year of the Fund's average
daily net assets attributable to the Class B Shares pursuant to the Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
deferred sales charge of 1.00% of the dollar amount subject to charge if
redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
It is presently the policy of the Distributor not to accept any order for Class
C Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and then of shares held the longest in the shareholder's account.
The Fund may spend up to 0.75% per year of the average daily net assets
attributable to the Class C Shares of the Fund pursuant to the Distribution
Plan. In addition, the Fund may spend up to 0.25% per year of the Fund's average
daily net assets attributable to the Class C Shares pursuant to the Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment
plan shares received thereon, automatically convert to Class A Shares eight
years after the end of the calendar month in which the shares were purchased.
Class B Shares purchased before June 1, 1996, and any dividend reinvestment plan
shares received thereon, automatically convert to Class A Shares six years after
the end of the calendar month in which the shares were purchased. Class C Shares
purchased before January 1, 1997, and any dividend reinvestment plan shares
received thereon, automatically convert to Class A Shares ten years after the
end of the calendar month in which such shares were purchased. Such conversion
will be on the basis of the relative net asset values per share, without the
imposition of any sales load, fee or other charge. The conversion schedule
applicable to a share of the Fund acquired through the exchange privilege from
another Van Kampen fund is determined by reference to the Van Kampen fund from
which such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or distributions constituting
"preferential dividends" under the federal income tax law and (ii) the
conversion of shares does not constitute a taxable event under federal income
tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) in
connection with required minimum distributions from an individual retirement
account ("IRA") or certain other retirement plan distributions, (iii) pursuant
to the Fund's systematic withdrawal plan but limited to 12% annually of the
18
-
<PAGE> 141
initial value of the account, (iv) in circumstances under which no commission or
transaction fee is paid to authorized dealers at the time of purchase of such
shares and (v) effected pursuant to the right of the Fund to involuntarily
liquidate a shareholder's account as described under the heading "Redemption of
Shares." The contingent deferred sales charge also is waived on redemptions of
Class C Shares as it relates to the reinvestment of redemption proceeds in
shares of the same class of the Fund within 180 days after redemption. For a
more complete description of contingent deferred sales charge waivers, please
refer to the Statement of Additional Information or contact your authorized
dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced sales charges. Investors, or their authorized
dealers, must notify the Fund at the time of the purchase order whenever a
quantity discount is applicable to purchases. Upon such notification, an
investor will receive the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds which have been previously purchased and are
still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as out-lined in the Class A Shares sales
charge table. The size of investment shown in the Class A Shares sales charge
table also includes purchases of shares of the Participating Funds over a
13-month period based on the total amount of intended purchases plus the value
of all shares of the Participating Funds previously purchased and still owned.
An investor may elect to compute the 13-month period starting up to 90 days
before the date of execution of a Letter of Intent. Each investment made during
the period receives the reduced sales charge applicable to the total amount of
the investment goal. The initial purchase must be for an amount equal to at
least 5% of the minimum total purchase amount of the level selected. If trades
not initially made under a Letter of Intent subsequently qualify for a lower
sales charge through the 90-day back-dating provisions, an adjustment will be
made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustment in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. The Fund
initially will escrow shares totaling 5% of the dollar amount of the Letter of
Intent to be held by Investor Services in the name of the shareholder. In the
event the Letter of Intent goal is not achieved within the period, the investor
must pay the difference between the sales charge applicable to the purchases
made and the sales charges previously paid. Such payments may be made directly
to the Distributor or, if not paid, the Distributor will liquidate sufficient
escrowed shares to obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges in
connection with the unit investment trust reinvestment program and purchases by
registered representatives of selling firms or purchases by persons affiliated
with the Fund or the Distributor. The Fund reserves the right to modify or
terminate these arrangements at any time.
19
-
<PAGE> 142
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund, at net asset value per share and with no minimum initial or
subsequent investment requirement, if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by the Fund and the Distributor. The total sales charge for all other
investments made from unit trust distributions will be 1.00% of the offering
price (1.01% of net asset value). Of this amount, the Distributor will pay to
the authorized dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their authorized dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each participating investor in a computerized format fully
compatible with Investor Services' processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a quarterly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value, upon written assurance that the purchase is made for investment
purposes and that the shares will not be resold except through redemption by the
Fund, by:
1. Current or retired trustees or directors of funds advised by Asset Management
or Advisory Corp. and such persons' families and their beneficial accounts.
2. Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries, employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser, and such persons' families and their beneficial accounts.
3. Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21 years
of age when purchasing for any accounts they beneficially own, or, in the
case of any such financial institution, when purchasing for retirement plans
for such institution's employees; provided that such purchases are otherwise
permitted by such institutions.
4. Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers through
which purchases are made an amount up to 0.50% of the amount invested, over a
12-month period.
5. Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor and
which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Statement of Additional
Information for further details with respect to such alliance programs.
6. Beneficial owners of shares of Participating Funds held by a retirement plan
or held in a tax-advantaged retirement account who purchase shares of the
Fund with proceeds from distributions from such a plan or retirement account
other than distributions taken to correct an excess contribution.
7. Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
8. Trusts created under pension, profit sharing or other employee benefit plans
qualified under Section 401(a) of the Code, or custodial accounts held by a
bank created pursuant to Section 403(b)
20
-
<PAGE> 143
of the Code and sponsored by non-profit organizations defined under Section
501(c)(3) of the Code and assets held by an employer or trustee in connection
with an eligible deferred compensation plan under Section 457 of the Code.
Such plans will qualify for purchases at net asset value provided, for plans
initially establishing accounts with the Distributor in the Participating
Funds after February 1, 1997, that (1) the initial amount invested in the
Participating Funds is at least $500,000 or (2) such shares are purchased by
an employer sponsored plan with more than 100 eligible employees. Such plans
that have been established with a Participating Fund or have received
proposals from the Distributor prior to February 1, 1997 based on net asset
value purchase privileges previously in effect will be qualified to purchase
shares of the Participating Funds at net asset value for accounts established
on or before May 1, 1997. Section 403(b) and similar accounts for which Van
Kampen Trust Company serves as custodian will not be eligible for net asset
value purchases based on the aggregate investment made by the plan or the
number of eligible employees, except under certain uniform criteria
established by the Distributor from time to time. Prior to February 1, 1997,
a commission will be paid to authorized dealers who initiate and are
responsible for such purchases within a rolling twelve-month period as
follows: 1.00% on sales to $5 million, plus 0.50% on the next $5 million,
plus 0.25% on the excess over $10 million. For purchases on February 1, 1997
and thereafter, a commission will be paid as follows: 1.00% on sales to $2
million, plus 0.80% on the next $1 million, plus 0.50% on the next $47
million, plus 0.25% on the excess over $50 million.
9. Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement or
authorization, on behalf of the group, for purchase of shares of the Fund and
Participating Funds, (iv) has a membership that the authorized dealer can
certify as to the group's members and (v) satisfies other uniform criteria
established by the Distributor for the purpose of realizing economies of
scale in distributing such shares. A qualified group does not include one
whose sole organizational nexus, for example, is that its participants are
credit card holders of the same institution, policy holders of an insurance
company, customers of a bank or broker-dealer, clients of an investment
adviser or other similar groups. Shares purchased in each group's
participants account in connection with this privilege will be subject to a
contingent deferred sales charge of 1.00% in the event of redemption within
one year of purchase, and a commission will be paid to authorized dealers who
initiate and are responsible for such sales to each individual as follows:
1.00% on sales to $2 million, plus 0.80% on the next $1 million and 0.50% on
the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust department, provided that
Investor Services receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described on
purchases made as described in (3) through (9) above. The Fund may terminate, or
amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
REDEMPTION OF
SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the heading "Purchase of Shares," redemptions of Class B Shares
and Class C Shares may be subject to a contingent deferred sales charge. In
addition, certain redemptions of Class A Shares for shareholder accounts of $1
million or more may be subject to a contingent deferred sales charge.
Redemptions completed through an authorized dealer or a custodian of a
retirement plan account may
21
-
<PAGE> 144
involve additional fees charged by the dealer or custodian.
Except as specified below under "Telephone Redemption Requests" payment for
shares redeemed generally will be made by check mailed within seven days after
acceptance by Investor Services of the request and any other necessary documents
in proper order. Such payment may be postponed or the right of redemption
suspended as provided by the rules of the SEC. Such payment may, under certain
circumstances, be paid wholly or in part by a distribution-in-kind of portfolio
securities. If the shares to be redeemed have been recently purchased by check,
Investor Services may delay the redemption until it confirms the purchase check
has cleared, which may take up to 15 days. A taxable gain or loss will be
recognized by the shareholder upon redemption of shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 418256, Kansas City, MO 64141-9256. The request for redemption
should indicate the number of shares to be redeemed, the class designation of
such shares and the shareholder's account number. The redemption request must be
signed by all persons in whose names the shares are registered. Signatures must
conform exactly to the account registration. If the proceeds of the redemption
exceed $50,000, or if the proceeds are not to be paid to the record owner at the
record address, or if the record address has changed within the previous 30
days, signature(s) must be guaranteed by one of the following: a bank or trust
company; a broker-dealer; a credit union; a national securities exchange,
registered securities association or clearing agency; a savings and loan
association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. In the case of shareholders holding
certificates, the certificates for the shares being redeemed properly endorsed
for transfer must accompany the redemption request. In the event the redemption
is requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the authorized signer and
certified within the prior 120 days must accompany the redemption request. IRA
redemption requests should be sent to the IRA custodian to be forwarded to
Investor Services. Contact the IRA custodian for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. Orders sent through authorized dealers
must be at least $500 (unless transmitted by your authorized dealer via the
FUNDSERV network). The redemption price for such shares is the net asset value
per share next calculated after an order in proper form is received by an
authorized dealer provided such order is transmitted to the Distributor prior to
the Distributor's close of business on such day. It is the responsibility of
authorized dealers to transmit redemption requests received by them to the
Distributor so they will be received prior to such time. Redemptions completed
through an authorized dealer may involve additional fees charged by the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application form accompanying this prospectus or call the Fund at (800) 341-2911
to request that a copy of the Telephone Redemption Authorization form be sent to
them for completion. To redeem shares, contact the telephone transaction line at
(800) 421-5684. Van Kampen Investments, Investor Services and the Fund employ
procedures considered by them to be reasonable to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring certain
personal identification information prior to acting upon telephone instructions,
tape recording telephone communications and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen Investments, Investor Services nor the Fund will be liable
for following telephone instructions which it reasonably believes to be genuine.
Telephone redemptions may not be available if the shareholder cannot
22
-
<PAGE> 145
reach Investor Services by telephone, whether because all telephone lines are
busy or for any other reason; in such case, a shareholder would have to use the
Fund's other redemption procedure previously described. Requests received by
Investor Services prior to 4:00 p.m., New York time, will be processed at the
next determined net asset value per share. These privileges are available for
all accounts other than retirement accounts or accounts with shares represented
by certificates. If an account has multiple owners, Investor Services may rely
on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions payable by wire transfer are expected to be wired on the next
business day following the date of redemption. The Fund reserves the right at
any time to terminate, limit or otherwise modify this redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account with a
value on the date of the notice of redemption less than the minimum initial
investment as specified in this prospectus. At least 60 days advance written
notice of any such involuntary redemption will be given and the shareholder will
be given an opportunity to purchase the required value of additional shares at
the next determined net asset value without sales charge. Any involuntary
redemption may only occur if the shareholder account is less than the minimum
initial investment due to shareholder redemptions.
DISTRIBUTIONS FROM
THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends and
capital gains distributions. Investors will be entitled to begin receiving
dividends on their shares on the business day after Investor Services receives
payment for such shares. However, shares become entitled to dividends on the day
Investor Services receives payment for the shares either through a fed wire or
NSCC settlement. Shares remain entitled to dividends through the day such shares
are processed for payment on redemption.
DIVIDENDS. Interest earned from investments is the Fund's main source of income.
Under the Fund's present policy, which may be changed at any time by the Board
of Trustees, distributions of all or substantially all of this income, less
expenses, are declared daily and paid monthly as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than purchase prices. Net realized capital gains represent the total
profit from sales of securities minus total losses from sales of securities
including losses carried forward from prior years. The Fund distributes any
taxable net realized capital gains to shareholders at least annually. As in the
case of dividends, capital gains distributions are automatically reinvested in
additional shares of the Fund at net asset value unless the shareholder
instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
23
-
<PAGE> 146
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value per share (without sales
charge) on the applicable payable date of the dividend or capital gains
distribution. Unless the shareholder instructs otherwise, the reinvestment plan
is automatic. This instruction may be made by telephone by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired) or by writing to Investor
Services. The investor may, on the initial application or prior to any
declaration, instruct that dividends be paid in cash and capital gains
distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to charge a bank account on a
regular basis to invest pre-determined amounts in the Fund. Additional
information is available from the Distributor or your authorized dealer.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint Investor Services as agent by completing the Authorization for
Redemption by Check form and the appropriate section of the application and
returning the form and the application to Investor Services. Once the form is
properly completed, signed and returned to the agent, a supply of checks drawn
on State Street Bank and Trust Company (the "Bank") will be sent to the Class A
shareholder. These checks may be made payable by the Class A shareholder to the
order of any person in any amount of $100 or more.
When a check is presented to the Bank for payment, full and fractional Class A
Shares required to cover the amount of the check are redeemed from the
shareholder's Class A account by Investor Services at the next determined net
asset value per share. Check writing redemptions represent the sale of Class A
Shares. Any gain or loss realized on the sale of shares is a taxable event.
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A account, the check will
be returned and the shareholder may be subject to additional charges. A Class A
shareholder may not liquidate the entire account by means of a check. The check
writing privilege may be terminated or suspended at any time by the Fund or the
Bank. Retirement plans and accounts that are subject to backup withholding are
not eligible for the privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next computed net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. Under normal circumstances, it is
the policy of the Adviser not to approve such requests.
When Class B Shares and Class C Shares are exchanged among Participating Funds,
the holding period for purposes of computing the contingent deferred sales
charge is based upon the date of the initial purchase of such shares from a
Participating Fund. If such Class B Shares or Class C Shares are redeemed and
not exchanged for shares of another Participating Fund, Class B Shares and Class
C Shares are subject to the contingent deferred sales charge schedule imposed by
the Participating Fund from which such shares were originally purchased.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is carried over and included in the
tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services
24
-
<PAGE> 147
or by contacting the telephone transaction line at (800) 421-5684. A shareholder
automatically has telephone exchange privileges unless otherwise designated in
the application form accompanying the prospectus. Van Kampen Investments and its
subsidiaries, including Investor Services, and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen Investments, Investor Services nor the Fund will be liable
for following telephone instructions which it reasonably believes to be genuine.
If the exchanging shareholder does not have an account in the fund whose shares
are being acquired, a new account will be established with the same
registration, dividend and capital gains options (except dividend
diversification) and authorized dealer of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or reinvest dividends
from the new account into another fund, however, an exchanging shareholder must
submit a specific request. The Fund reserves the right to reject any order to
acquire its shares through exchange. In addition, the Fund may modify, restrict
or terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these Participating Funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund prior to investing.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instruction. Van Kampen Investments, Investor
Services and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated through the internet are genuine. Such
procedures include requiring use of a personal identification number prior to
acting upon internet instructions and providing written confirmation of
instructions communicated through the internet. If reasonable procedures are
employed, neither Van Kampen Investments, Investor Services nor the Fund will be
liable for following instructions through the internet which it reasonably
believes to be genuine. If an account has multiple owners, Investor Services may
rely on the instructions of any one owner.
FEDERAL INCOME TAXATION
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined under applicable
federal income tax law). Exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. Exempt-interest dividends are included in determining what
portion, if any, of a person's social security and railroad retirement benefits
will be
25
-
<PAGE> 148
includable in gross income subject to federal income tax.
Under applicable federal income tax law, the interest on certain municipal
securities may be an item of tax preference subject to the alternative minimum
tax. The Fund may invest a portion of its assets in municipal securities subject
to this provision so that a portion of its exempt-interest dividends may be an
item of tax preference to the extent such dividends represent interest received
from such municipal securities. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax.
Although exempt-interest dividends from the Fund generally may be treated by
shareholders as interest excluded from their gross income, each shareholder is
advised to consult his or her tax adviser with respect to whether
exempt-interest dividends retain this exclusion given the investor's tax
circumstances. For example, exempt-interest dividends may not be excluded if the
shareholder would be treated as a "substantial user" (or a "related person" of a
substantial user, as each term is defined by applicable federal income tax law)
of the facilities financed with respect to any of the tax-exempt obligations
held by the Fund.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the shareholder's taxable
year. If a shareholder receives an exempt-interest dividend with respect to any
shares and such shares are held for six months or less, any loss on the sale or
exchange of the shares will be disallowed to the extent of the amount of such
exempt-interest dividend.
While the Fund expects that a major portion of its net investment income
(consisting generally of tax-exempt interest, taxable income and net short-term
capital gains) will constitute tax-exempt interest, a significant portion of the
Fund's net investment income may consist of taxable income. Distributions of
such taxable income are taxable to shareholders as ordinary income to the extent
of the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains (which are the
excess of net long-term capital gains over net short-term capital losses) as
capital gain dividends, if any, are taxable to shareholders as long-term capital
gains, whether paid in cash or reinvested in additional shares, and regardless
of how long the shares of the Fund have been held by such shareholders. Such
capital gain dividends may be taxed at different rates depending on how long the
Fund held the securities. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming such shares are held as a capital asset). Although
distributions generally are treated as taxable in the year they are paid,
distributions declared in October, November or December, payable to shareholders
of record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt interest dividends cannot exceed,
however, the excess of the amount of interest exempt from tax under Section 103
of the Code received by the Fund during the year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. Since the percentage of
dividends which are exempt-interest dividends is determined on an average annual
method for the taxable year, the percentage of income designated as tax-exempt
for any particular dividend may be substantially different from the percentage
of the Fund's income that was tax exempt during the period covered by the
dividend. Fund distributions generally will not qualify for the dividends
received deduction for corporations.
The sale or exchange of shares is a taxable transaction for federal income tax
purposes. Shareholders who sell their shares will generally recognize gain or
loss in an amount equal to the difference between their adjusted tax basis in
the shares and the amount received. If such shares are held as a capital asset,
the gain or loss will be a capital gain or loss. Any capital gains may be taxed
at different rates depending on how long the shareholder held its shares.
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain
26
-
<PAGE> 149
required certifications or who are otherwise subject to backup withholding.
The Fund intends to qualify as a regulated investment company under the federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its net investment income, the Fund will not be
required to pay federal income taxes on any income it distributed to
shareholders. If the Fund distributes less than the sum of 98% of its ordinary
income or less than and 98% of its capital gain net income, then the Fund will
be subject to a 4% excise tax on the undistributed amounts.
The federal income tax discussion above is for general information only. The
exemption of interest income for federal income tax purposes may not result in
similar exemptions under the laws of a particular state or local taxing
authority. Income distributions may be taxable to shareholders under state or
local law as dividend income even though a portion of such distributions may be
derived from interest on tax-exempt obligations which, if realized directly,
would be exempt from such income taxes. The Fund will report annually to its
shareholders the percentage and source, on a state-by-state basis, of interest
income earned on municipal securities received by the Fund during the preceding
calendar year. Dividends and distributions paid by the Fund from sources other
than tax-exempt interest are generally subject to taxation at the state and
local levels. Prospective investors should consult their own tax advisers
regarding the specific federal tax consequences of purchasing, holding,
exchanging or selling shares, as well as the effects of state, local and foreign
tax law and any proposed tax law changes.
27
-
<PAGE> 150
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, independent accountants, whose report,
along with the Fund's financial statements, is included in the Statement of
Additional Information and may be obtained by shareholders without charge by
calling the telephone number on the back cover of this prospectus. This
information should be read in conjunction with the financial statements and
notes thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
Class A Shares
May 28, 1993
Nine Months (Commencement
Ended of Investment
September 30, Year Ended December 31, Operations) to
1998 1997 1996 1995 1994 December 31, 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................. $10.536 $10.213 $10.264 $ 9.330 $10.145 $ 9.700
------- ------- ------- ------- ------- -------
Net Investment Income.............. .358 .480 .455 .508 .489 .278
Net Realized and Unrealized
Gain/Loss........................ .199 .317 (.032) .900 (.815) .462
------- ------- ------- ------- ------- -------
Total from Investment Operations.... .557 .797 .423 1.408 (.326) .740
Less:
Distributions from Net Investment
Income............................. .365 .474 .474 .474 .489 .273
Distributions from Net Realized
Gain............................... -0- -0- -0- -0- -0- .022
------- ------- ------- ------- ------- -------
Total Distributions................. .365 .474 .474 .474 .489 .295
Net Asset Value, End of the
Period............................. $10.728 $10.536 $10.213 $10.264 $ 9.330 $10.145
======= ======= ======= ======= ======= =======
Total Return*(a).................... 5.36%** 8.08% 4.27% 15.31% (3.32%) 7.75%**
Net Assets at End of the Period (In
millions).......................... $ 20.6 $ 12.9 $ 12.5 $ 15.6 $ 15.7 $ 14.0
Ratio of Expenses to Average Net
Assets*............................ 1.30% 1.52% 1.56% 1.00% .67% .14%
Ratio of Net Investment Income to
Average Net Assets*................ 4.61% 4.67% 4.45% 5.10% 5.07% 4.78%
Portfolio Turnover.................. 15%** 37% 45% 75% 274% 86%**
*If certain expenses had not been
reimbursed by the Adviser, Total
Return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets............................. n/a 1.67% 1.74% 1.61% 1.75% 2.21%
Ratio of Net Investment Income to
Average Net Assets................. n/a 4.52% 4.27% 4.49% 3.99% 2.70%
<CAPTION>
Class B Shares
May 28, 1993
Nine Months (Commencement
Ended of Investment
September 30, Year Ended December 31, Operations) to
1998 1997 1996 1995 1994 December 31, 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................. $10.526 $10.209 $10.263 $ 9.319 $10.137 $ 9.700
------- ------- ------- ------- ------- -------
Net Investment Income.............. .308 .402 .375 .430 .417 .233
Net Realized and Unrealized
Gain/Loss........................ .191 .317 (.027) .916 (.818) .460
------- ------- ------- ------- ------- -------
Total from Investment Operations.... .499 .719 .348 1.346 (.401) .693
Less:
Distributions from Net Investment
Income............................. .311 .402 .402 .402 .417 .234
Distributions from Net Realized
Gain............................... -0- -0- -0- -0- -0- .022
------- ------- ------- ------- ------- -------
Total Distributions................. .311 .402 .402 .402 .417 .256
Net Asset Value, End of the
Period............................. $10.714 $10.526 $10.209 $10.263 $ 9.319 $10.137
======= ======= ======= ======= ======= =======
Total Return*(a).................... 4.74%** 7.23% 3.54% 14.62% (4.04%) 7.23%**
Net Assets at End of the Period (In
millions).......................... $ 15.2 $ 16.4 $ 16.4 $ 17.5 $ 17.7 $ 13.9
Ratio of Expenses to Average Net
Assets*............................ 2.06% 2.28% 2.32% 1.75% 1.43% .92%
Ratio of Net Investment Income to
Average Net Assets*................ 3.90% 3.91% 3.69% 4.33% 4.30% 3.95%
Portfolio Turnover.................. 15%** 37% 45% 75% 274% 86%**
*If certain expenses had not been
reimbursed by the Adviser, Total
Return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets............................. n/a 2.42% 2.50% 2.36% 2.50% 2.98%
Ratio of Net Investment Income to
Average Net Assets................. n/a 3.77% 3.51% 3.72% 3.24% 1.89%
<CAPTION>
Class C Shares
October 28, 1993
Nine Months (Commencement
Ended of Distribution)
September 30, Year Ended December 31, to
1998 1997 1996 1995 1994 December 31, 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................. $10.525 $10.206 $10.260 $ 9.314 $10.134 $10.250
------- ------- ------- ------- ------- -------
Net Investment Income.............. .308 .402 .374 .430 .419 .091
Net Realized and Unrealized
Gain/Loss........................ .190 .319 (.026) .918 (.822) (.098)
------- ------- ------- ------- ------- -------
Total from Investment Operations.... .498 .721 .348 1.348 (.403) (.007)
Less:
Distributions from Net Investment
Income............................. .311 .402 .402 .402 .417 .087
Distributions from Net Realized
Gain............................... -0- -0- -0- -0- -0- .022
------- ------- ------- ------- ------- -------
Total Distributions................. .311 .402 .402 .402 .417 .109
Net Asset Value, End of the
Period............................. $10.712 $10.525 $10.206 $10.260 $ 9,314 $10.134
======= ======= ======= ======= ======= =======
Total Return*(a).................... 4.74%** 7.23% 3.54% 14.74% (4.04%) (.10%)**
Net Assets at End of the Period (In
millions).......................... $ 3.3 $ 3.1 $ 5.8 $ 4.9 $ 4.7 $ .3
Ratio of Expenses to Average Net
Assets*............................ 2.06% 2.29% 2.32% 1.74% 1.43% .97%
Ratio of Net Investment Income to
Average Net Assets*................ 3.89% 3.88% 3.70% 4.36% 4.34% 4.05%
Portfolio Turnover.................. 15%** 37% 45% 75% 274% 86%**
*If certain expenses had not been
reimbursed by the Adviser, Total
Return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets............................. n/a 2.43% 2.50% 2.34% 2.46% 2.97%
Ratio of Net Investment Income to
Average Net Assets................. n/a 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
maximum sales charge or contingent deferred sales charge.
n/a - not applicable
28
<PAGE> 151
APPENDIX -- DESCRIPTION
OF SECURITIES RATINGS
STANDARD & POOR'S -- A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P follows):
A S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of payment--capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation:
2. Nature of and provisions of the obligation:
3. Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditor's rights.
LONG-TERM DEBT -- INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to meet
its financial commitment on the obligation is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only in small degree.
Capacity to meet its financial commitment on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligations in higher rated
categories. Capacity to meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to meet its financial commitment on the obligation.
SPECULATIVE GRADE
BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: Debt rated "BB" is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated "B" is more vulnerable to nonpayment than obligations rated "BB",
but the obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to nonpayment.
29
-
<PAGE> 152
C: The "C" rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this obligation
are being continued.
D: Debt rated "D" is in payment default. The "D" rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The "D" rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity concerns and market access risks unique
to notes. Notes due in 3 years or less will likely receive a note rating. Notes
maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment.
- -- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
- -- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Strong or strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse Financial and economic changes over the term of the
notes.
SP-3: Speculative capacity to pay principal and interest.
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from 'A-1' for the highest
quality obligations to 'D' for the lowest. These categories are as follows:
A-1: A short-term obligation rated A-1 is rated in the highest category by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B: A short-term obligation rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C: A short-term obligation rated C is currently vulnerable to nonpayment and is
dependent on
30
-
<PAGE> 153
favorable business, financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D: A short-term obligation rated D is in payment default. The D rating is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of, such information.
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option or demand
feature as part of their structure.
The first rating addresses the likelihood of repayment of principal and interest
as due, and the second rating addresses only the demand feature. The long-term
debt rating symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols for the put option (for example, 'AAA/A-1+').
With short-term demand debt, S&P's note rating symbols are used with the
commercial paper rating symbols (for example, 'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE INC. -- A brief description of the applicable Moody's
Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payment
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as
31
-
<PAGE> 154
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date date to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk,
long-term secular trends for example, may be less important over the short run.
A short-term rating may also be assigned on an issue having a demand
feature-variable rate demand obligation. Such ratings will be designated as
VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as MIG 1 or
VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's assigns a MIG
or VMIG rating, all categories define an investment grade situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG. This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's makes no representation that such obligations are exempt
from registration under the Securities Act of 1933, nor does it represent that
any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (on supporting institutions) have a superior ability for
repayment of short-term debt obligations. Prime-1 repayment ability will often
be evidenced by many of the following characteristics:
- -- Leading market positions in well established industries.
32
-
<PAGE> 155
- -- High rates of return on funds employed.
- -- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- -- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- -- Well established access to a ranges of financial markets and assured sources
of alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term debt obligations. This will normally be evidenced by
many of the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supported institutions) have an acceptable ability for
repayment of short-term debt obligations. The effect of industry characteristics
and market compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection measurements
and may require relatively high financial leverage. Adequate alternate liquidity
is maintained.
Issuers rated Not Prime do not fall within any of the prime rating categories.
33
-
<PAGE> 156
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or redemptions, call
the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUND INFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen Intermediate Term Municipal Income Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Intermediate Term Municipal Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 157
VAN KAMPEN
INTERMEDIATE TERM
MUNICIPAL INCOME FUND
PROSPECTUS
JANUARY 28, 1999
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports,
which explain the market conditions and
investment strategies affecting the Fund's
recent performance.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling (800)
341-2911 from 7:00 a.m. to 7:00 p.m., Central
time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800) 421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC Public
Reference Room in Washington, DC or online at
the SEC's web site (http://www.sec.gov). For
more information, please call the SEC at (800)
SEC-0330. You can also request these materials
by writing the Public Reference Section of the
SEC, Washington DC, 20549-6009, and paying a
duplication fee.
[VAN KAMPEN FUNDS LOGO]
Investment Company Act File No.
811-4386.
INF PRO 1/99
<PAGE> 158
VAN KAMPEN
FLORIDA INSURED TAX FREE INCOME FUND
Van Kampen Florida Insured Tax Free Income
Fund is a mutual fund with an investment
objective to provide investors with a high
level of current income exempt from federal
income tax and Florida intangible personal
property taxes, consistent with preservation
of capital. The Fund is designed for investors
who are residents of Florida for tax purposes.
The Fund's management seeks to achieve the
investment objective by investing primarily in
a portfolio of Florida municipal securities
that are insured at the time of purchase as to
timely payment of both principal and interest
by a top-rated private insurance company.
Shares of the Fund have not been approved or
disapproved by the Securities and Exchange
Commission (SEC) or any state regulators, and
neither the SEC nor any state regulator has
ruled on the accuracy or adequacy of this
prospectus. It is a criminal offense to state
otherwise.
This prospectus is dated JANUARY 28, 1999.
[VAN KAMPEN FUNDS LOGO]
<PAGE> 159
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary................................ 3
Fees and Expenses of the Fund...................... 5
Investment Objective and Policies.................. 6
Investment Advisory Services....................... 13
Purchase of Shares................................. 14
Redemption of Shares............................... 19
Distributions from the Fund........................ 21
Shareholder Services............................... 21
Florida Taxation................................... 23
Federal Income Taxation............................ 24
Financial Highlights............................... 26
</TABLE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus, in connection with the offer contained in this prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
<PAGE> 160
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund is a mutual fund with an investment objective to provide investors with
a high level of current income exempt from federal income tax and Florida
intangible personal property taxes, consistent with preservation of capital. The
Fund is designed for investors who are residents of Florida for tax purposes.
There can be no assurance that the Fund will achieve its investment objective.
INVESTMENT STRATEGIES
Under normal market conditions, the Fund's management seeks to achieve the
investment objective by investing at least 80% of the Fund's total assets in a
portfolio of Florida municipal securities that are insured at the time of
purchase as to timely payment of both principal and interest by a top-rated
private insurance company. Under normal market conditions, up to 20% of the
Fund's total assets may consist of uninsured Florida municipal securities rated
"investment grade" at the time of purchase by a nationally recognized
statistical rating organization. Under normal market conditions, up to 20% of
the Fund's total assets may be invested in municipal securities that are subject
to federal alternative minimum tax. The Fund may purchase or sell certain
derivative instruments (such as options, futures and options on futures, and
interest rate swaps or other interest rate related transactions) for various
risk management and hedging purposes. The Fund may purchase or sell securities
on a when-issued or delayed delivery basis.
INVESTMENT RISKS
Because of the following risks, you could lose money on your investment in the
Fund over the short or long term:
MARKET RISK. The prices of income securities tend to fall as interest rates
rise. This "market risk" is usually greater among securities with longer
maturities. Because the Fund does not have a policy limiting the maturities of
its investments and the Fund expects to own securities with longer maturities,
the Fund will be subject to greater market risk than a fund that owns
shorter-term securities.
Generally, the Fund's municipal securities are insured as to timely payment of
both principal and interest by a top-rated private insurance company. This
insurance does not, however, guarantee that the prices of these securities will
remain stable during interest rate changes.
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased, as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitments for these securities, the greater the Fund's
exposure to market price fluctuation.
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest and principal. Credit risk should be low for the Fund because it
invests primarily in insured municipal securities.
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates, which can vary widely over the short and long term. If interest rates
drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of municipal
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would be reinvested by the Fund in securities with the new, lower
interest rates, resulting in a possible decline in the Fund's income and
distributions to shareholders.
MUNICIPAL SECURITIES RISK. The Fund invests primarily in insured municipal
securities. The yields of
UNDERSTANDING MUNICIPAL SECURITIES
Municipal securities, including municipal bonds, notes or leases, generally
are issued by state and local governments or regional governmental
authorities to raise money for their daily operations or special projects.
The interest received from municipal securities generally is exempt from
federal income tax. In addition, the interest may be exempt from certain
state or local taxes when received from issuers who are located in the
investors' home state, municipality or region. The interest from certain
municipal securities is a preference item subject to federal alternative
minimum tax.
3
<PAGE> 161
municipal securities, or of insured municipal securities, may move differently
and adversely compared to the yields of the overall debt securities markets.
While the interest received from municipal securities generally is exempt from
federal income tax, the Fund may invest up to 20% of its total assets in
municipal securities subject to federal alternative minimum tax. In addition,
there could be changes in applicable tax laws or tax treatments that reduce or
eliminate the current federal income tax exemption on municipal securities or
otherwise adversely affect the current federal or state tax status of municipal
securities.
NON-DIVERSIFICATION RISKS. The Fund is classified as a "non-diversified" fund,
which means the Fund may invest a greater portion of its assets in a more
limited number of issuers than a "diversified" fund. As a result, the Fund may
be subject to greater risk than a diversified fund because changes in the
financial condition or market assessment of a single issuer may cause greater
fluctuations in the value of the Fund's shares.
STATE-SPECIFIC RISKS. Because the Fund invests primarily in a portfolio of
Florida municipal securities, the Fund is more susceptible to political,
economic, regulatory or other factors affecting issuers of Florida municipal
securities than a fund that does not limit its investments to such issuers.
RISKS OF USING DERIVATIVE INVESTMENTS. In general terms, a derivative investment
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures and options on futures, interest
rate swaps and other interest rate-related transactions are examples of
derivatives. Such transactions involve risks different from the direct
investment in underlying securities such as imperfect correlation between the
value of the instruments and the underlying assets; risks of default by the
other party to certain transactions; risks that the transactions may incur
losses that partially or completely offset gains in portfolio positions; risks
that the transactions may not be liquid; and manager risk.
MANAGER RISK. As with any fund, the Fund's management may not be successful in
selecting the best-performing securities and the Fund's performance may lag
behind that of similar funds.
An investment in the Fund is not a deposit of any bank or other insured
depository institution. Your investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
INVESTOR PROFILE
In light of its objective and investment strategies, the Fund may be appropriate
for investors who:
- - Seek current income.
- - Are in a high federal income tax bracket.
- - Are subject to Florida intangible personal property tax.
- - Wish to add to their personal investment portfolios a fund that invests
primarily in insured Florida municipal securities.
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program, and investors should consider
their long-term investment goals and financial needs when making an investment
decision about the Fund. An investment in the Fund is intended to be a long-term
investment, and the Fund should not be used as a trading vehicle.
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance varies from year to year. The following chart shows the annual
returns of the Fund's Class A Shares over the past five calendar years prior to
the date of this prospectus. Sales loads are not reflected in this chart. If
these sales loads had been included, the returns shown below would have been
lower. Remember that the past performance of the Fund is not indicative of its
future performance.
BAR GRAPH
<TABLE>
<CAPTION>
ANNUAL RETURN
-------------
<S> <C>
'1994' -1.47
'1995' 16.29
'1996' 4.37
'1997' 8.72
'1998' 6.61
</TABLE>
The annual return variability of the Fund's Class B Shares and Class C Shares
would be substantially
4
<PAGE> 162
similar to that shown for the Class A Shares because all of the Fund's shares
are invested in the same portfolio of securities; however, the actual annual
returns of the Class B Shares and Class C Shares would be lower than the annual
returns shown for the Fund's Class A Shares because of differences in the
expenses borne by each class of shares.
During the five-year period shown in the bar chart, the highest quarterly return
was 6.75% (for the quarter ended March 31, 1995) and the lowest quarterly return
was -2.37% (for the quarter ended March 31, 1996).
COMPARATIVE PERFORMANCE
This table shows how the Fund's performance compares with the Lehman Brothers
Municipal Bond Index, a broad-based market index that the Fund's management
believes is an applicable benchmark for the Fund. Average annual total returns,
assuming payment of the maximum sales charges, are shown for the one-year period
ended December 31, 1998 and the period from the inception date for each class of
shares to December 31, 1998 (the most recently completed calendar year prior to
the date of this prospectus). Remember that the past performance of the Fund is
not indicative of its future performance.
<TABLE>
<CAPTION>
Average Annual
Total Returns Past 10
for the Years
Periods Ended Past 1 or Since
December 31, 1998 Year Inception
- -----------------------------------------------------
<S> <C> <C> <C>
Van Kampen Florida Insured
Tax Free Income Fund
.....................................................
Class A Shares 1.52 % 6.49%(1)
.....................................................
Class B Shares 1.84 % 6.60%(1)
.....................................................
Class C Shares 4.70 % 6.89%(1)
.....................................................
Lehman Brothers Municipal
Bond Index 6.48 % 8.22%
.....................................................
</TABLE>
Inception date: (1) 7/29/94.
The current yield for the thirty-day period ended September 30, 1998 is 4.19%
for Class A Shares, 3.63% for Class B Shares and 3.64% for Class C Shares.
Investors can obtain the current yield of the Fund for each class of shares by
calling (800) 341-2911.
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- --------------------------------------------------------------
<S> <C> <C> <C>
Maximum sales charge
(load) imposed on
purchases (as a
percentage of
offering price) 4.75%(1) None None
..............................................................
Maximum deferred
sales charge (load)
(as a percentage of
the lesser of
original purchase
price or redemption
proceeds) None(2) Year 1-4.00% Year 1-1.00%
Year 2-3.75% After-None
Year 3-3.50%
Year 4-2.50%
Year 5-1.50%
Year 6-1.00%
After-None
..............................................................
Maximum sales charge
(load) imposed on
reinvested dividends
(as a percentage of
offering price) None None None
..............................................................
Redemption fees (as a
percentage of amount None None None
redeemed)
..............................................................
Exchange fee None None None
..............................................................
</TABLE>
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares--Class A
Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares--Class A Shares."
5
<PAGE> 163
ANNUAL FUND
OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- --------------------------------------------------------------
<S> <C> <C> <C>
Management Fees(1) 0.50% 0.50% 0.50%
..............................................................
Distribution and/or 0.25% 1.00%(3) 1.00%(3)
Service (12b-1)
Fees(2)
..............................................................
Other Expenses(1) 0.55% 0.55% 0.53%
..............................................................
Total Annual Fund 1.30% 2.05% 2.03%
Operating Expenses(1)
..............................................................
</TABLE>
(1) The Fund's investment adviser is currently waiving or reimbursing all or a
portion of the Fund's Management Fees and Other Expenses such that actual
Total Annual Fund Operating Expenses for the fiscal period ended September
30, 1998 were 0.60%, 1.35% and 1.32% for Class A Shares, Class B Shares and
Class C Shares, respectively.
(2) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(3) Because Distribution and/or Service (12b-1) Fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges. Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by National Association of
Securities Dealers, Inc. rules.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% annual return each year and
that the Fund's operating expenses remain the same each year (except for the
ten-year amounts for Class B Shares which reflect the conversion of Class B
Shares to Class A Shares after eight years). Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $601 $868 $1,154 $1,968
......................................................................
Class B Shares $608 $993 $1,253 $2,187*
......................................................................
Class C Shares $306 $637 $1,093 $2,358
......................................................................
</TABLE>
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $601 $868 $1,154 $1,968
......................................................................
Class B Shares $208 $643 $1,103 $2,187*
......................................................................
Class C Shares $206 $637 $1,093 $2,358
......................................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
To simplify comparison among funds, all funds are required by the SEC to assume
a 5% annual return. Class B Shares of the Fund acquired through the exchange
privilege are subject to the contingent deferred sales charge schedule of the
fund from which the shareholder's purchase of Class B Shares was originally
made. Accordingly, future expenses as projected could be higher than those
determined in the above table if the investor's Class B Shares were exchanged
from a fund with a higher contingent deferred sales charge. The Fund's actual
annual return and actual expenses for future periods may be greater or less than
those shown.
INVESTMENT OBJECTIVE
AND POLICIES
The Fund's investment objective is to provide investors with a high level of
current income exempt from federal income tax and Florida intangible personal
property taxes, consistent with preservation of capital. The Fund is designed
for investors who are residents of Florida for tax purposes. The Fund's
investment objective is a fundamental policy and may not be changed without
shareholder approval of the holders of a majority of the Fund's outstanding
voting securities, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"). There are risks inherent in all investments in securities;
accordingly there can be no assurance the Fund will achieve its investment
objective.
Under normal market conditions, the Fund's management seeks to achieve the
investment objective by investing at least 80% of the Fund's total assets in
Florida municipal securities that are insured at the time of purchase as to
timely payment of both principal and interest by an entity whose claims-paying
ability is rated AAA by Standard and
6
<PAGE> 164
Poor's ("S&P"), or Aaa by Moody's Investors Service, Inc. ("Moody's") or an
equivalent rating by another nationally recognized statistical rating
organization ("NRSRO"). Under normal market conditions, up to 20% of the Fund's
total assets may consist of uninsured Florida municipal securities rated
investment grade at the time of investment. Investment grade securities are
securities rated BBB or higher by S&P, Baa or higher by Moody's or an equivalent
rating by another NRSRO and comparably rated short term securities. Under normal
market conditions, up to 20% of the Fund's total assets may be invested in
municipal securities that are subject to the alternative minimum tax. From time
to time, the Fund temporarily may invest up to 10% of its total assets in tax
exempt money market funds and such instruments will be treated as investments in
municipal securities.
The Fund's investment adviser will buy and sell securities for the Fund's
portfolio with a view to seeking a high level of current income exempt from
federal income tax and Florida intangible personal property taxes and will
select securities which the Fund's investment adviser believes entail reasonable
credit risk considered in relation to the investment policies of the Fund. As a
result, the Fund will not necessarily invest in the highest yielding Florida
municipal securities permitted by its investment policies if the Fund's
investment adviser determines that market risks or credit risks associated with
such investments would subject the Fund's portfolio to undue risk. The potential
for realization of capital gains resulting from possible changes in interest
rates will not be a major consideration. Other than for tax purposes, frequency
of portfolio turnover generally will not be a limiting factor if the Fund's
investment adviser considers it advantageous to purchase or sell securities.
MUNICIPAL SECURITIES
Municipal securities are obligations issued by or on behalf of states,
territories or possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest on
which, in the opinion of bond counsel or other counsel to the issuers of such
securities, is, at the time of issuance, exempt from federal income tax. Florida
municipal securities are municipal securities the interest on which, in the
opinion of bond counsel or other counsel to the issuers of such securities, is,
at the time of issuance, exempt from Florida intangible personal property taxes.
Under normal market conditions, at least 80% of the Fund's total assets will be
invested in Florida municipal securities. The policy stated in the foregoing
sentence is a fundamental policy of the Fund and may not be changed without
shareholder approval of the holders of a majority of the Fund's outstanding
voting securities, as defined in the 1940 Act. Under normal market conditions,
up to 20% of the Fund's total assets may be invested in municipal securities
that are subject to federal alternative minimum tax.
The issuers of municipal securities obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
securities may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to lend to other public
institutions and facilities. Certain types of municipal securities are issued to
obtain funding for privately operated facilities.
The yields of municipal securities depend on, among other things, general money
market conditions, general conditions of the municipal securities market, size
of a particular offering, the maturity of the obligation and rating of the
issue. The ratings of S&P and Moody's represent their opinions of the quality of
the municipal securities they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may
have different yields while municipal securities of the same maturity and coupon
with different ratings may have the same yield.
The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special delegation" securities. "General
obligation" securities are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. "Revenue" securities
are usually payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Industrial development bonds are usually
revenue securities, the credit quality of which is normally directly related to
the credit standing of the industrial user involved.
7
-
<PAGE> 165
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, variable rate demand notes, municipal leases,
custodial receipts, participation certificates and derivative municipal
securities (which include terms or elements similar in to certain strategic
transactions described below). Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to reflect market
rates of interest. The Fund also may also invest in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest. Investment in such securities involve special risks as
compared to a fixed rate municipal security. The extent of increases and
decreases in the value of derivative variable rate securities and the
corresponding change to the net asset value of the Fund generally will be larger
than comparable changes in the value of an equal principal amount of a fixed
rate municipal security having similar credit quality, redemption provisions and
maturity. The markets for such securities may be less developed and have less
liquidity than the markets for conventional municipal securities. The Fund will
not invest more than 20% of its total assets in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Municipal notes include tax, revenue and
bond anticipation notes of short maturity, generally less than three years,
which are issued to obtain temporary funds for various public purposes. Variable
rate demand notes are obligations which contain a floating or variable interest
rate adjustment formula and which are subject to a right of demand for payment
of the principal balance plus accrued interest either at any time or at
specified intervals. The interest rate on a variable rate demand note may be
based on a known lending rate, such as a bank's prime rate, and may be adjusted
when such rate changes, or the interest rate may be a market rate that is
adjusted at specified intervals. The adjustment formula maintains the value of
the variable rate demand note at approximately the par value of such note at the
adjustment date. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Certain municipal lease obligations may include "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Custodial receipts are underwritten by
securities dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities. Participation
certificates are obligations issued by state or local governments or authorities
to finance the acquisition of equipment and facilities. They may represent
participations in a lease, an installment purchase contract, or a conditional
sales contract. Municipal securities may not be backed by the faith, credit and
taxing power of the issuer. Other than as set forth above, there is no
limitation with respect to the amount of the Fund's assets that may be invested
in the foregoing types of municipal securities. Certain of the municipal
securities in which the Fund may invest represent relatively recent innovations
in the municipal securities markets and the markets for such securities may be
less developed than the market for conventional fixed rate municipal securities.
A more detailed description of the types of municipal securities in which the
Fund may invest is included in the Statement of Additional Information.
Under normal market conditions, longer term municipal securities generally
provide a higher yield than shorter term municipal securities, and therefore the
Fund generally expects to invest primarily in longer term municipal securities.
The Fund will, however, invest in shorter term municipal securities when it
believes market conditions warrant such investments.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund will invest primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities generally can be
expected to rise. Conversely, when interest rates rise, the value of a portfolio
invested in fixed income securities generally can be expected to decline. The
prices of longer term municipal securities generally are more volatile with
respect to changes in interest rates than the prices of shorter term municipal
securities. Volatility may be greater during periods of general economic
uncertainty.
Although the Fund invests primarily in municipal securities that are insured at
the time of purchase as to timely payment of both principal and interest,
municipal securities, like other debt obligations, are subject to the credit
risk of non-payment. The ability
8
<PAGE> 166
of issuers of municipal securities to make timely payments of interest and
principal may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal,
state and local governmental units. Such non-payment would result in a reduction
of income to the Fund, and could result in a reduction in the value of the
municipal securities experiencing non-payment and a potential decrease in the
net asset value of the Fund. In addition, the Fund may incur expenses to work
out or restructure a distressed or defaulted security.
The Fund may invest up to 20% of its total assets in municipal securities that
are subject to federal alternative minimum tax. The Fund may not be a suitable
investment for investors who are already subject to the federal alternative
minimum tax or who would become subject to the federal alternative minimum tax
as a result of an investment in the Fund.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the current federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected and the Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
The Fund generally considers investments in municipal securities not to be
subject to industry concentration policies (issuers of municipal securities as a
group are not an industry) and the Fund may invest in municipal securities
issued by entities having similar characteristics. The issuers may be located in
the same geographic area or may pay their interest obligations from revenue of
similar projects, such as hospitals, airports, utility systems and housing
finance agencies. This may make the Fund's investments more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation in the Fund's net asset value
also increases. The Fund may invest more than 25% of its total assets in a
segment of the municipal securities market with similar characteristics if the
Fund's investment adviser determines that the yields available from obligations
in a particular segment justify the additional risks of a larger investment in
such segment. The Fund may not, however, invest more than 25% of its total
assets in industrial development revenue bonds issued for companies in the same
industry. Sizeable investments in such obligations could involve increased risk
to the Fund should any of such issuers or any such related projects or
facilities experience financial difficulties.
From time to time, the Fund's investments may include securities as to which the
Fund, by itself or together with other funds or accounts managed by the Fund's
investment adviser, holds a major portion or all of an issue of municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Fund's investment adviser believes it is advisable to do so.
INSURED MUNICIPAL SECURITIES
The Fund invests primarily in a portfolio of municipal securities that are
insured at the time of investment as to timely payment of both principal and
interest by a top-rated private insurance company. Such insurance could be
provided as: Original Issue Insurance, Secondary Market Insurance or Portfolio
Insurance. Original Issue Insurance is purchased with respect to a particular
issue of municipal securities by the issuer thereof or a third party in
conjunction with the original issue of such municipal securities. Secondary
Market Insurance is purchased by the Fund or a third party subsequent to the
time of original issuance of a municipal security. Both Original Issue Insurance
and Secondary Market Insurance remain in effect as long as the municipal
securities covered thereby remain outstanding and the insurer remains in
business, regardless of whether the Fund ultimately disposes of such municipal
securities. Portfolio Insurance may be purchased by the Fund with respect to
municipal securities which the Fund intends to purchase or already owns and
would generally terminate when the municipal security is sold by the Fund or
redeemed. There is no limitation on the percentage of the Fund's assets that may
be invested in municipal securities insured by any type of insurance or any
given insurer.
Original Issue Insurance, Secondary Market Insurance and Portfolio Insurance
generally do not insure payment on an accelerated basis, the payment of any
redemption premium or the market value of the Fund's portfolio securities. Such
insurance also does not insure against nonpayment of principal or interest on
municipal securities resulting from the insolvency, negligence or any other act
or omission of the trustee or other paying agent for such obligations.
9
<PAGE> 167
The Fund invests in municipal securities insured by insurers whose claims-paying
ability is rated AAA by S&P, Aaa by Moody's or the equivalent by another NRSRO
at the time of the Fund's investment. A subsequent downgrade by S&P, Moody's or
another NRSRO of an insurer's claims-paying ability may result in increased
credit risk of the municipal securities insured by such insurer and may result
in a downgrade of the rating assigned to the municipal securities insured by
such insurer. The securities could experience a decrease in market price as a
result of such a downgrade. In the event the ratings assigned to such municipal
securities decline to below investment grade, such municipal securities would
probably become less liquid or even illiquid. There can be no assurance that an
insurer will be able to honor its obligations with respect to municipal
securities in the Fund's portfolio. For more information on insurance and a
description of S&P's and Moody's claims-paying ability ratings of insurers, see
the Statement of Additional Information.
SPECIAL CONSIDERATIONS REGARDING
FLORIDA MUNICIPAL SECURITIES
The Fund invests primarily in a portfolio of Florida municipal securities, which
are municipal securities the interest on which, in the opinion of bond counsel
or other counsel to the issuers of such securities, is, at the time of issuance,
exempt from Florida intangible personal property taxes. Because the Fund invests
primarily in a portfolio of Florida municipal securities, the Fund is more
susceptible to political, economic, regulatory or other factors affecting
issuers of Florida municipal securities than a fund which does not limit its
investments to such issuers. These risks include possible legislative, state
constitutional or regulatory amendments that may affect the ability of state and
local governments or regional governmental authorities to raise money to pay
principal and interest on their municipal securities. Economic, fiscal and
budgetary conditions throughout the state may also influence the Fund's
performance.
The following information is a summary of a more detailed description of certain
factors affecting Florida municipal securities which is contained in the
Statement of Additional Information. Investors should obtain a copy of the
Statement of Additional Information for the more detailed discussion of such
factors. Such information is derived from certain official statements of the
State of Florida published in connection with the issuance of specific Florida
municipal securities, as well as from other publicly available documents. Such
information has not been independently verified by the Fund and may not apply to
all Florida municipal securities acquired by the Fund. The Fund assumes no
responsibility for the completeness or accuracy of such information.
Florida state and local government obligations may be adversely affected by
political and economic conditions and developments within the State of Florida
and the nation as a whole.
Florida's economic outlook is projected generally to reflect the national
economic outlook and is expected to experience steady if unspectacular growth
over the next couple of years. Historically, Florida's unemployment rate has
generally tracked below that of the nation; however, beginning with the
recession in the early 1990's, the trend reversed. Since 1995, the state's
unemployment rate has again been below or about the same as the nation's. The
unemployment rate for Florida in 1997 was 4.8% while the national rate in 1997
was 4.9%. Florida's unemployment rate is expected to be 4.5% for fiscal year
1998-99 and 4.7% for fiscal year 1999-00. For the State's fiscal year ended June
30, 1997, receipts from the sales and use tax, the greatest single source of tax
revenue to the State of Florida, were $12,089 million, an increase of 5.5% from
fiscal year 1995-96.
Tourism is one of Florida's most important industries. Approximately 47 million
people visited the State in 1997. By the end of fiscal year 1998-99, 49.7
million domestic and international tourists are expected to have visited the
state. In 1999-2000, tourist arrivals should approximate 50.6 million.
County and municipal governments in Florida depend primarily upon ad valorem
property taxes, sales, motor fuel and other local excise taxes and miscellaneous
revenue sources, including revenues from utilities services. Florida school
districts derive substantially all of their revenues from local property taxes.
The overall level of revenue from these sources is in part dependent upon the
local, state and national economies. Local government obligations held by the
Fund may constitute general obligations or may be special obligations payable
solely from one or more specified revenue sources. The ability of the local
governments to repay their obligations on a timely basis will be dependent upon
the continued strength of the revenues pledged and of the overall fiscal status
of the local government.
10
-
<PAGE> 168
Voters at the general election in November 1994 approved an amendment to the
Constitution of the State of Florida limiting future state revenues. It is
unclear what effect, if any, such amendment would have on state or local
government debt obligations.
The value of Florida municipal instruments may also be affected by general
conditions in the money markets or the municipal bond markets, the levels of
federal income tax rates, the supply of tax-exempt bonds, the credit quality and
rating of the issues and perceptions with respect to the level of interest
rates.
There can be no assurance that there will not be a decline in economic
conditions or that particular Florida municipal securities in the portfolio of
the Fund will not be adversely affected by any such changes.
More detailed information concerning Florida municipal securities and the State
of Florida is included in the Statement of Additional Information.
OTHER INVESTMENTS AND RISK FACTORS
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income indices and other financial instruments, purchase and sell
financial futures contracts and enter into various interest rate transactions
such as swaps, caps, floors or collars. Collectively, all of the above are
referred to as "Strategic Transactions." Strategic Transactions may be used to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the investment adviser's ability to predict pertinent market
movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. Strategic Transactions have risks associated with them including
possible default by the other party to the transaction, illiquidity and, to the
extent the investment adviser's view as to certain market movements is
incorrect, the risk that the use of such Strategic Transactions could result in
losses greater than if they had not been used. Use of put and call options may
result in losses to the Fund, force the sale of portfolio securities at
inopportune times or for prices other than at current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the risk management or hedging instrument may be greater than gains in the
value of the Fund's position. In addition, futures and options markets may not
be liquid in all circumstances and certain over-the-counter options may have no
markets. As a result, in certain markets, the Fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and their risks are described more
fully in the Fund's Statement of Additional Information. Income earned or deemed
to be earned by the Fund from its Strategic Transactions, if any, generally will
be taxable income of the Fund.
The Fund may purchase and sell municipal securities on a "when-issued" or
"delayed delivery" basis whereby the Fund buys or sells a security with payment
and delivery taking place in the future. The payment obligation and the interest
rate are fixed at the time the Fund enters into the commitment. No income
accrues to the Fund on municipal securities in
11
-
<PAGE> 169
connection with such transactions prior to the date the Fund actually takes
delivery of such securities. These transactions are subject to market risk as
the value or yield of a municipal security at delivery may be more or less than
the purchase price or the yield generally available on municipal securities when
delivery occurs. In addition, the Fund is subject to counterparty risk because
it relies on the buyer or seller, as the case may be, to consummate the
transaction, and failure by the other party to complete the transaction may
result in the Fund missing the opportunity of obtaining a price or yield
considered to be advantageous. The Fund will only make commitments to purchase
such securities with the intention of actually acquiring these securities, but
the Fund may sell these securities prior to settlement if it is deemed
advisable. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when-issued" or "delayed
delivery" basis.
The Fund may invest up to 15% of the Fund's net assets in illiquid and certain
restricted securities. Such securities may be difficult or impossible to sell at
the time and the price that the Fund would like. Thus, the Fund may have to sell
such securities at a lower price, sell other securities instead to obtain cash
or forego other investment opportunities.
The Fund may borrow amounts up to 5% of its net assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its net assets to
secure such borrowings.
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
Additional Information which can be obtained by investors free of charge as
described on the back cover of this prospectus.
Although the Fund does not intend to engage in substantial short-term trading,
it may sell securities without regard to the length of time they have been held
in order to take advantage of new investment opportunities or yield
differentials or otherwise. The Fund's portfolio turnover is shown under the
heading "Financial Highlights". The portfolio turnover rate may be expected to
vary from year to year. A high portfolio turnover rate (100% or more) increases
the Fund's transactions costs, including brokerage commissions or dealer costs,
and may result in the realization of more short-term capital gains than if the
Fund had a lower portfolio turnover. The turnover rate will not be a limiting
factor, however, if the Fund's investment adviser considers portfolio changes
appropriate.
When market conditions dictate a more "defensive" investment strategy, the Fund
may invest on a temporary basis a portion or all of its assets in high-quality,
short-term Florida municipal obligations. If such municipal obligations are not
available or, in the investment adviser's judgment, do not afford sufficient
protection against adverse market conditions, the Fund may invest in
high-quality, municipal securities of issuers other than issuers of Florida
municipal securities. Furthermore, if such high-quality securities are not
available or, in the investment adviser's judgment, do not afford sufficient
protection against adverse market conditions, the Fund may invest in taxable
obligations. Such taxable obligations may include in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, other
investment grade quality income securities, prime commercial paper, certificates
of deposit, bankers' acceptances and other obligations of domestic banks having
total assets of at least $500 million, and repurchase agreements. The effect of
taking such a defensive position may be that the Fund does not achieve its
investment objective.
YEAR 2000 RISKS. Like other mutual funds, financial and business organizations
and individuals around the world, the Fund could be adversely affected if the
computer systems used by the Fund's investment adviser and other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." The Fund's investment adviser is taking steps that it believes are
reasonably designed to address the Year 2000 Problem with respect to computer
systems that it uses and to obtain reasonable assurances that comparable steps
are being taken by the Fund's other major service providers. At this time, there
can be no assurances that these steps will be sufficient to avoid any adverse
impact to the Fund. In addition, the Year 2000 Problem may adversely affect the
markets and the issuers of securities in which the Fund may invest which, in
turn, may adversely affect the net asset value of the Fund. Improperly
functioning trading systems may result in settlement problems and liquidity
issues. In addition, corporate and governmental data processing errors may
result in production problems for individual companies or
12
-
<PAGE> 170
issuers and overall economic uncertainty. Earnings of individual issuers will be
affected by remediation costs, which may be substantial and may be reported
inconsistently in U.S. and foreign financial statements. Accordingly, the Fund's
investments may be adversely affected. The statements above are subject to the
Year 2000 Information and Readiness Disclosure Act which Act may limit the legal
rights regarding the use of such statements in the case of a dispute.
INVESTMENT ADVISORY SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp."). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $50 billion under management or supervision. Van
Kampen Investments' more than 50 open-end and 39 closed-end funds and more than
2,500 unit investment trusts are professionally distributed by leading financial
advisers nationwide. Van Kampen Funds Inc., the distributor of the Fund (the
"Distributor") and the sponsor of the funds mentioned above, is also a wholly
owned subsidiary of Van Kampen Investments. Van Kampen Investments is an
indirect wholly owned subsidiary of Morgan Stanley Dean Witter & Co. The
Adviser's principal office is located at 1 Parkview Plaza, PO Box 5555, Oakbrook
Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed based upon an annual rate applied to average daily net assets of the
Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
- -----------------------------------------------------
<S> <C>
First $500 million 0.50%
.....................................................
Over $500 million 0.45%
.....................................................
</TABLE>
Applying this fee schedule absent advisory fee waivers, the Fund would have paid
the Adviser an advisory fee at the effective rate of 0.50% of the Fund's average
net assets for the Fund's fiscal period ended September 30, 1998.
Under the Advisory Agreement, the Fund also reimburses the Adviser for the cost
of the Fund's accounting services, which include maintaining its financial books
and records and calculating its daily net asset value. Other operating expenses
paid by the Fund include service fees, distribution fees, custodial fees, legal
and accounting fees, the costs of reports and proxies to shareholders, trustees'
fees (other than those who are affiliated persons of the Adviser, Distributor or
Van Kampen Investments) and all other business expenses not specifically assumed
by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes of Ethics permit directors, trustees,
officers and employees to buy and sell securities for their personal accounts
subject to certain restrictions. Persons with access to certain sensitive
information are subject to pre-clearance and other procedures designed to
prevent conflicts of interest.
PORTFOLIO MANAGEMENT. Thomas M. Byron, a Vice President of the Adviser, has been
primarily responsible for the day-to-day management of the Fund's portfolio
since January 1997. Prior to January 1997, Mr. Byron was manager of the Unit
Investment Trust Purchasing Desk and assumed buying responsibilities for all
national tax-free and taxable unit trusts for the Adviser since April 1994.
Prior to April 1994, Mr. Byron was responsible for buying the state unit
investment trusts for the Adviser. Mr. Byron has been employed by the Adviser
since 1981.
13
<PAGE> 171
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each investor to choose the class of shares that is most beneficial given the
amount to be invested and the length of time the investor expects to hold the
shares. Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Both
minimums may be waived by the Distributor for plans involving periodic
investments.
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares bear the sales charge expenses at the time of redemption and any
expenses (including higher distribution fees and transfer agency costs)
resulting from such deferred sales charge arrangement, (ii) generally, each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan (described below) pursuant to which its
distribution fee or service fee is paid, (iii) each class of shares has
different exchange privileges, (iv) certain classes of shares are subject to a
conversion feature and (v) certain classes of shares have different shareholder
service options available.
The price of the Fund's shares is based upon the Fund's net asset value per
share. The net asset values per share of the Class A Shares, Class B Shares and
Class C Shares are generally expected to be substantially the same. In certain
circumstances, however, the per share net asset values of the classes of shares
may differ from one another, reflecting the daily expense accruals of the higher
distribution fees and transfer agency costs applicable to the Class B Shares and
Class C Shares and the differential in the dividends that may be paid on each
class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on:
customary business holidays, any day on which no purchase or redemption orders
are received or there is not a sufficient degree of trading in the Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Fund reserves the right to calculate the net asset
value per share and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable. Net asset value per share for
each class is determined by dividing the value of the Fund's portfolio
securities, cash and other assets (including accrued interest) attributable to
such class, less all liabilities (including accrued expenses) attributable to
such class, by the total number of shares of the class outstanding. Portfolio
securities are valued by using market quotations, prices provided by market
makers or estimates of market values determined in good faith based upon yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees of the Fund.
Securities with remaining maturities of 60 days or less are valued at amortized
cost when amortized cost is determined in good faith by or under the direction
of the Board of Trustees of the Fund to be representative of the fair value at
which it is expected such securities may be resold. Any securities or other
assets for which current market quotations are not readily available are valued
at their fair value as determined in good faith under procedures established by
and under the general supervision of the Board of Trustees of the Fund.
The Fund has adopted a distribution plan (the "Distribution Plan") with respect
to each class of its shares pursuant to Rule 12b-1 under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Fund also has adopted a service
plan (the "Service Plan") with respect to each class of its shares. The
Distribution Plan and the Service Plan provide that the Fund may pay
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders of each class.
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. The net income attributable to a class of shares and the
dividends payable on such class of shares will be reduced by the amount of the
distribution fees and other expenses associated with such class of shares.
14
<PAGE> 172
To assist investors in comparing classes of shares, the tables under the heading
"Fees and Expenses of the Fund" provide a summary of sales charges and expenses
and an example of the sales charges and expenses applicable to each class of
shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza, PO
Box 5555, Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through
members of the National Association of Securities Dealers, Inc. ("NASD") who are
acting as securities dealers ("dealers") and NASD members or eligible non-NASD
members who are acting as brokers or agents or investors ("brokers"). "Dealers"
and "brokers" are sometimes referred to herein as "authorized dealers."
Shares may be purchased on any business day by completing the application
accompanying this prospectus and forwarding the application, directly or through
an authorized dealer, to the Fund's shareholder service agent, Van Kampen
Investor Services Inc. ("Investor Services"), a wholly owned subsidiary of Van
Kampen Investments. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A Shares, Class B Shares or Class C Shares.
Sales personnel of authorized dealers distributing the Fund's shares are
entitled to receive compensation for selling such shares and may receive
differing compensation for selling Class A Shares, Class B Shares or Class C
Shares.
The price paid for shares purchased is based on the next calculation of net
asset value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers are priced
based on the date of receipt provided such order is transmitted to Investor
Services prior to Investor Services' close of business on such date. Orders
received by authorized dealers or transmitted to Investor Services after its
close of business are priced based on the date of the next computed net asset
value per share provided they are received by Investor Services prior to
Investor Services' close of business on such date. It is the responsibility of
authorized dealers to transmit orders received by them to Investor Services so
they will be received in a timely manner. Orders of less than $500 generally are
mailed by the authorized dealer and processed at the offering price next
calculated after receipt by Investor Services.
Shares of the Fund may be sold in foreign countries where permissible. The Fund
and the Distributor reserve the right to refuse any order for the purchase of
shares. The Fund also reserves the right to suspend the sale of the Fund's
shares in response to conditions in the securities markets or for other reasons.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gains
distributions, unless the investor instructs the Fund otherwise. Investors
wishing to receive cash instead of additional shares should contact the Fund at
(800) 341-2911 or by writing to the Fund, c/o Van Kampen Investors Services
Inc., PO Box 418256, Kansas City, MO 64141-9256.
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 4.75% of the offering price (or 4.99% of the net amount
invested), reduced on investments of $100,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of
Size of Offering Net Amount
Investment Price Invested
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.75% 4.99%
..........................................................
$100,000 but less than
$250,000 3.75% 3.90%
..........................................................
$250,000 but less than
$500,000 2.75% 2.83%
..........................................................
$500,000 but less than
$1,000,000 2.00% 2.04%
..........................................................
$1,000,000 or more * *
..........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1.00% on certain redemptions made within one year of
the purchase. The contingent deferred sales charge is assessed on an amount
equal to the lesser of the then current market value or the cost of the shares
being redeemed. Accordingly, no sales charge is imposed on increases in net
asset value above the initial purchase price.
The Fund may spend an aggregate amount up to 0.25% per year of the average daily
net assets attributable to the Class A Shares of the Fund pursuant to the
Distribution Plan and Service Plan. From such amount, the Fund may spend up to
0.25% per year of the Fund's average daily net assets attributable to the Class
A Shares pursuant to the
15
-
<PAGE> 173
Service Plan in connection with the ongoing provision of services to holders of
such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
deferred sales charge if redeemed within six years of purchase as shown in the
table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge as a
Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
- ------------------------------------------------
<S> <C> <C> <C>
First 4.00%
................................................
Second 3.75%
................................................
Third 3.50%
................................................
Fourth 2.50%
................................................
Fifth 1.50%
................................................
Sixth 1.00%
................................................
Seventh and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
It is presently the policy of the Distributor not to accept any order for Class
B Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for the purchase of Class B Shares
until the time of redemption of such shares. Solely for purposes of determining
the number of years from the time of any payment for the purchase of shares, all
payments during a month are aggregated and deemed to have been made on the last
day of the month.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and then of shares held the longest in the shareholder's account.
The Fund may spend up to 0.75% per year of the average daily net assets
attributable to the Class B Shares of the Fund pursuant to the Distribution
Plan. In addition, the Fund may spend up to 0.25% per year of the Fund's average
daily net assets attributable to the Class B Shares pursuant to the Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
deferred sales charge of 1.00% of the dollar amount subject to charge if
redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
It is presently the policy of the Distributor not to accept any order for Class
C Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and then of shares held the longest in the shareholder's account.
The Fund may spend up to 0.75% per year of the average daily net assets
attributable to the Class C Shares of the Fund pursuant to the Distribution
Plan. In addition, the Fund may spend up to 0.25% per
16
-
<PAGE> 174
year of the Fund's average daily net assets attributable to the Class C Shares
pursuant to the Service Plan in connection with the ongoing provision of
services to holders of such shares by the Distributor and by brokers, dealers or
financial intermediaries and in connection with the maintenance of such
shareholders' accounts.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, and any dividend reinvestment
plan shares received thereon, automatically convert to Class A Shares eight
years after the end of the calendar month in which the shares were purchased.
Class B Shares purchased before June 1, 1996, and any dividend reinvestment plan
shares received thereon, automatically convert to Class A Shares seven years
after the end of the calendar month in which the shares were purchased. Class C
Shares purchased before January 1, 1997, and any dividend reinvestment plan
shares received thereon, automatically convert to Class A Shares ten years after
the end of the calendar month in which such shares were purchased. Such
conversion will be on the basis of the relative net asset values per share,
without the imposition of any sales load, fee or other charge. The conversion
schedule applicable to a share of the Fund acquired through the exchange
privilege from another Van Kampen fund is determined by reference to the Van
Kampen fund from which such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or distributions constituting
"preferential dividends" under the federal income tax law and (ii) the
conversion of shares does not constitute a taxable event under federal income
tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) in
connection with required minimum distributions from an individual retirement
account ("IRA") or certain other retirement plan distributions, (iii) pursuant
to the Fund's systematic withdrawal plan but limited to 12% annually of the
initial value of the account, (iv) in circumstances under which no commission or
transaction fee is paid to authorized dealers at the time of purchase of such
shares and (v) effected pursuant to the right of the Fund to involuntarily
liquidate a shareholder's account as described under the heading "Redemption of
Shares." The contingent deferred sales charge also is waived on redemptions of
Class C Shares as it relates to the reinvestment of redemption proceeds in
shares of the same class of the Fund within 180 days after redemption. For a
more complete description of contingent deferred sales charge waivers, please
refer to the Statement of Additional Information or contact your authorized
dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced sales charges. Investors, or their authorized
dealers, must notify the Fund at the time of the purchase order whenever a
quantity discount is applicable to purchases. Upon such notification, an
investor will receive the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds,
17
-
<PAGE> 175
although other Participating Funds may have different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds which have been previously purchased and are
still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as out-lined in the Class A Shares sales
charge table. The size of investment shown in the Class A Shares sales charge
table also includes purchases of shares of the Participating Funds over a
13-month period based on the total amount of intended purchases plus the value
of all shares of the Participating Funds previously purchased and still owned.
An investor may elect to compute the 13-month period starting up to 90 days
before the date of execution of a Letter of Intent. Each investment made during
the period receives the reduced sales charge applicable to the total amount of
the investment goal. The initial purchase must be for an amount equal to at
least 5% of the minimum total purchase amount of the level selected. If trades
not initially made under a Letter of Intent subsequently qualify for a lower
sales charge through the 90-day back-dating provisions, an adjustment will be
made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustment in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. The Fund
initially will escrow shares totaling 5% of the dollar amount of the Letter of
Intent to be held by Investor Services in the name of the shareholder. In the
event the Letter of Intent goal is not achieved within the period, the investor
must pay the difference between the sales charge applicable to the purchases
made and the sales charges.
(6) Beneficial owners of shares of Participating Funds held by a retirement plan
or held in a tax-advantaged retirement account who purchase shares of the
Fund with proceeds from distributions from such a plan or retirement account
other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit plans
qualified under Section 401(a) of the Code, or custodial accounts held by a
bank created pursuant to Section 403(b) of the Code and sponsored by
non-profit organizations defined under Section 501(c)(3) of the Code and
assets held by an employer or trustee in connection with an eligible
deferred compensation plan under Section 457 of the Code. Such plans will
qualify for purchases at net asset value provided, for plans initially
establishing accounts with the Distributor in the Participating Funds after
February 1, 1997, that (1) the initial amount invested in the Participating
Funds is at least $500,000 or (2) such shares are purchased by an employer
sponsored plan with more than 100 eligible employees. Such plans that have
been established with a Participating Fund or have received proposals from
the Distributor prior to February 1, 1997 based on net asset value purchase
privileges previously in effect will be qualified to purchase shares of the
Participating Funds at net asset value for accounts established on or before
May 1, 1997. Section 403(b) and similar accounts for which Van Kampen Trust
Company serves as custodian will not be eligible for net asset value
purchases based on the aggregate investment made by the plan or the number
of eligible employees, except under certain uniform criteria established by
the Distributor from time to time. Prior to February 1, 1997, a commission
will be paid to authorized dealers who initiate and are responsible for such
purchases within a rolling twelve-month period as follows: 1.00% on sales to
$5 million, plus 0.50% on the next $5 million, plus 0.25% on the excess over
$10 million. For purchases on February 1, 1997 and thereafter, a commission
will be paid as follows: 1.00% on sales to $2 million, plus 0.80% on the
next $1 million, plus 0.50% on the next $47 million, plus 0.25% on the
excess over $50 million.
(9) Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the
18
-
<PAGE> 176
group, for purchase of shares of the Fund and Participating Funds, (iv) has
a membership that the authorized dealer can certify as to the group's
members and (v) satisfies other uniform criteria established by the
Distributor for the purpose of realizing economies of scale in distributing
such shares. A qualified group does not include one whose sole
organizational nexus, for example, is that its participants are credit card
holders of the same institution, policy holders of an insurance company,
customers of a bank or broker-dealer, clients of an investment adviser or
other similar groups. Shares purchased in each group's participants account
in connection with this privilege will be subject to a contingent deferred
sales charge of 1.00% in the event of redemption within one year of
purchase, and a commission will be paid to authorized dealers who initiate
and are responsible for such sales to each individual as follows: 1.00% on
sales to $2 million, plus 0.80% on the next $1 million and 0.50% on the
excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust department, provided that
Investor Services receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described on
purchases made as described in (3) through (9) above. The Fund may terminate, or
amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
REDEMPTION OF
SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the heading "Purchase of Shares," redemptions of Class B Shares
and Class C Shares may be subject to a contingent deferred sales charge. In
addition, certain redemptions of Class A Shares for shareholder accounts of $1
million or more may be subject to a contingent deferred sales charge.
Redemptions completed through an authorized dealer or a custodian of a
retirement plan account may involve additional fees charged by the dealer or
custodian.
Except as specified below under "Telephone Redemption Requests," payment for
shares redeemed generally will be made by check mailed within seven days after
acceptance by Investor Services of the request and any other necessary documents
in proper order. Such payment may be postponed or the right of redemption
suspended as provided by the rules of the SEC. Such payment may, under certain
circumstances, be paid wholly or in part by a distribution-in-kind of portfolio
securities. If the shares to be redeemed have been recently purchased by check,
Investor Services may delay the redemption until it confirms the purchase check
has cleared, which may take up to 15 days. A taxable gain or loss will be
recognized by the shareholder upon redemption of shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 418256, Kansas City, MO 64141-9256. The request for redemption
should indicate the number of shares to be redeemed, the class designation of
such shares and the shareholder's account number. The redemption request must be
signed by all persons in whose names the shares are registered. Signatures must
conform exactly to the account registration. If the proceeds of the redemption
exceed $50,000, or if the proceeds are not to be paid to the record owner at the
record address, or if the record address has changed within the previous 30
days, signature(s) must be guaranteed by one of the following: a bank or trust
company; a broker-dealer; a credit union; a national securities exchange,
registered securities association or clearing
19
-
<PAGE> 177
agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. In the case of shareholders holding
certificates, the certificates for the shares being redeemed properly endorsed
for transfer must accompany the redemption request. In the event the redemption
is requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the authorized signer and
certified within the prior 120 days must accompany the redemption request. IRA
redemption requests should be sent to the IRA custodian to be forwarded to
Investor Services. Contact the IRA custodian for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. Orders sent through authorized dealers
must be at least $500 (unless transmitted by your authorized dealer via the
FUNDSERV network). The redemption price for such shares is the net asset value
per share next calculated after an order in proper form is received by an
authorized dealer provided such order is transmitted to the Distributor prior to
the Distributor's close of business on such day. It is the responsibility of
authorized dealers to transmit redemption requests received by them to the
Distributor so they will be received prior to such time. Redemptions completed
through an authorized dealer may involve additional fees charged by the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application form accompanying this prospectus or call the Fund at (800) 341-2911
to request that a copy of the Telephone Redemption Authorization form be sent to
them for completion. To redeem shares, contact the telephone transaction line at
(800) 421-5684. Van Kampen Investments, Investor Services and the Fund employ
procedures considered by them to be reasonable to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring certain
personal identification information prior to acting upon telephone instructions,
tape recording telephone communications and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen Investments, Investor Services nor the Fund will be liable
for following telephone instructions which it reasonably believes to be genuine.
Telephone redemptions may not be available if the shareholder cannot reach
Investor Services by telephone, whether because all telephone lines are busy or
for any other reason; in such case, a shareholder would have to use the Fund's
other redemption procedure previously described. Requests received by Investor
Services prior to 4:00 p.m., New York time, will be processed at the next
determined net asset value per share. These privileges are available for all
accounts other than retirement accounts or accounts with shares represented by
certificates. If an account has multiple owners, Investor Services may rely on
the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions payable by wire transfer are expected to be wired on the next
business day following the date of redemption. The Fund reserves the right at
any time to terminate, limit or otherwise modify this redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account with a
value on the date of the notice of redemption less than the minimum initial
investment as specified in this prospectus. At least 60 days advance written
notice of any such involuntary redemption will be given and the shareholder will
be given an opportunity to
20
-
<PAGE> 178
purchase the required value of additional shares at the next determined net
asset value without sales charge. Any involuntary redemption may only occur if
the shareholder account is less than the minimum initial investment due to
shareholder redemptions.
DISTRIBUTIONS FROM
THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends and
capital gains distributions. Investors will be entitled to begin receiving
dividends on their shares on the business day after Investor Services receives
payment for such shares. However, shares become entitled to dividends on the day
Investor Services receives payment for the shares either through a fed wire or
NSCC settlement. Shares remain entitled to dividends through the day such shares
are processed for payment on redemption.
DIVIDENDS. Interest earned from investments is the Fund's main source of income.
Under the Fund's present policy, which may be changed at any time by the Board
of Trustees, distributions of all or substantially all of this income, less
expenses, are declared daily and paid monthly as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than purchase prices. Net realized capital gains represent the total
profit from sales of securities minus total losses from sales of securities
including losses carried forward from prior years. The Fund distributes any
taxable net realized capital gains to shareholders at least annually. As in the
case of dividends, capital gains distributions are automatically reinvested in
additional shares of the Fund at net asset value unless the shareholder
instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value per share (without sales
charge) on the applicable payable date of the dividend or capital gains
distribution. Unless the shareholder instructs otherwise, the reinvestment plan
is automatic. This instruction may be made by telephone by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired) or by writing to Investor
Services. The investor may, on the initial application or prior to any
declaration, instruct that dividends be paid in cash and capital gains
distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to charge a bank account on a
regular basis to invest pre-determined amounts in the Fund. Additional
information is available from the Distributor or your authorized dealer.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint Investor Services as agent by completing the Authorization for
Redemption by Check form and the appropriate section of the application and
returning the form and the application to Investor Services. Once the form is
properly completed, signed and returned to the agent, a supply of checks drawn
on State Street Bank and Trust Company (the "Bank") will be sent to the Class A
shareholder. These checks may be made payable by the Class A
21
-
<PAGE> 179
shareholder to the order of any person in any amount of $100 or more.
When a check is presented to the Bank for payment, full and fractional Class A
Shares required to cover the amount of the check are redeemed from the
shareholder's Class A account by Investor Services at the next determined net
asset value per share. Check writing redemptions represent the sale of Class A
Shares. Any gain or loss realized on the sale of shares is a taxable event.
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A account, the check will
be returned and the shareholder may be subject to additional charges. A Class A
shareholder may not liquidate the entire account by means of a check. The check
writing privilege may be terminated or suspended at any time by the Fund or the
Bank. Retirement plans and accounts that are subject to backup withholding are
not eligible for the privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next computed net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. Under normal circumstances, it is
the policy of the Adviser not to approve such requests.
When Class B Shares and Class C Shares are exchanged among Participating Funds,
the holding period for purposes of computing the contingent deferred sales
charge is based upon the date of the initial purchase of such shares from a
Participating Fund. If such Class B Shares or Class C Shares are redeemed and
not exchanged for shares of another Participating Fund, Class B Shares and Class
C Shares are subject to the contingent deferred sales charge schedule imposed by
the Participating Fund from which such shares were originally purchased.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is carried over and included in the
tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanying the prospectus. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, neither Van Kampen Investments, Investor Services nor
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gains options (except dividend
diversification) and authorized dealer of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or reinvest dividends
from the new account into another fund, however, an exchanging shareholder must
submit a specific request. The Fund reserves the right to reject any order to
acquire its shares through exchange. In addition, the Fund may modify, restrict
or terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
22
-
<PAGE> 180
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these Participating Funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund prior to investing.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instruction. Van Kampen Investments, Investor
Services and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated through the internet are genuine. Such
procedures include requiring use of a personal identification number prior to
acting upon internet instructions and providing written confirmation of
instructions communicated through the internet. If reasonable procedures are
employed, neither Van Kampen Investments, Investor Services nor the Fund will be
liable for following instructions through the internet which it reasonably
believes to be genuine. If an account has multiple owners, Investor Services may
rely on the instructions of any one owner.
FLORIDA TAXATION
The following Florida tax discussion is based on the advice of Squire, Sanders &
Dempsey L.L.P., special counsel to the Fund for Florida tax matters.
Under existing Florida law, shares of the Fund will not be subject to the
Florida intangible personal property tax for any year if, on the last business
day of the previous calendar year, the Fund's portfolio consisted solely of (1)
notes, bonds and other obligations issued by the State of Florida or its
municipalities, counties, and other taxing districts, or by the United States
Government and its agencies, or by the governments of Puerto Rico, Guam or the
U.S. Virgin Islands, or (2) other intangible personal property exempt from the
Florida intangible personal property tax. (FOR THIS PURPOSE, OBLIGATIONS ISSUED
BY A NONPROFIT CORPORATION FORMED UNDER THE GENERAL NONPROFIT CORPORATION LAW OF
A STATE ARE NOT EXEMPT FROM THE FLORIDA INTANGIBLE PERSONAL PROPERTY TAX EVEN IF
THEY ARE CONSIDERED FOR FEDERAL INCOME TAX PURPOSES TO BE OBLIGATIONS ISSUED "ON
BEHALF OF" A GOVERNMENTAL UNIT THE INTEREST ON WHICH IS EXEMPT FROM FEDERAL
INCOME TAX.) Shares of the Fund will generally be subject to the Florida
intangible personal property tax for any year if, on the last business day of
the previous calendar year, the Fund's portfolio consists of any asset that is
not exempt from the Florida intangible property tax.
The State of Florida and its political subdivisions do not impose income taxes
on individuals, and therefore individual shareholders of the Fund will not be
subject to a Florida income tax on distributions from the Fund or on gain from
the sale or other disposition of shares of the Fund.
Corporations (and certain other entities treated as corporations under the
Florida Income Tax Code) that are subject to the Florida income tax will be
taxable on distributions from the Fund and on gain from the sale or other
disposition of shares of the Fund to the extent such income or gain is allocated
or
23
-
<PAGE> 181
apportioned to Florida. Accordingly, investment in shares of the Fund may not be
appropriate for such corporations.
The transfer of shares of the Fund will not be subject to the Florida
documentary stamp tax. Shares of the Fund will be included in assets subject to
Florida estate tax.
Under current Florida tax law, the Florida intangible personal property tax rate
is $2.00 per $1,000 of taxable intangible property. Shareholders subject to
taxation in a state other than Florida may realize a lower after-tax rate of
return than Florida shareholders if the dividends distributed by the Fund are
not exempt from taxation in such other state.
The state tax discussion set forth above is for general information only.
Prospective investors should consult their own tax advisers regarding the
specific state tax consequences of holding and disposing of shares, as well as
the effects of federal, local and foreign tax law and any proposed tax law
changes.
FEDERAL INCOME TAXATION
The following federal income tax discussion is based on the advice of Skadden,
Arps, Slate, Meagher & Flom (Illinois).
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined under applicable
federal income tax law). Exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. Exempt-interest dividends are included in determining what
portion, if any, of a person's social security and railroad retirement benefits
will be includable in gross income subject to federal income tax.
Under applicable federal income tax law, the interest on certain municipal
securities may be an item of tax preference subject to the alternative minimum
tax. The Fund may invest a portion of its assets in municipal securities subject
to this provision so that a portion of its exempt-interest dividends may be an
item of tax preference to the extent such dividends represent interest received
from such municipal securities. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alter-native minimum tax.
Although exempt-interest dividends from the Fund generally may be treated by
shareholders as interest excluded from their gross income, each shareholder is
advised to consult his or her tax adviser with respect to whether
exempt-interest dividends retain this exclusion given the investor's tax
circumstances. For example, exempt-interest dividends may not be excluded if the
shareholder would be treated as a "substantial user" (or a "related person" of a
substantial user, as each term is defined by applicable federal income tax law)
of the facilities financed with respect to any of the tax-exempt obligations
held by the Fund.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the shareholder's taxable
year. If a shareholder receives an exempt-interest dividend with respect to any
shares and such shares are held for six months or less, any loss on the sale or
exchange of the shares will be disallowed to the extent of the amount of such
exempt-interest dividend.
While the Fund expects that a major portion of its net investment income
(consisting generally of tax-exempt interest, taxable income and net short-term
capital gains) will constitute tax-exempt interest, a significant portion of the
Fund's net investment income may consist of taxable income. Distributions of
such taxable income are taxable to shareholders as ordinary income to the extent
of the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains (which are the
excess of net long-term capital gains over net short-term capital losses) as
capital gain dividends, if any, are taxable to shareholders as long-term capital
gains, whether paid in cash or reinvested in additional shares, and regardless
of how long the shares of the Fund have been held by such shareholders. Such
capital gain dividends may be taxed at different rates depending on how long the
Fund held the securities. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such
24
-
<PAGE> 182
holder (assuming such shares are held as a capital asset). Although
distributions generally are treated as taxable in the year they are paid,
distributions declared in October, November or December, payable to shareholders
of record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt interest dividends cannot exceed,
however, the excess of the amount of interest exempt from tax under Section 103
of the Code received by the Fund during the year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. Since the percentage of
dividends which are exempt-interest dividends is determined on an average annual
method for the taxable year, the percentage of income designated as tax-exempt
for any particular dividend may be substantially different from the percentage
of the Fund's income that was tax exempt during the period covered by the
dividend. Fund distributions generally will not qualify for the dividends
received deduction for corporations.
The sale or exchange of shares is a taxable transaction for federal income tax
purposes. Shareholders who sell their shares will generally recognize gain or
loss in an amount equal to the difference between their adjusted tax basis in
the shares and the amount received. If such shares are held as a capital asset,
the gain or loss will be a capital gain or loss. Any capital gains may be taxed
at different rates depending on how long the shareholder held its shares.
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain required certifications
or who are otherwise subject to backup withholding.
The Fund intends to qualify as a regulated investment company under the federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its net investment income, the Fund will not be
required to pay federal income taxes on any income it distributed to
shareholders. If the Fund distributes less than the sum of 98% of its ordinary
income or less than and 98% of its capital gain net income, then the Fund will
be subject to a 4% excise tax on the undistributed amounts.
The federal income tax discussion above is for general information only.
Prospective investors should consult their own tax advisers regarding the
specific federal tax consequences of purchasing, holding, exchanging or selling
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
25
-
<PAGE> 183
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, independent accountants, whose report,
along with the Fund's financial statements, is included in the Statement of
Additional Information and may be obtained by shareholders without charge by
calling the telephone number on the back cover of this prospectus. This
information should be read in conjunction with the financial statements and
notes thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
Class A Shares Class B Shares
July 29, 1994
(Commencement
of Investment Year
Nine Months Operations) Nine Months Ended
Ended to Ended December
September 30, Year Ended December 31, December 31, September 30, 31,
1998 1997 1996 1995 1994 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.......................... $15.550 $15.060 $15.203 $13.796 $14.300 $15.554 $15.064
------- ------- ------- ------- ------- ------- -------
Net Investment Income........... .564 .766 .784 .789 .291 .478 .650
Net Realized and Unrealized
Gain/Loss..................... .388 .508 (.153) 1.416 (.507) .388 .510
------- ------- ------- ------- ------- ------- -------
Total from Investment
Operations...................... .952 1.274 .631 2.205 (.216) .866 1.160
Less:
Distributions from and in Excess
of Net Investment Income...... .581 .774 .774 .798 .288 .495 .660
Distributions from Net Realized
Gain.......................... -0- .010 -0- -0- -0- -0- .010
------- ------- ------- ------- ------- ------- -------
Total Distributions.............. .581 .784 .774 .798 .288 .495 .670
------- ------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period.......................... $15.921 $15.550 $15.060 $15.203 $13.796 $15.925 $15.554
======= ======= ======= ======= ======= ======= =======
Total Return*(a)................. 6.26%** 8.72% 4.37% 16.29% (1.47%)** 5.74%** 7.91%
Net Assets at End of the Period
(In millions)................... $27.1 $29.3 $22.2 $16.2 $9.0 $23.6 $22.5
Ratio of Expenses to Average Net
Assets*......................... .60% .59% .28% .44% .49% 1.35% 1.33%
Ratio of Net Investment Income to
Average Net Assets*............. 4.85% 5.05% 5.31% 5.33% 5.13% 4.09% 4.30%
Portfolio Turnover............... 50% ** 48% 73% 41% 19%** 50%** 48%
* If certain expenses had not
been assumed by the Adviser,
total return would have been
lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net
Assets.......................... 1.30% 1.29% 1.47% 1.70% 1.99% 2.05% 2.03%
Ratio of Net Investment Income to
Average Net Assets.............. 4.15% 4.35% 4.13% 4.07% 3.64% 3.39% 3.60%
<CAPTION>
Class B Shares
July 29, 1994
(Commencement
of Investment
Operations)
to
December 31,
1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the
Period.......................... $15.201 $13.792 $14.300
------- ------- -------
Net Investment Income........... .677 .685 .251
Net Realized and Unrealized
Gain/Loss..................... (.154) 1.415 (.509)
------- ------- -------
Total from Investment
Operations...................... .523 2.100 (.258)
Less:
Distributions from and in Excess
of Net Investment Income...... .660 .691 .250
Distributions from Net Realized
Gain.......................... -0- -0- -0-
------- ------- -------
Total Distributions.............. .660 .691 .250
------- ------- -------
Net Asset Value, End of the
Period.......................... $15.064 $15.201 $13.792
======= ======= =======
Total Return*(a)................. 3.58% 15.53% (1.81%)**
Net Assets at End of the Period
(In millions)................... $18.9 $16.9 $10.9
Ratio of Expenses to Average Net
Assets*......................... 1.03% 1.12% 1.26%
Ratio of Net Investment Income to
Average Net Assets*............. 4.56% 4.66% 4.31%
Portfolio Turnover............... 73% 41% 19%**
* If certain expenses had not
been assumed by the Adviser,
total return would have been
lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net
Assets.......................... 2.22% 2.38% 2.75%
Ratio of Net Investment Income to
Average Net Assets.............. 3.38% 3.40% 2.81%
<CAPTION>
Class C Shares
July 29, 1994
(Commencement
of Investment
Nine Months Operations)
Ended to
September 30, Year Ended December 31, December 31,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.......................... $15.581 $15.081 $15.213 $13.786 $14.300
-------- -------- ------- ------- -------
Net Investment Income........... .483 .666 .668 .690 .249
Net Realized and Unrealized
Gain/Loss..................... .372 .504 (.140) 1.428 (.513)
-------- -------- ------- ------- -------
Total from Investment
Operations...................... .855 1.170 .528 2.118 (.264)
Less:
Distributions from and in Excess
of Net Investment Income...... .495 .660 .660 .691 .250
Distributions from Net Realized
Gain.......................... -0- .010 -0- -0- -0-
-------- -------- ------- ------- -------
Total Distributions.............. .495 .670 .660 .691 .250
-------- -------- ------- ------- -------
Net Asset Value, End of the
Period.......................... $15.941 $15.581 $15.081 $15.213 $13.786
======== ======== ======= ======= =======
Total Return*(a)................. 5.60%** 7.97% 3.65% 15.61% (1.81%)**
Net Assets at End of the Period
(In millions)................... $1,622.4 $1,195.1 $849.2 $461.8 $11.4
Ratio of Expenses to Average Net
Assets*......................... 1.32% 1.37% 1.03% 1.13% 1.26%
Ratio of Net Investment Income to
Average Net Assets*............. 4.08% 4.38% 4.56% 4.51% 4.28%
Portfolio Turnover............... 50%** 48% 73% 41% 19%**
* If certain expenses had not
been assumed by the Adviser,
total return would have been
lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net
Assets.......................... 2.03% 2.06% 2.22% 2.39% 2.74%
Ratio of Net Investment Income to
Average Net Assets.............. 3.38% 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.
26
<PAGE> 184
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or redemptions, call
the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUND INFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN FLORIDA INSURED TAX FREE INCOME FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen Florida Insured Tax Free Income Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Florida Insured Tax Free Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 185
VAN KAMPEN
FLORIDA INSURED TAX FREE INCOME FUND
PROSPECTUS
JANUARY 28, 1999
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports,
which explain the market conditions and
investment strategies affecting the Fund's
recent performance.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling (800)
341-2911 from 7:00 a.m. to 7:00 p.m., Central
time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800) 421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC Public
Reference Room in Washington, DC or online at
the SEC's web site (http://www.sec.gov). For
more information, please call the SEC at (800)
SEC-0330. You can also request these materials
by writing the Public Reference Section of the
SEC, Washington DC, 20549-6009, and paying a
duplication fee.
[VAN KAMPEN FUNDS LOGO]
Investment Company Act File No.
811-4386.
FLI PRO 1/99
<PAGE> 186
VAN KAMPEN
NEW YORK TAX FREE
INCOME FUND
Van Kampen New York Tax Free Income Fund is a
mutual fund with an investment objective 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 is designed
for investors who are residents of New York
for tax purposes. The Fund's management seeks
to achieve the investment objective by
investing primarily in a portfolio of New York
municipal securities that are rated investment
grade at the time of purchase.
Shares of the Fund have not been approved or
disapproved by the Securities and Exchange
Commission (SEC) or any state regulators, and
neither the SEC nor any state regulator has
ruled on the accuracy or adequacy of this
prospectus. It is a criminal offense to state
otherwise.
This prospectus is dated JANUARY 28, 1999.
[VAN KAMPEN FUNDS LOGO]
<PAGE> 187
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary................................ 3
Fees and Expenses of the Fund...................... 6
Investment Objective and Policies.................. 7
Investment Advisory Services....................... 15
Purchase of Shares................................. 16
Redemption of Shares............................... 22
Distributions from the Fund........................ 24
Shareholder Services............................... 24
New York Taxation.................................. 26
Federal Income Taxation............................ 26
Financial Highlights............................... 29
</TABLE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus, in connection with the offer contained in this prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
<PAGE> 188
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund is a mutual fund with an investment objective 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 is designed
for investors who are residents of New York for tax purposes. There can be no
assurance that the Fund will achieve its investment objective.
INVESTMENT STRATEGIES
Under normal market conditions, the Fund's management seeks to achieve the
investment objective by investing at least 80% of the Fund's total assets in a
portfolio of New York municipal securities that are rated investment grade at
the time of purchase. Investment grade securities are securities rated BBB or
higher by Standard and Poor's ("S&P") or Baa or higher by Moody's Investors
Service, Inc. ("Moody's") or an equivalent rating by another nationally
recognized statistical rating organization ("NRSRO") and comparably rated short
term securities. Under normal market conditions, up to 20% of the Fund's total
assets may consist of New York municipal securities rated below investment grade
(but not rated lower than B- by S&P or B3 by Moody's) or comparably rated short
term securities and unrated New York municipal securities believed by the Fund's
investment adviser to be of comparable quality at the time of purchase.
Securities rated BB or below by S&P, Ba or below by Moody's or unrated
securities of comparable quality are commonly referred to as "junk bonds" and
involve special risks as compared to investments in higher-grade securities (see
sidebar for an explanation of quality ratings). Under normal market conditions,
up to 20% of the Fund's total assets may be invested in municipal securities
that are subject to federal alternative minimum tax. The Fund may purchase or
sell certain derivative instruments (such as options, futures and options on
futures, and interest rate swaps or other interest rate related transactions)
for various risk management and hedging purposes. The Fund may purchase or sell
securities on a when-issued or delayed delivery basis.
INVESTMENT RISKS
Because of the following risks, you could lose money on your investment in the
Fund over the short or long term:
MARKET RISK. The prices of income securities tend to fall as interest rates
rise. This "market risk" is
usually greater among securities with longer maturities. Because the Fund does
not have a policy limiting the maturities of its investments and the Fund
expects to own securities with longer maturities, the Fund will be subject to
greater market risk than a fund that owns shorter-term securities.
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased, as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitments for these securities, the greater the Fund's
exposure to market price fluctuation.
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest and principal. Under normal market conditions, the Fund invests at
least 80% of its total assets in investment grade securities and the Fund may
invest up to 20% of its total assets in securities with below investment grade
credit quality. Therefore, the Fund is subject to a higher level of credit risk
than a fund that buys only investment grade securities. The credit quality of
"noninvestment grade" securities is considered speculative by recognized rating
agencies with respect to the issuer's
UNDERSTANDING
QUALITY RATINGS
Bond ratings are based on the issuer's ability to pay interest and repay the
principal. Bonds with ratings above the line are considered "investment
grade," while those with ratings below the line are regarded as
"noninvestment grade," or "junk bonds." A detailed explanation of these
ratings can be found in the Fund's Statement of Additional Information.
Moody's S&P Meaning
- ------------------------------------------------------
Aaa AAA Highest quality
......................................................
Aa AA High quality
......................................................
A A Above-average quality
......................................................
Baa BBB Average quality
- ------------------------------------------------------
Ba BB Below-average quality
......................................................
B B Marginal quality
......................................................
Caa CCC Poor quality
......................................................
Ca CC Highly speculative
......................................................
C C Lowest quality
......................................................
-- D In default
......................................................
3
<PAGE> 189
continuing ability to pay interest and principal. The credit risks and market
prices of lower-grade securities are more sensitive to negative issuer
developments, such as a decline in revenues or increase in expenditures, or
adverse economic conditions, such as a recession, than are the prices of higher
grade securities.
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates, which can vary widely over the short and long term. If interest rates
drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of municipal
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would be reinvested by the Fund in securities with the new, lower
interest rates, resulting in a possible decline in the Fund's income and
distributions to shareholders.
MUNICIPAL SECURITIES RISK. The Fund invests primarily in municipal securities.
The yields of municipal securities may move differently and adversely compared
to the yields of the overall debt securities markets. While the interest
received from municipal securities generally is exempt from federal income tax,
the Fund may invest up to 20% of its total assets in municipal securities
subject to federal alternative minimum tax. In addition, there could be changes
in applicable tax laws or tax treatments that reduce or eliminate the current
federal income tax exemption on municipal securities or otherwise adversely
affect the current federal or state tax status of municipal securities.
NON-DIVERSIFICATION RISKS. The Fund is classified as a "non-diversified" fund,
which means the Fund may invest a greater portion of its assets in a more
limited number of issuers than a "diversified" fund. As a result, the Fund may
be subject to greater risk than a diversified fund because changes in the
financial condition or market assessment of a single issuer may cause greater
fluctuations in the value of the Fund's shares.
STATE-SPECIFIC RISKS. Because the Fund invests primarily in a portfolio of New
York municipal securities, the Fund is more susceptible to political, economic,
regulatory or other factors affecting issuers of New York municipal securities
than a fund that does not limit its investments to such issuers.
RISKS OF USING DERIVATIVE INVESTMENTS. In general terms, a derivative investment
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures and options on futures, interest
rate swaps and other interest rate-related transactions are examples of
derivatives. Such transactions involve risks different from the direct
investment in underlying securities such as imperfect correlation between the
value of the instruments and the underlying assets; risks of default by the
other party to certain transactions; risks that the transactions may incur
losses that partially or completely offset gains in portfolio positions; risks
that the transactions may not be liquid; and manager risk.
MANAGER RISK. As with any fund, the Fund's management may not be successful in
selecting the best-performing securities and the Fund's performance may lag
behind that of similar funds.
An investment in the Fund is not a deposit of any bank or other insured
depository institution. Your investment is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
INVESTOR PROFILE
In light of its objective and investment strategies, the Fund may be appropriate
for investors who:
- - Seek current income.
- - Are in a high federal income tax bracket.
- - Are subject to New York State or New York City income taxes.
UNDERSTANDING
MUNICIPAL SECURITIES
Municipal securities, including municipal bonds, notes or leases,
generally are issued by state and local governments or regional
governmental authorities to raise money for their daily operations or
special projects. The interest received from municipal securities
generally is exempt from federal income tax. In addition, the interest
may be exempt from certain state or local taxes when received from
issuers who are located in the investors' home state, municipality or
region. The interest from certain municipal securities is a
preference item subject to federal alternative minimum tax.
4
<PAGE> 190
- - Wish to add to their personal investment portfolio a fund that invests
primarily in New York municipal securities.
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program, and investors should consider
their long-term investment goals and financial needs when making an investment
decision about the Fund. An investment in the Fund is intended to be a long-term
investment, and the Fund should not be used as a trading vehicle.
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance varies from year to year. The following chart shows the annual
returns of the Fund's Class A Shares over the past five calendar years prior to
the date of this prospectus. Sales loads are not reflected in this chart. If
these sales loads had been included, the returns shown below would have been
lower. Remember that the past performance of the Fund is not indicative of its
future performance.
<TABLE>
<CAPTION>
<S> <C>
'1994' -2.93%
'1995' 17.33%
'1996' 5.14%
'1997' 10.92%
'1998' 7.50%
</TABLE>
*The return for 1994 is for the period from July 29, 1994 (commencement of
investment operations) to December 31, 1994.
The annual return variability of the Fund's Class B Shares and Class C Shares
would be substantially similar to that shown for the Class A Shares because all
of the Fund's shares are invested in the same portfolio of securities; however,
the actual annual returns of the Class B Shares and Class C Shares would be
lower than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
During the five-year period shown in the bar chart, the highest quarterly return
was 7.67% (for the quarter ended March 31, 1995) and the lowest quarterly return
was -2.08% (for the quarter ended March 31, 1996).
COMPARATIVE PERFORMANCE
This table shows how the Fund's performance compares with the Lehman Brothers
Municipal Bond Index, a broad-based market index that the Fund's management
believes is an applicable benchmark for the Fund. Average annual total returns,
assuming payment of the maximum sales charge, are shown for the one-year period
ended December 31, 1998 and the period from the inception date for each class of
shares to December 31, 1998 (the most recently completed calendar year prior to
the date of this prospectus). Remember that the past performance of the Fund is
not indicative of its future performance.
<TABLE>
<CAPTION>
Average Annual
Total Returns Past
for the 10 Years
Periods Ended Past or Since
December 31, 1998 1 Year Inception
- ---------------------------------------------
<S> <C> <C>
Van Kampen New
York Tax Free
Income Fund
.............................................
Class A Shares 2.42% 7.20%(1)
.............................................
Class B Shares 2.71% 7.32%(1)
.............................................
Class C Shares 5.71% 7.59%(1)
.............................................
Lehman Brothers
Municipal Bond
Index 6.48% 8.22%
.............................................
</TABLE>
Inception date: (1) 7/29/94.
The current yield for the thirty-day period ended September 30, 1998 is 4.71%
for Class A Shares, 4.19% for Class B Shares and 4.20% for Class C Shares.
Investors can obtain the current yield of the Fund for each class of shares by
calling (800) 341-2911.
5
<PAGE> 191
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum sales charge
(load) imposed on
purchases (as a
percentage of
offering price) 4.75%(1) None None
..............................................................
Maximum deferred
sales charge (load)
(as a percentage of
the lesser of
original purchase
price or redemption
proceeds) None(2) Year 1-4.00% Year 1-1.00%
Year 2-3.75% After-None
Year 3-3.50%
Year 4-2.50%
Year 5-1.50%
Year 6-1.00%
After-None
..............................................................
Maximum sales charge
(load) imposed on
reinvested dividends
(as a percentage of
offering price) None None None
..............................................................
Redemption fees (as a
percentage of amount None None None
redeemed)
..............................................................
Exchange fee None None None
..............................................................
</TABLE>
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares -- Class A Shares."
ANNUAL FUND
OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fees(1) 0.60% 0.60% 0.60%
..............................................................
Distribution and/or 0.25% 1.00%(3) 1.00%(3)
Service (12b-1)
Fees(2)
..............................................................
Other Expenses(1) 0.58% 0.59% 0.58%
..............................................................
Total Annual Fund 1.43% 2.19% 2.18%
Operating Expenses(1)
..............................................................
</TABLE>
(1) The Fund's investment adviser is currently waiving or reimbursing all or a
portion of the Fund's Management Fees and Other Expenses such that actual
Total Annual Fund Operating Expenses for the fiscal period ended September
30, 1998 were 0.39%, 1.14% and 1.14% for Class A Shares, Class B Shares and
Class C Shares, respectively.
(2) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(3) Because Distribution and/or Service (12b-1) Fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges. Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by National Association of
Securities Dealers, Inc. rules.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% annual return each year and
that the Fund's operating expenses remain the same each year (except for the
ten-year amounts for Class B Shares which reflect the conversion of Class B
Shares to Class A Shares after eight years). Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $614 $ 906 $1,219 $2,107
.......................................................................
Class B Shares $622 $1,035 $1,325 $2,331*
.......................................................................
Class C Shares $321 $ 682 $1,169 $2,513
.......................................................................
</TABLE>
6
-
<PAGE> 192
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $614 $906 $1,219 $2,107
......................................................................
Class B Shares $222 $685 $1,175 $2,331*
......................................................................
Class C Shares $221 $682 $1,169 $2,513
......................................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
To simplify comparison among funds, all funds are required by the SEC to assume
a 5% annual return. Class B Shares of the Fund acquired through the exchange
privilege are subject to the contingent deferred sales charge schedule of the
fund from which the shareholder's purchase of Class B Shares was originally
made. Accordingly, future expenses as projected could be higher than those
determined in the above table if the investor's Class B Shares were exchanged
from a fund with a higher contingent deferred sales charge. The Fund's actual
annual return and actual expenses for future periods may be greater or less than
those shown.
INVESTMENT OBJECTIVE
AND POLICIES
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 is designed for
investors who are residents of New York for tax purposes. The Fund's investment
objective is a fundamental policy and may not be changed without shareholder
approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"). There are risks inherent in all investments in securities;
accordingly there can be no assurance the Fund will achieve its investment
objective.
Under normal market conditions, the Fund's management seeks to achieve the
investment objective by investing at least 80% of the Fund's total assets in New
York municipal securities that are rated investment grade at the time of
purchase. Investment grade securities are securities rated BBB or higher by S&P,
Baa or higher by Moody's or an equivalent rating by another NRSRO and comparably
rated short term securities. Under normal market conditions, up to 20% of the
Fund's total assets may consist of New York municipal securities rated below
investment grade (but not rated lower than B- by S&P or B3 by Moody's) or
comparably rated short term securities and unrated New York municipal securities
believed by the Fund's investment adviser to be of comparable quality at the
time of purchase. Securities rated BB or below by S&P, Ba or below by Moody's or
unrated securities of comparable quality are commonly referred to as "junk
bonds" and involve special risks as compared to investments in higher-grade
securities. For a description of securities ratings, see the Fund's Statement of
Additional Information. Under normal market conditions, up to 20% of the Fund's
total assets may be invested in municipal securities that are subject to
alternative minimum tax. From time to time, the Fund temporarily may invest up
to 10% of its total assets in tax exempt money market funds and such instruments
will be treated as investments in municipal securities.
The Fund's investment adviser will buy and sell securities for the Fund's
portfolio with a view to seeking a high level of current income exempt from
federal, New York State and New York City income taxes and will select
securities which the Fund's investment adviser believes entail reasonable credit
risk considered in relation to the investment policies of the Fund. As a result,
the Fund will not necessarily invest in the highest yielding New York municipal
securities permitted by its investment policies if the Fund's investment adviser
determines that market risks or credit risks associated with such investments
would subject the Fund's portfolio to undue risk. The potential for realization
of capital gains resulting from possible changes in interest rates will not be a
major consideration. Other than for tax purposes, frequency of portfolio
turnover generally will not be a limiting factor if the Fund's investment
adviser considers it advantageous to purchase or sell securities.
MUNICIPAL SECURITIES
Municipal securities are obligations issued by or on behalf of states,
territories or possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the interest on
which, in the opinion of bond counsel or other counsel to the issuers of such
securities, is, at the time of issuance, exempt from federal income tax. New
York municipal securities are municipal
7
<PAGE> 193
securities the interest on which, in the opinion of bond counsel or other
counsel to the issuers of such securities, is, at the time of issuance, exempt
from New York State and New York City individual income tax. Under normal market
conditions, at least 80% of the Fund's total assets will be invested in New York
municipal securities. The policy stated in the foregoing sentence is a
fundamental policy of the Fund and may not be changed without shareholder
approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the 1940 Act. Under normal market conditions, up to
20% of the Fund's total assets may be invested in municipal securities that are
subject to federal alternative minimum tax.
The issuers of municipal securities obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, highways, bridges, schools, hospitals, housing, mass transportation,
streets and water and sewer works. Other public purposes for which municipal
securities may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to lend to other public
institutions and facilities. Certain types of municipal securities are issued to
obtain funding for privately operated facilities.
The yields of municipal securities depend on, among other things, general money
market conditions, general conditions of the municipal securities market, size
of a particular offering, the maturity of the obligation and rating of the
issue. The ratings of S&P and Moody's represent their opinions of the quality of
the municipal securities they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may
have different yields while municipal securities of the same maturity and coupon
with different ratings may have the same yield.
The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special delegation" securities. "General
obligation" securities are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. "Revenue" securities
are usually payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Industrial development bonds are usually
revenue securities, the credit quality of which is normally directly related to
the credit standing of the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, variable rate demand notes, municipal leases,
custodial receipts, participation certificates and derivative municipal
securities (which include terms or elements similar in to certain strategic
transactions described below). Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to reflect market
rates of interest. The Fund also may also invest in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest. Investment in such securities involve special risks as
compared to a fixed rate municipal security. The extent of increases and
decreases in the value of derivative variable rate securities and the
corresponding change to the net asset value of the Fund generally will be larger
than comparable changes in the value of an equal principal amount of a fixed
rate municipal security having similar credit quality, redemption provisions and
maturity. The markets for such securities may be less developed and have less
liquidity than the markets for conventional municipal securities. The Fund will
not invest more than 20% of its total assets in derivative variable rate
securities, such as inverse floaters whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Municipal notes include tax, revenue and
bond anticipation notes of short maturity, generally less than three years,
which are issued to obtain temporary funds for various public purposes. Variable
rate demand notes are obligations which contain a floating or variable interest
rate adjustment formula and which are subject to a right of demand for payment
of the principal balance plus accrued interest either at any time or at
specified intervals. The interest rate on a variable rate demand note may be
based on a known lending rate, such as a bank's prime rate, and may be adjusted
when such rate changes, or the interest rate may be a market rate that is
adjusted at specified intervals. The adjustment formula maintains the value of
the variable rate demand note at approximately the par value of such note at the
adjustment date. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. Certain municipal lease obligations may
8
-
<PAGE> 194
include "non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. Custodial receipts are
underwritten by securities dealers or banks and evidence ownership of future
interest payments, principal payments or both on certain municipal securities.
Participation certificates are obligations issued by state or local governments
or authorities to finance the acquisition of equipment and facilities. They may
represent participations in a lease, an installment purchase contract, or a
conditional sales contract. Municipal securities may not be backed by the faith,
credit and taxing power of the issuer. Other than as set forth above, there is
no limitation with respect to the amount of the Fund's assets that may be
invested in the foregoing types of municipal securities. Certain of the
municipal securities in which the Fund may invest represent relatively recent
innovations in the municipal securities markets and the markets for such
securities may be less developed than the market for conventional fixed rate
municipal securities. A more detailed description of the types of municipal
securities in which the Fund may invest is included in the Statement of
Additional Information.
Under normal market conditions, longer term municipal securities generally
provide a higher yield than shorter term municipal securities and therefore the
Fund generally expects to invest primarily in longer term municipal securities.
The Fund will, however, invest in shorter term municipal securities when it
believes market conditions warrant such investments.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund will invest primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities generally can be
expected to rise. Conversely, when interest rates rise, the value of a portfolio
invested in fixed income securities generally can be expected to decline. The
prices of longer term municipal securities generally are more volatile with
respect to changes in interest rates than the prices of shorter term municipal
securities. Volatility may be greater during periods of general economic
uncertainty.
Municipal securities, like other debt obligations, are subject to the credit
risk of non-payment. The ability of issuers of municipal securities to make
timely payments of interest and principal may be adversely impacted in general
economic downturns and as relative governmental cost burdens are allocated and
reallocated among federal, state and local governmental units. Such non-payment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal securities experiencing non-payment and
a potential decrease in the net asset value of the Fund. In addition, the Fund
may incur expenses to work out or restructure a distressed or defaulted
security. Securities below investment grade involve special risks compared to
higher grade securities. See "Lower Grade Municipal Securities" below.
The Fund may invest up to 20% of its total assets in municipal securities that
are subject to federal alternative minimum tax. The Fund may not be a suitable
investment for investors who are already subject to the federal alternative
minimum tax or who would become subject to the federal alternative minimum tax
as a result of an investment in the Fund.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the current federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected and the Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
The Fund generally considers investments in municipal securities not to be
subject to industry concentration policies (issuers of municipal securities as a
group are not an industry) and the Fund may invest in municipal securities
issued by entities having similar characteristics. The issuers may be located in
the same geographic area or may pay their interest obligations from revenue of
similar projects, such as hospitals, airports, utility systems and housing
finance agencies. This may make the Fund's investments more susceptible to
similar economic, political or regulatory occurrences. As the similarity in
issuers increases, the potential for fluctuation in the Fund's net asset value
also increases. The Fund may invest more than 25% of its total assets in a
segment of the municipal securities market with similar characteristics if the
Fund's investment adviser determines that
9
-
<PAGE> 195
the yields available from obligations in a particular segment justify the
additional risks of a larger investment in such segment. The Fund may not,
however, invest more than 25% of its total assets in industrial development
revenue bonds issued for companies in the same industry. Sizeable investments in
such obligations could involve increased risk to the Fund should any of such
issuers or any such related projects or facilities experience financial
difficulties.
From time to time, the Fund's investments may include securities as to which the
Fund, by itself or together with other funds or accounts managed by the Fund's
investment adviser, holds a major portion or all of an issue of municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Fund's investment adviser believes it is advisable to do so.
LOWER GRADE MUNICIPAL SECURITIES
Under normal market conditions, the Fund may invest up to 20% of its total
assets in municipal securities rated below investment grade (but not lower than
B- by S&P or B3 by Moody's) or comparably rated short term securities and in
unrated New York municipal securities considered by the Fund's investment
adviser to be of comparable quality at the time of purchase. With respect to
such investments, the Fund has not established any limit on the percentage of
its portfolio which may be invested in securities in any one rating category.
Securities rated BB or below by S&P, Ba or below by Moody's or unrated
securities of comparable quality are commonly referred to as "junk bonds".
Generally, lower grade securities provide higher yields than higher grade
securities of similar maturity but are subject to greater risks, such as greater
credit risk, greater market risk and volatility, greater liquidity concerns and
potentially greater manager risk. Investors should carefully consider the risks
of owning shares of a fund which invests in lower grade municipal securities
before making an investment in the Fund.
The higher yield on such securities held by the Fund reflects the greater credit
risk that the financial condition of the issuer or adverse changes in general
economic conditions, or both, may impair the ability of the issuer to make
payments of income and principal. Lower grade securities are considered
speculative by the rating agencies with respect to the capacity of the issuer to
make interest and principal payments and are more susceptible to nonpayment or
default than higher grade securities. An economic downturn or increase in
interest rates could severely impact the ability of such issuers to pay
principal and interest or obtain other financing. The ratings of S&P and Moody's
represent their opinions of the quality of the securities they undertake to
rate, but not the market value risk of such securities. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Credit ratings are also subject to a risk that the rating agencies may fail to
change such ratings to reflect subsequent events in a timely fashion. See the
Statement of Additional Information for a description of security ratings.
The values of all debt securities fluctuate in response to changes in interest
rates, but lower grade securities generally are subject to more market risk and
volatility than higher grade securities. Lower grade securities tend to react to
short-term issuer or economic developments to a greater extent than higher grade
securities, which fluctuate primarily in response to the general level of
interest rates, assuming that there has been no change in the fundamental
quality of such securities. Yields on the Fund's portfolio securities can be
expected to fluctuate over time. A significant increase in interest rates or a
general economic downturn could severely disrupt the market for lower grade
municipal securities and adversely affect the market value of such securities.
Such events also could lead to a higher incidence of default by issuers of lower
grade municipal securities compared to higher grade securities. In addition,
changes in credit risks, changes in interest rates, the credit markets or
periods of general economic uncertainty can be expected to result in increased
volatility in the market price of the Fund's lower grade municipal securities
and thus in the net asset value of the Fund. Lower grade securities may be more
susceptible to real or perceived adverse economic conditions than higher grade
securities. A projection of an economic downturn, for example, could cause a
decline in prices of lower grade securities because the advent of a recession
could lessen the ability of a such issuer to make principal and interest
payments on its securities or obtain additional financing when necessary. In
addition, recent and proposed legislation may have an adverse impact on the
market prices or liquidity for lower grade municipal securities.
10
-
<PAGE> 196
The amount of available information about the financial condition of municipal
securities issuers is generally less extensive than that for corporate issuers
with publicly traded securities and the market for municipal securities is
generally considered to be less liquid than the market for corporate debt
obligations. In addition, the markets for lower grade securities may be less
liquid than the markets for higher grade securities. Liquidity relates to the
ability of a fund to sell a security in a timely manner at a price which
reflects the value of that security. To the extent that there is no established
retail market for some of the lower grade municipal securities in which the Fund
may invest, trading in such securities may be relatively inactive. Prices of
lower grade debt securities may decline rapidly in the event a significant
number of holders decide to sell. Changes in expectations regarding an
individual issuer or lower grade debt securities generally could reduce market
liquidity for such securities and make their sale by the Fund more difficult, at
least in the absence of price concessions. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established retail market exists as compared with the effects on securities for
which such a market does exist. An economic downturn or an increase in interest
rates could severely disrupt the market for such securities and adversely affect
the value of outstanding bonds or the ability of the issuers to repay principal
and interest. Further, the Fund may have more difficulty selling such securities
in a timely manner and at their stated value than would be the case for
securities for which an established retail market does exist. Certain municipal
securities in which the Fund may invest, such as special obligation bonds, lease
obligations, participation certificates and variable rate instruments, may be
particularly less liquid. Although the issuer of some such municipal securities
may be obligated to redeem such securities at face value, such redemption could
result in capital losses to the Fund to the extent such municipal securities
were purchased by the Fund at a premium to face value.
The Fund's investment adviser is responsible for determining the net asset value
of the Fund, subject to the supervision of the Fund's Board of Trustees. During
periods of reduced market liquidity or in the absence of readily available
market quotations for lower grade municipal securities held in the Fund's
portfolio, the ability of the Fund's investment adviser to value the Fund's
securities becomes more difficult and the judgment of the Fund's investment
adviser may play a greater role in the valuation of the Fund's securities due to
the reduced availability of reliable objective data.
In the event that an issuer of securities held by the Fund experiences
difficulties in the timely payment of principal or interest and such issuer
seeks to restructure the terms of its borrowings, the Fund may incur additional
expenses and may determine to invest additional assets with respect to such
issuer or the project or projects to which the Fund's portfolio securities
relate. Further, the Fund may incur additional expenses to the extent that it is
required to seek recovery upon a default in the payment of interest or the
repayment of principal on its portfolio holdings, and the Fund may be unable to
obtain full recovery thereof.
The Fund's investment adviser seeks to minimize the risks involved in investing
in lower grade municipal securities through diversification, careful investment
analysis and attention to current developments and trends in the economy and
financial and credit markets. In purchasing and selling securities, the Fund's
investment adviser evaluates the issuers of such securities based on a number of
factors, including but not limited to the issuer's financial strength, its
sensitivity to economic conditions and trends, its revenues or earnings
potential, its operating history and management skills. Municipal securities
generally are not listed for trading on any national securities exchange, and
many issuers of lower grade municipal securities choose not to have a rating
assigned to their obligations by any nationally recognized statistical rating
organization. The amount of information available about the financial condition
of an issuer of unlisted or unrated securities generally is not as extensive as
that which is available with respect to issuers of listed or rated securities.
Thus, investment results of the Fund's lower grade securities may be more
dependent upon the investment adviser's credit analysis, judgment and experience
than a fund investing solely in higher grade securities.
Certain of the lower grade municipal securities in which the Fund may invest may
be, subsequent to the Fund's investment in such securities, downgraded or have
their rating withdrawn by Moody's or S&P or may be deemed by the Fund's
investment adviser to be of a lower quality as a result of impairment of the
creditworthiness of the issuer of such securities or of the project the revenues
from which are the source of payment of interest and repayment of principal with
respect to such securities. The Fund may, if deemed
11
-
<PAGE> 197
appropriate by the Fund's investment adviser, retain a security whose rating has
been downgraded or whose rating has been withdrawn. In such instances, the
secondary market for such municipal securities may become less liquid, with the
possibility that more than 15% of the Fund's net assets would be invested in
securities which are not readily marketable. In such event, the Fund will take
reasonable and appropriate steps to reduce the percentage of the Fund's
portfolio represented by securities that are not readily marketable to less than
15% of the Fund's net assets as soon as is reasonably practicable.
The table below sets forth the percentages of the Fund's assets invested during
the fiscal period ended September 30, 1998 in the various S&P's and Moody's
rating categories and in unrated securities determined by the Fund's investment
adviser to be of comparable quality. The percentages are based on the
dollar-weighted average of credit ratings of all municipal securities held by
the Fund during the 1998 fiscal period computed on a monthly basis.
<TABLE>
<CAPTION>
Period Ended September 30, 1998
Unrated Securities of
Rated Securities Comparable Quality
(As a Percentage of (As a Percentage of
Rating Category Portfolio Value) Portfolio Value)
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA/Aaa 31.6% 0%
.......................................................................
AA/Aa 4.6% 0%
.......................................................................
A/A 11.8% 0%
.......................................................................
BBB/Baa 40.2% 2.4%
.......................................................................
BB/Ba 0% 6.7%
.......................................................................
B/B 0% 2.7%
.......................................................................
CCC/Caa 0% 0%
.......................................................................
CC/Ca 0% 0%
.......................................................................
C/C 0% 0%
.......................................................................
D 0% 0%
.......................................................................
Percentage of
Rated and
Unrated
Securities 88.2% 11.8%
.......................................................................
</TABLE>
The percentage of the Fund's assets invested in securities of various grades may
vary from time to time from those set forth above.
SPECIAL CONSIDERATIONS REGARDING
NEW YORK MUNICIPAL SECURITIES
The Fund invests substantially all of its assets in a portfolio of New York
municipal securities, which are municipal securities the interest on which, in
the opinion of bond counsel or other counsel to the issuers of such securities,
is, at the time of issuance, exempt from New York State and New York City
individual income taxes. Because the Fund invests substantially all of its
assets in a portfolio of New York municipal securities, the Fund is more
susceptible to political, economic, regulatory or other factors affecting
issuers of New York municipal securities than a fund which does not limit its
investments to such issuers. These risks include possible legislative, state
constitutional or regulatory amendments that may affect the ability of state and
local governments or regional governmental authorities to raise money to pay
principal and interest on their municipal securities. Economic, fiscal and
budgetary conditions throughout the state may also influence the Fund's
performance.
The following information is a summary of a more detailed description of certain
factors affecting New York municipal securities which is contained in the
Statement of Additional Information. Investors should obtain a copy of the
Statement of Additional Information for the more detailed discussion of such
factors. Such information is derived from certain official statements of the
State of New York published in connection with the issuance of specific New York
municipal securities, as well as from other publicly available documents. Such
information has not been independently verified by the Fund and may not apply to
all New York municipal securities acquired by the Fund. The Fund assumes no
responsibility for the completeness or accuracy of such information.
Investors should be aware of certain factors that might affect the financial
condition of the issuers of New York municipal securities. The State of New York
has historically been one of the wealthiest states in the nation. For decades,
however, the economy of the State of New York has grown more slowly than that of
the nation as a whole, and the result has been a gradual erosion of the State's
relative economic affluence. New York City, for example, has faced greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in New York City.
The State of New York has for many years had a very high state and local tax
burden. The burden of state and local taxation, in combination with the many
other causes of regional economic dislocations, has
12
-
<PAGE> 198
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State of New York.
There can be no assurance that the State of New York and its political
subdivisions will not face substantial potential budget gaps in future years
resulting from a significant disparity between tax revenues projected from a
lower recurring receipts base and the spending required to maintain programs at
current levels. To address any potential budgetary imbalance, the State of New
York and such subdivisions may need to take significant actions to align
recurring receipts and disbursements in future fiscal years.
Although revenue obligations of the State of New York or its political
subdivisions may be payable from a specific project or source, including lease
rentals, there can be no assurance that future economic difficulties and the
resulting impact on State and local government finances will not adversely
affect the market value of the portfolio of the Fund or the ability of the
respective obligors to make timely payments of principal and interest on such
obligations.
More detailed information concerning New York municipal securities and the State
of New York is included in the Statement at Additional Information.
OTHER INVESTMENTS AND RISK FACTORS
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income indices and other financial instruments, purchase and sell
financial futures contracts and enter into various interest rate transactions
such as swaps, caps, floors or collars. Collectively, all of the above are
referred to as "Strategic Transactions." Strategic Transactions may be used to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the investment adviser's ability to predict pertinent market
movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. Strategic Transactions have risks associated with them including
possible default by the other party to the transaction, illiquidity and, to the
extent the investment adviser's view as to certain market movements is
incorrect, the risk that the use of such Strategic Transactions could result in
losses greater than if they had not been used. Use of put and call options may
result in losses to the Fund, force the sale of portfolio securities at
inopportune times or for prices other than at current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the risk management or hedging instrument may be greater than gains in the
value of the Fund's position. In addition, futures and options markets may not
be liquid in all circumstances and certain over-the-counter options may have no
markets. As a result, in certain markets, the Fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and their risks are described more
fully in the Fund's Statement of Additional Information. Income earned or deemed
to be earned by the Fund from its Strategic Transactions, if any, generally will
be taxable income of the Fund.
13
-
<PAGE> 199
The Fund may purchase and sell municipal securities on a "when-issued" or
"delayed delivery" basis whereby the Fund buys or sells a security with payment
and delivery taking place in the future. The payment obligation and the interest
rate are fixed at the time the Fund enters into the commitment. No income
accrues to the Fund on municipal securities in connection with such transactions
prior to the date the Fund actually takes delivery of such securities. These
transactions are subject to market risk as the value or yield of a municipal
security at delivery may be more or less than the purchase price or the yield
generally available on municipal securities when delivery occurs. In addition,
the Fund is subject to counterparty risk because it relies on the buyer or
seller, as the case may be, to consummate the transaction, and failure by the
other party to complete the transaction may result in the Fund missing the
opportunity of obtaining a price or yield considered to be advantageous. The
Fund will only make commitments to purchase such securities with the intention
of actually acquiring these securities, but the Fund may sell these securities
prior to settlement if it is deemed advisable. No specific limitation exists as
to the percentage of the Fund's assets which may be used to acquire securities
on a "when-issued" or "delayed delivery" basis.
The Fund may invest up to 15% of the Fund's net assets in illiquid and certain
restricted securities. Such securities may be difficult or impossible to sell at
the time and the price that the Fund would like. Thus, the Fund may have to sell
such securities at a lower price, sell other securities instead to obtain cash
or forego other investment opportunities.
The Fund may borrow amounts up to 5% of its total assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its total assets to
secure such borrowings.
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
Additional Information which can be obtained by investors free of charge as
described on the back cover of this prospectus.
Although the Fund does not intend to engage in substantial short-term trading,
it may sell securities without regard to the length of time they have been held
in order to take advantage of new investment opportunities or yield
differentials or otherwise. The Fund's portfolio turnover is shown under the
heading "Financial Highlights". The portfolio turnover rate may be expected to
vary from year to year. A high portfolio turnover rate (100% or more) increases
the Fund's transactions costs, including brokerage commissions or dealer costs,
and may result in the realization of more short-term capital gains than if the
Fund had a lower portfolio turnover. The turnover rate will not be a limiting
factor, however, if the Fund's investment adviser considers portfolio changes
appropriate.
When market conditions dictate a more "defensive" investment strategy, the Fund
may invest on a temporary basis a portion or all of its assets in high-quality,
short-term New York municipal obligations. If such municipal obligations are not
available or, in the investment adviser's judgment, do not afford sufficient
protection against adverse market conditions, the Fund may invest in
high-quality municipal securities of issuers other than issuers of New York
municipal securities. Furthermore, if such high-quality securities are not
available or, in the investment adviser's judgment, do not afford sufficient
protection against adverse market conditions, the Fund may invest in taxable
obligations. Such taxable obligations may include in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, other
investment grade quality income securities, prime commercial paper, certificates
of deposit, bankers' acceptances and other obligations of domestic banks having
total assets of at least $500 million, and repurchase agreements. The effect of
taking such a defensive position may be that the Fund does not achieve its
investment objective.
YEAR 2000 RISKS. Like other mutual funds, financial and business organizations
and individuals around the world, the Fund could be adversely affected if the
computer systems used by the Fund's investment adviser and other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." The Fund's investment adviser is taking steps that it believes are
reasonably designed to address the Year 2000 Problem with respect to computer
systems that it uses and to obtain reasonable assurances that comparable steps
are being taken by the Fund's other major service providers. At this time, there
can be no assurances that these steps will be sufficient to avoid any adverse
impact to the Fund. In addition, the Year 2000 Problem may adversely affect the
markets and the issuers of securities in which the Fund may
14
-
<PAGE> 200
invest which, in turn, may adversely affect the net asset value of the Fund.
Improperly functioning trading systems may result in settlement problems and
liquidity issues. In addition, corporate and governmental data processing errors
may result in production problems for individual companies or issuers and
overall economic uncertainty. Earnings of individual issuers will be affected by
remediation costs, which may be substantial and may be reported inconsistently
in U.S. and foreign financial statements. Accordingly, the Fund's investments
may be adversely affected. The statements above are subject to the Year 2000
Information and Readiness Disclosure Act which Act may limit the legal rights
regarding the use of such statements in the case of a dispute.
INVESTMENT ADVISORY
SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp."). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $50 billion under management or supervision. Van
Kampen Investments' more than 50 open-end and 39 closed-end funds and more than
2,500 unit investment trusts are professionally distributed by leading financial
advisers nationwide. Van Kampen Funds Inc., the distributor of the Fund (the
"Distributor") and the sponsor of the funds mentioned above, is also a wholly
owned subsidiary of Van Kampen Investments. Van Kampen Investments is an
indirect wholly owned subsidiary of Morgan Stanley Dean Witter & Co. The
Adviser's principal office is located at 1 Parkview Plaza, PO Box 5555, Oakbrook
Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed based upon an annual rate applied to average daily net assets of the
Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
- ------------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.60%
......................................................
Over $500 million 0.50%
......................................................
</TABLE>
Applying this fee schedule, absent fee waivers the Fund would have paid the
Adviser an advisory fee at the effective rate of 0.60% of the Fund's average net
assets for the Fund's fiscal period ended September 30, 1998.
Under the Advisory Agreement, the Fund also reimburses the Adviser for the cost
of the Fund's accounting services, which include maintaining its financial books
and records and calculating its daily net asset value. Other operating expenses
paid by the Fund include service fees, distribution fees, custodial fees, legal
and accounting fees, the costs of reports and proxies to shareholders, trustees'
fees (other than those who are affiliated persons of the Adviser, Distributor or
Van Kampen Investments) and all other business expenses not specifically assumed
by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes of Ethics permit directors, trustees,
officers and employees to buy and sell securities for their personal accounts
subject to certain restrictions. Persons with access to certain sensitive
information are subject to pre-clearance and other procedures designed to
prevent conflicts of interest.
PORTFOLIO MANAGEMENT. David C. Johnson, a Senior Vice President of the Adviser,
supervises the Adviser's municipal securities practice and coordinates the
Adviser's investment policy regarding such
15
-
<PAGE> 201
securities. Mr. Johnson has been employed by the Adviser since April 1989.
Dennis S. Pietrzak, a Vice President of the Adviser, has been primarily
responsible for the day-to-day management of the Fund's portfolio since August
1995. Mr. Pietrzak has been employed by the Adviser since August, 1995. Prior to
joining the Adviser, Mr. Pietrzak was employed by Merrill Lynch where he was in
charge of municipal underwriting and trading in Merrill Lynch's Midwest region.
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each investor to choose the class of shares that is most beneficial given the
amount to be invested and the length of time the investor expects to hold the
shares. Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Both
minimums may be waived by the Distributor for plans involving periodic
investments.
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares bear the sales charge expenses at the time of redemption and any
expenses (including higher distribution fees and transfer agency costs)
resulting from such deferred sales charge arrangement, (ii) generally, each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan (described below) pursuant to which its
distribution fee or service fee is paid, (iii) each class of shares has
different exchange privileges, (iv) certain classes of shares are subject to a
conversion feature and (v) certain classes of shares have different shareholder
service options available.
The price of the Fund's shares is based upon the Fund's net asset value per
share. The net asset values per share of the Class A Shares, Class B Shares and
Class C Shares are generally expected to be substantially the same. In certain
circumstances, however, the per share net asset values of the classes of shares
may differ from one another, reflecting the daily expense accruals of the higher
distribution fees and transfer agency costs applicable to the Class B Shares and
Class C Shares and the differential in the dividends that may be paid on each
class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on:
customary business holidays, any day on which no purchase or redemption orders
are received or there is not a sufficient degree of trading in the Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Fund reserves the right to calculate the net asset
value per share and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable. Net asset value per share for
each class is determined by dividing the value of the Fund's portfolio
securities, cash and other assets (including accrued interest) attributable to
such class, less all liabilities (including accrued expenses) attributable to
such class, by the total number of shares of the class outstanding. Portfolio
securities are valued by using market quotations, prices provided by market
makers or estimates of market values determined in good faith based upon yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees of the Fund.
Securities with remaining maturities of 60 days or less are valued at amortized
cost when amortized cost is determined in good faith by or under the direction
of the Board of Trustees of the Fund to be representative of the fair value at
which it is expected such securities may be resold. Any securities or other
assets for which current market quotations are not readily available are valued
at their fair value as determined in good faith under procedures established by
and under the general supervision of the Board of Trustees of the Fund.
The Fund has adopted a distribution plan (the "Distribution Plan") with respect
to each class of its shares pursuant to Rule 12b-1 under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Fund also has adopted a service
plan (the "Service Plan") with respect to each class of its shares. The
Distribution Plan and the Service Plan provide that the Fund may pay
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders of each class.
16
-
<PAGE> 202
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. The net income attributable to a class of shares and the
dividends payable on such class of shares will be reduced by the amount of the
distribution fees and other expenses associated with such class of shares. To
assist investors in comparing classes of shares, the tables under the heading
"Fees and Expenses of the Fund" provide a summary of sales charges and expenses
and an example of the sales charges and expenses applicable to each class of
shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza, PO
Box 5555, Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through
members of the National Association of Securities Dealers, Inc. ("NASD") who are
acting as securities dealers ("dealers") and NASD members or eligible non-NASD
members who are acting as brokers or agents or investors ("brokers"). "Dealers"
and "brokers" are sometimes referred to herein as "authorized dealers."
Shares may be purchased on any business day by completing the application
accompanying this prospectus and forwarding the application, directly or through
an authorized dealer, to the Fund's shareholder service agent, Van Kampen
Investor Services Inc. ("Investor Services"), a wholly owned subsidiary of Van
Kampen Investments. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A Shares, Class B Shares or Class C Shares.
Sales personnel of authorized dealers distributing the Fund's shares are
entitled to receive compensation for selling such shares and may receive
differing compensation for selling Class A Shares, Class B Shares or Class C
Shares.
The price paid for shares purchased is based on the next calculation of net
asset value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers are priced
based on the date of receipt provided such order is transmitted to Investor
Services prior to Investor Services' close of business on such date. Orders
received by authorized dealers or transmitted to Investor Services after its
close of business are priced based on the date of the next computed net asset
value per share provided they are received by Investor Services prior to
Investor Services' close of business on such date. It is the responsibility of
authorized dealers to transmit orders received by them to Investor Services so
they will be received in a timely manner. Orders of less than $500 generally are
mailed by the authorized dealer and processed at the offering price next
calculated after receipt by Investor Services.
Shares of the Fund may be sold in foreign countries where permissible. The Fund
and the Distributor reserve the right to refuse any order for the purchase of
shares. The Fund also reserves the right to suspend the sale of the Fund's
shares in response to conditions in the securities markets or for other reasons.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gains
distributions, unless the investor instructs the Fund otherwise. Investors
wishing to receive cash instead of additional shares should contact the Fund at
(800) 341-2911 or by writing to the Fund, c/o Van Kampen Investors Services
Inc., PO Box 418256, Kansas City, MO 64141-9256.
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 4.75% of the offering price (or 4.99% of the net amount
invested), reduced on investments of $100,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of
Size of Offering Net Amount
Investment Price Invested
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.75% 4.99%
..........................................................
$100,000 but less than
$250,000 3.75% 3.90%
..........................................................
$250,000 but less than
$500,000 2.75% 2.83%
..........................................................
$500,000 but less than
$1,000,000 2.00% 2.04%
..........................................................
$1,000,000 or more * *
..........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1.00% on certain redemptions made within one year of
the purchase. The contingent deferred sales charge is assessed on an amount
equal to the lesser of the then current market value or the cost of the shares
being redeemed. Accordingly, no sales charge is imposed on increases in net
asset value above the initial purchase price.
17
-
<PAGE> 203
The Fund may spend an aggregate amount up to 0.25% per year of the average daily
net assets attributable to the Class A Shares of the Fund pursuant to the
Distribution Plan and Service Plan. From such amount, the Fund may spend up to
0.25% per year of the Fund's average daily net assets attributable to the Class
A Shares pursuant to the Service Plan in connection with the ongoing provision
of services to holders of such shares by the Distributor and by brokers, dealers
or financial intermediaries and in connection with the maintenance of such
shareholders' accounts.
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
deferred sales charge if redeemed within six years of purchase as shown in the
table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
as a Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
- ------------------------------------------------
<S> <C>
First 4.00%
................................................
Second 3.75%
................................................
Third 3.50%
................................................
Fourth 2.50%
................................................
Fifth 1.50%
................................................
Sixth 1.00%
................................................
Seventh and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
It is presently the policy of the Distributor not to accept any order for Class
B Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for the purchase of Class B Shares
until the time of redemption of such shares. Solely for purposes of determining
the number of years from the time of any payment for the purchase of shares, all
payments during a month are aggregated and deemed to have been made on the last
day of the month.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and then of shares held the longest in the shareholder's account.
The Fund may spend up to 0.75% per year of the average daily net assets
attributable to the Class B Shares of the Fund pursuant to the Distribution
Plan. In addition, the Fund may spend up to 0.25% per year of the Fund's average
daily net assets attributable to the Class B Shares pursuant to the Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
deferred sales charge of 1.00% of the dollar amount subject to charge if
redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
It is presently the policy of the Distributor not to accept any order for Class
C Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and then of shares held the longest in the shareholder's account.
18
<PAGE> 204
The Fund may spend up to 0.75% per year of the average daily net assets
attributable to the Class C Shares of the Fund pursuant to the Distribution
Plan. In addition, the Fund may spend up to 0.25% per year of the Fund's average
daily net assets attributable to the Class C Shares pursuant to the Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, and any dividend reinvest
ment plan shares received thereon, automatically convert to Class A Shares eight
years after the end of the calendar month in which the shares were purchased.
Class B Shares purchased before June 1, 1996, and any dividend reinvestment plan
shares received thereon, automatically convert to Class A Shares seven years
after the end of the calendar month in which the shares were purchased. Class C
Shares purchased before January 1, 1997, and any dividend reinvestment plan
shares received thereon, automatically convert to Class A Shares ten years after
the end of the calendar month in which such shares were purchased. Such
conversion will be on the basis of the relative net asset values per share,
without the imposition of any sales load, fee or other charge. The conversion
schedule applicable to a share of the Fund acquired through the exchange
privilege from another Van Kampen fund is determined by reference to the Van
Kampen fund from which such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or distributions constituting
"preferential dividends" under the federal income tax law and (ii) the
conversion of shares does not constitute a taxable event under federal income
tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) in
connection with required minimum distributions from an individual retirement
account ("IRA") or certain other retirement plan distributions, (iii) pursuant
to the Fund's systematic withdrawal plan but limited to 12% annually of the
initial value of the account, (iv) in circumstances under which no commission or
transaction fee is paid to authorized dealers at the time of purchase of such
shares and (v) effected pursuant to the right of the Fund to involuntarily
liquidate a shareholder's account as described under the heading "Redemption of
Shares." The contingent deferred sales charge also is waived on redemptions of
Class C Shares as it relates to the reinvestment of redemption proceeds in
shares of the same class of the Fund within 180 days after redemption. For a
more complete description of contingent deferred sales charge waivers, please
refer to the Statement of Additional Information or contact your authorized
dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced sales charges. Investors, or their authorized
dealers, must notify the Fund at the time of the purchase order whenever a
quantity discount is applicable to purchases. Upon such notification, an
investor will receive the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the
19
-
<PAGE> 205
total dollar amount being invested by any person in shares of the Fund, or in
any combination of shares of the Fund and shares of other Participating Funds,
although other Participating Funds may have different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds which have been previously purchased and are
still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as out-lined in the Class A Shares sales
charge table. The size of investment shown in the Class A Shares sales charge
table also includes purchases of shares of the Participating Funds over a
13-month period based on the total amount of intended purchases plus the value
of all shares of the Participating Funds previously purchased and still owned.
An investor may elect to compute the 13-month period starting up to 90 days
before the date of execution of a Letter of Intent. Each investment made during
the period receives the reduced sales charge applicable to the total amount of
the investment goal. The initial purchase must be for an amount equal to at
least 5% of the minimum total purchase amount of the level selected. If trades
not initially made under a Letter of Intent subsequently qualify for a lower
sales charge through the 90-day back-dating provisions, an adjustment will be
made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustment in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. The Fund
initially will escrow shares totaling 5% of the dollar amount of the Letter of
Intent to be held by Investor Services in the name of the shareholder. In the
event the Letter of Intent goal is not achieved within the period, the investor
must pay the difference between the sales charge applicable to the purchases
made and the sales charges previously paid. Such payments may be made directly
to the Distributor or, if not paid, the Distributor will liquidate sufficient
escrowed shares to obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges in
connection with the unit investment trust reinvestment program and purchases by
registered representatives of selling firms or purchases by persons affiliated
with the Fund or the Distributor. The Fund reserves the right to modify or
terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund, at net asset value per share and with no minimum initial or
subsequent investment requirement, if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by the Fund and the Distributor. The total sales charge for all other
investments made from unit trust distributions will be 1.00% of the offering
price (1.01% of net asset value). Of this amount, the Distributor will pay to
the authorized dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their authorized dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each participating investor in a computerized format fully
compatible with Investor Services' processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a quarterly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value, upon
20
-
<PAGE> 206
written assurance that the purchase is made for investment purposes and that the
shares will not be resold except through redemption by the Fund, by:
(1) Current or retired trustees or directors of funds advised by Asset
Management or Advisory Corp. and such persons' families and their beneficial
accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries, employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser, and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21 years
of age when purchasing for any accounts they beneficially own, or, in the
case of any such financial institution, when purchasing for retirement plans
for such institution's employees; provided that such purchases are otherwise
permitted by such institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers through
which purchases are made an amount up to 0.50% of the amount invested, over
a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor and
which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Statement of Additional
Information for further details with respect to such alliance programs.
(6) Beneficial owners of shares of Participating Funds held by a retirement plan
or held in a tax-advantaged retirement account who purchase shares of the
Fund with proceeds from distributions from such a plan or retirement account
other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit plans
qualified under Section 401(a) of the Code, or custodial accounts held by a
bank created pursuant to Section 403(b) of the Code and sponsored by
non-profit organizations defined under Section 501(c)(3) of the Code and
assets held by an employer or trustee in connection with an eligible
deferred compensation plan under Section 457 of the Code. Such plans will
qualify for purchases at net asset value provided, for plans initially
establishing accounts with the Distributor in the Participating Funds after
February 1, 1997, that (1) the initial amount invested in the Participating
Funds is at least $500,000 or (2) such shares are purchased by an employer
sponsored plan with more than 100 eligible employees. Such plans that have
been established with a Participating Fund or have received proposals from
the Distributor prior to February 1, 1997 based on net asset value purchase
privileges previously in effect will be qualified to purchase shares of the
Participating Funds at net asset value for accounts established on or before
May 1, 1997. Section 403(b) and similar accounts for which Van Kampen Trust
Company serves as custodian will not be eligible for net asset value
purchases based on the aggregate investment made by the plan or the number
of eligible employees, except under certain uniform criteria established by
the Distributor from time to time. Prior to February 1, 1997, a commission
will be paid to authorized dealers who initiate and are responsible for such
purchases within a rolling twelve-month period as follows: 1.00% on sales to
$5 million, plus 0.50% on the next $5 million, plus 0.25% on the excess over
$10 million. For purchases on February 1, 1997 and thereafter, a commission
will be paid as follows: 1.00% on sales to $2 million, plus 0.80% on the
next $1 million, plus 0.50% on the next $47 million, plus 0.25% on the
excess over $50 million.
(9) Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to
21
-
<PAGE> 207
acquire shares of the Fund or similar investments, (iii) has given and
continues to give its endorsement or authorization, on behalf of the group,
for purchase of shares of the Fund and Participating Funds, (iv) has a
membership that the authorized dealer can certify as to the group's members
and (v) satisfies other uniform criteria established by the Distributor for
the purpose of realizing economies of scale in distributing such shares. A
qualified group does not include one whose sole organizational nexus, for
example, is that its participants are credit card holders of the same
institution, policy holders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups.
Shares purchased in each group's participants account in connection with
this privilege will be subject to a contingent deferred sales charge of
1.00% in the event of redemption within one year of purchase, and a
commission will be paid to authorized dealers who initiate and are
responsible for such sales to each individual as follows: 1.00% on sales to
$2 million, plus 0.80% on the next $1 million and 0.50% on the excess over
$3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust department, provided that
Investor Services receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described on
purchases made as described in (3) through (9) above. The Fund may terminate, or
amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
REDEMPTION OF
SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the heading "Purchase of Shares," redemptions of Class B Shares
and Class C Shares may be subject to a contingent deferred sales charge. In
addition, certain redemptions of Class A Shares for shareholder accounts of $1
million or more may be subject to a contingent deferred sales charge.
Redemptions completed through an authorized dealer or a custodian of a
retirement plan account may involve additional fees charged by the dealer or
custodian.
Except as specified below under "Telephone Redemption Requests," payment for
shares redeemed generally will be made by check mailed within seven days after
acceptance by Investor Services of the request and any other necessary documents
in proper order. Such payment may be postponed or the right of redemption
suspended as provided by the rules of the SEC. Such payment may, under certain
circumstances, be paid wholly or in part by a distribution-in-kind of portfolio
securities. If the shares to be redeemed have been recently purchased by check,
Investor Services may delay the redemption until it confirms the purchase check
has cleared, which may take up to 15 days. A taxable gain or loss will be
recognized by the shareholder upon redemption of shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 418256, Kansas City, MO 64141-9256. The request for redemption
should indicate the number of shares to be redeemed, the class designation of
such shares and the shareholder's account number. The redemption request must be
signed by all persons in whose names the shares are registered. Signatures must
conform exactly to the account registration. If the proceeds of the redemption
exceed $50,000, or if the proceeds are not to be paid to the record owner at the
record address, or if the record address has changed within the previous 30
days, signature(s) must be guaranteed by one of the following: a bank or trust
company; a broker-dealer; a credit union; a national securities exchange,
22
-
<PAGE> 208
registered securities association or clearing agency; a savings and loan
association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. In the case of shareholders holding
certificates, the certificates for the shares being redeemed properly endorsed
for transfer must accompany the redemption request. In the event the redemption
is requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the authorized signer and
certified within the prior 120 days must accompany the redemption request. IRA
redemption requests should be sent to the IRA custodian to be forwarded to
Investor Services. Contact the IRA custodian for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. Orders sent through authorized dealers
must be at least $500 (unless transmitted by your authorized dealer via the
FUNDSERV network). The redemption price for such shares is the net asset value
per share next calculated after an order in proper form is received by an
authorized dealer provided such order is transmitted to the Distributor prior to
the Distributor's close of business on such day. It is the responsibility of
authorized dealers to transmit redemption requests received by them to the
Distributor so they will be received prior to such time. Redemptions completed
through an authorized dealer may involve additional fees charged by the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application form accompanying this prospectus or call the Fund at (800) 341-2911
to request that a copy of the Telephone Redemption Authorization form be sent to
them for completion. To redeem shares, contact the telephone transaction line at
(800) 421-5684. Van Kampen Investments, Investor Services and the Fund employ
procedures considered by them to be reasonable to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring certain
personal identification information prior to acting upon telephone instructions,
tape recording telephone communications and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen Investments, Investor Services nor the Fund will be liable
for following telephone instructions which it reasonably believes to be genuine.
Telephone redemptions may not be available if the shareholder cannot reach
Investor Services by telephone, whether because all telephone lines are busy or
for any other reason; in such case, a shareholder would have to use the Fund's
other redemption procedure previously described. Requests received by Investor
Services prior to 4:00 p.m., New York time, will be processed at the next
determined net asset value per share. These privileges are available for all
accounts other than retirement accounts or accounts with shares represented by
certificates. If an account has multiple owners, Investor Services may rely on
the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions payable by wire transfer are expected to be wired on the next
business day following the date of redemption. The Fund reserves the right at
any time to terminate, limit or otherwise modify this redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account with a
value on the date of the notice of redemption less than the minimum initial
investment as specified in this prospectus. At least 60 days advance written
notice of any such involuntary redemption will be given and the shareholder will
be given an opportunity to
23
-
<PAGE> 209
purchase the required value of additional shares at the next determined net
asset value without sales charge. Any involuntary redemption may only occur if
the shareholder account is less than the minimum initial investment due to
shareholder redemptions.
DISTRIBUTIONS FROM THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends and
capital gains distributions. Investors will be entitled to begin receiving
dividends on their shares on the business day after Investor Services receives
payment for such shares. However, shares become entitled to dividends on the day
Investor Services receives payment for the shares either through a fed wire or
NSCC settlement. Shares remain entitled to dividends through the day such shares
are processed for payment on redemption.
DIVIDENDS. Interest earned from investments is the Fund's main source of income.
Under the Fund's present policy, which may be changed at any time by the Board
of Trustees, distributions of all or substantially all of this income, less
expenses, are declared daily and paid monthly as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than purchase prices. Net realized capital gains represent the total
profit from sales of securities minus total losses from sales of securities
including losses carried forward from prior years. The Fund distributes any
taxable net realized capital gains to shareholders at least annually. As in the
case of dividends, capital gains distributions are automatically reinvested in
additional shares of the Fund at net asset value unless the shareholder
instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value per share (without sales
charge) on the applicable payable date of the dividend or capital gains
distribution. Unless the shareholder instructs otherwise, the reinvestment plan
is automatic. This instruction may be made by telephone by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired) or by writing to Investor
Services. The investor may, on the initial application or prior to any
declaration, instruct that dividends be paid in cash and capital gains
distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to charge a bank account on a
regular basis to invest pre-determined amounts in the Fund. Additional
information is available from the Distributor or your authorized dealer.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint Investor Services as agent by completing the Authorization for
Redemption by Check form and the appropriate section of the application and
returning the form and the application to Investor Services. Once the form is
properly completed, signed and returned to the agent, a supply of checks drawn
on State Street Bank and Trust Company (the "Bank") will be sent to the Class A
shareholder. These checks may be made payable by the Class A
24
-
<PAGE> 210
shareholder to the order of any person in any amount of $100 or more.
When a check is presented to the Bank for payment, full and fractional Class A
Shares required to cover the amount of the check are redeemed from the share
holder's Class A account by Investor Services at the next determined net asset
value per share. Check writing redemptions represent the sale of Class A Shares.
Any gain or loss realized on the sale of shares is a taxable event.
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A account, the check will
be returned and the shareholder may be subject to additional charges. A Class A
shareholder may not liquidate the entire account by means of a check. The check
writing privilege may be terminated or suspended at any time by the Fund or the
Bank. Retirement plans and accounts that are subject to backup withholding are
not eligible for the privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next computed net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. Under normal circumstances, it is
the policy of the Adviser not to approve such requests.
When Class B Shares and Class C Shares are exchanged among Participating Funds,
the holding period for purposes of computing the contingent deferred sales
charge is based upon the date of the initial purchase of such shares from a
Participating Fund. If such Class B Shares or Class C Shares are redeemed and
not exchanged for shares of another Participating Fund, Class B Shares and Class
C Shares are subject to the contingent deferred sales charge schedule imposed by
the Participating Fund from which such shares were originally purchased.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is carried over and included in the
tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanying the prospectus. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, neither Van Kampen Investments, Investor Services nor
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gains options (except dividend
diversification) and authorized dealer of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or reinvest dividends
from the new account into another fund, however, an exchanging shareholder must
submit a specific request. The Fund reserves the right to reject any order to
acquire its shares through exchange. In addition, the Fund may modify, restrict
or terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
25
-
<PAGE> 211
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these Participating Funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund prior to investing.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instruction. Van Kampen Investments, Investor
Services and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated through the internet are genuine. Such
procedures include requiring use of a personal identification number prior to
acting upon internet instructions and providing written confirmation of
instructions communicated through the internet. If reasonable procedures are
employed, neither Van Kampen Investments, Investor Services nor the Fund will be
liable for following instructions through the internet which it reasonably
believes to be genuine. If an account has multiple owners, Investor Services may
rely on the instructions of any one owner.
NEW YORK
TAXATION
The discussion under this heading applies only to shareholders of the Fund that
are residents of New York for New York tax purposes. Individual shareholders
will not be subject to New York State or New York City income tax on
distributions attributable to interest on New York municipal securities.
Individual shareholders will be subject to New York State or New York City
income tax on distributions attributable to other income of the Fund (including
net capital gain), and gain on the sale of shares of the Fund. Corporations
should note that all or a part of any distribution from the Fund, and gain on
the sale of shares of the Fund, may be subject to the New York State corporate
franchise tax and the New York City general corporation tax.
Under currently applicable New York State law, the highest marginal New York
State income tax rate imposed on individuals for taxable years beginning after
1996 is 6.85%. The highest marginal New York City income tax rate currently
imposed on individuals is 3.83%. In addition, individual taxpayers with New York
adjusted gross income in excess of $100,000 must pay a supplemental tax to
recognize the benefit of graduated tax rates. Shareholders subject to taxation
in a state other than New York will realize a lower after-tax rate of return if
distributions from the Fund are not exempt from taxation in such other state.
FEDERAL INCOME
TAXATION
The Fund intends to invest in sufficient tax-exempt municipal securities to
permit payment of "exempt-interest dividends" (as defined under applicable
federal income tax law). Exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. Exempt-interest dividends are included in determining what
portion, if any, of a person's social
26
-
<PAGE> 212
security and railroad retirement benefits will be includable in gross income
subject to federal income tax.
Under applicable federal income tax law, the interest on certain municipal
securities may be an item of tax preference subject to the alternative minimum
tax. The Fund may invest a portion of its assets in municipal securities subject
to this provision so that a portion of its exempt-interest dividends may be an
item of tax preference to the extent such dividends represent interest received
from such municipal securities. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax.
Although exempt-interest dividends from the Fund generally may be treated by
shareholders as interest excluded from their gross income, each shareholder is
advised to consult his or her tax adviser with respect to whether
exempt-interest dividends retain this exclusion given the investor's tax
circumstances. For example, exempt-interest dividends may not be excluded if the
shareholder would be treated as a "substantial user" (or a "related person" of a
substantial user, as each term is defined by applicable federal income tax law)
of the facilities financed with respect to any of the tax-exempt obligations
held by the Fund.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund is not deductible for federal income tax purposes if
the Fund distributes exempt-interest dividends during the shareholder's taxable
year. If a shareholder receives an exempt-interest dividend with respect to any
shares and such shares are held for six months or less, any loss on the sale or
exchange of the shares will be disallowed to the extent of the amount of such
exempt-interest dividend.
While the Fund expects that a major portion of its net investment income
(consisting generally of tax-exempt interest, taxable income and net short-term
capital gains) will constitute tax-exempt interest, a significant portion of the
Fund's net investment income may consist of taxable income. Distributions of
such taxable income are taxable to shareholders as ordinary income to the extent
of the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains (which are the
excess of net long-term capital gains over net short-term capital losses) as
capital gain dividends, if any, are taxable to shareholders as long-term capital
gains, whether paid in cash or reinvested in additional shares, and regardless
of how long the shares of the Fund have been held by such shareholders. Such
capital gain dividends may be taxed at different rates depending on how long the
Fund held the securities. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming such shares are held as a capital asset). Although
distributions generally are treated as taxable in the year they are paid,
distributions declared in October, November or December, payable to shareholders
of record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt interest dividends cannot exceed,
however, the excess of the amount of interest exempt from tax under Section 103
of the Code received by the Fund during the year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. Since the percentage of
dividends which are exempt-interest dividends is determined on an average annual
method for the taxable year, the percent age of income designated as tax-exempt
for any particular dividend may be substantially different from the percentage
of the Fund's income that was tax exempt during the period covered by the
dividend. Fund distributions generally will not qualify for the dividends
received deduction for corporations.
The sale or exchange of shares is a taxable transaction for federal income tax
purposes. Shareholders who sell their shares will generally recognize gain or
loss in an amount equal to the difference between their adjusted tax basis in
the shares and the amount received. If such shares are held as a capital asset,
the gain or loss will be a capital gain or loss. Any capital gains may be taxed
at different rates depending on how long the shareholder held its shares.
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain
27
-
<PAGE> 213
required certifications or who are otherwise subject to backup withholding.
The Fund intends to qualify as a regulated investment company under the federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its net investment income, the Fund will not be
required to pay federal income taxes on any income it distributed to
shareholders. If the Fund distributes less than the sum of 98% of its ordinary
income or less than and 98% of its capital gain net income, then the Fund will
be subject to a 4% excise tax on the undistributed amounts.
The federal income tax discussion above is for general information only.
Prospective investors should consult their own tax advisers regarding the
specific federal tax consequences of purchasing, holding, exchanging or selling
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
28
-
<PAGE> 214
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by KPMG LLP, independent accountants, whose report,
along with the Fund's financial statements, is included in the Statement of
Additional Information and may be obtained by shareholders without charge by
calling the telephone number on the back cover of this prospectus. This
information should be read in conjunction with the financial statements and
notes thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
Class A Shares
July 29, 1994
(Commencement
of Investment
Nine Months Operations)
Ended to
September 30, Year Ended December 31, December 31,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period.............. $15.734 $14.992 $15.048 $13.579 $14,300
------- ------- ------- ------- -------
Net Investment Income...... .596 .786 .816 .821 .302
Net Realized and Unrealized
Gain/Loss................ .509 .795 (.074) 1.476 (.722)
------- ------- ------- ------- -------
Total from Investment
Operations................. 1.105 1.581 .742 2.297 (.420)
------- ------- ------- ------- -------
Less:
Distributions from and in
Excess of Net Investment
Income..................... .599 .798 .798 .828 .301
Distributions from Net
Realized Gain.............. .017 .041 -0- -0- -0-
------- ------- ------- ------- -------
Total Distributions......... .616 .839 .798 .828 .301
------- ------- ------- ------- -------
Net Asset Value, End of the
Period..................... $16.223 $15.734 $14.992 $15.048 $13.579
======= ======= ======= ======= =======
Total Return*(a)............ 7.11%** 10.92% 5.14% 17.33% (2.93%)**
Net Assets at End of the
Period (In millions)....... $25.0 $18.0 $7.7 $5.4 $2.9
Ratio of Expenses to Average
Net Assets*................ .39% .64% .31% .21% $.26%
Ratio of Net Investment
Income to Average Net
Assets*.................... 5.01% 5.16% 5.56% 5.63% 5.27%
Portfolio Turnover.......... 53%** 60% 126% 51% 68%**
* If certain expenses had
not been assumed by the
Adviser, total return would
have been lower and the
ratios would have been as
follows:
Ratio of Expenses to Average
Net Assets................. 1.43% 1.47% 1.82% 2.10% 2.73%
Ratio of Net Investment
Income to Average
Net Assets................. 3.97% 4.33% 4.04% 3.74% 2.81%
<CAPTION>
Class B Shares
July 29, 1994
(Commencement
of Investment
Nine Months Operations)
Ended to
September 30, Year Ended December 31, December 31,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period.............. $15.727 $14.992 $15.046 $13.578 $14,300
------- ------- ------- ------- -------
Net Investment Income...... .509 .684 .704 .713 .263
Net Realized and Unrealized
Gain/Loss................ .507 .782 (.068) 1.476 (.722)
------- ------- ------- ------- -------
Total from Investment
Operations................. 1.016 1.466 .636 2.189 (.459)
------- ------- ------- ------- -------
Less:
Distributions from and in
Excess of Net Investment
Income..................... .518 .690 .690 .721 .263
Distributions from Net
Realized Gain.............. .017 .041 -0- -0- -0-
------- ------- ------- ------- -------
Total Distributions......... .535 .731 .690 .721 .263
------- ------- ------- ------- -------
Net Asset Value, End of the
Period..................... $16.208 $15.727 $14.992 $15.046 $13.578
======= ======= ======= ======= =======
Total Return*(a)............ 6.58%** 10.07% 4.37% 16.47% (3.20%)**
Net Assets at End of the
Period (In millions)....... $19.0 $13.1 $10.1 $9.7 $8.1
Ratio of Expenses to Average
Net Assets*................ 1.14% 1.36% 1.07% .93% .96%
Ratio of Net Investment
Income to Average Net
Assets*.................... 4.26% 4.49% 4.79% 4.93% 4.58%
Portfolio Turnover.......... 53%** 60% 126% 51% 68%**
* If certain expenses had
not been assumed by the
Adviser, total return would
have been lower and the
ratios would have been as
follows:
Ratio of Expenses to Average
Net Assets................. 2.19% 2.18% 2.60% 2.82% 3.42%
Ratio of Net Investment
Income to Average
Net Assets................. 3.21% 3.67% 3.26% 3.04% 2.12%
<CAPTION>
Class C Shares
July 29, 1994
(Commencement
of Investment
Nine Months Operations)
Ended to
September 30, Year Ended December 31, December 31,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period.............. $15.726 $14.992 $15.041 $13.579 $14,300
------- ------- ------- ------- -------
Net Investment Income...... .515 .676 .701 .711 .267
Net Realized and Unrealized
Gain/Loss................ .498 .789 (.060) 1.472 (.725)
------- ------- ------- ------- -------
Total from Investment
Operations................. 1.013 1.465 .641 2.183 (.458)
------- ------- ------- ------- -------
Less:
Distributions from and in
Excess of Net Investment
Income..................... .518 .690 .690 .721 .263
Distributions from Net
Realized Gain.............. .017 .041 -0- -0- -0-
------- ------- ------- ------- -------
Total Distributions......... .535 .731 .690 .721 .263
------- ------- ------- ------- -------
Net Asset Value, End of the
Period..................... $16.204 $15.726 $14.992 $15.041 $13.579
======= ======= ======= ======= =======
Total Return*(a)............ 6.51%** 10.07% 4.44% 16.39% (3.20%)**
Net Assets at End of the
Period (In millions)....... $3.1 $1.0 $.4 $.4 $.2
Ratio of Expenses to Average
Net Assets*................ 1.14% 1.41% 1.08% .98% .96%
Ratio of Net Investment
Income to Average Net
Assets*.................... 4.22% 4.37% 4.78% 4.81% 4.58%
Portfolio Turnover.......... 53%** 60% 126% 51% 68%**
* If certain expenses had
not been assumed by the
Adviser, total return would
have been lower and the
ratios would have been as
follows:
Ratio of Expenses to Average
Net Assets................. 2.18% 2.23% 2.61% 2.86% 3.42%
Ratio of Net Investment
Income to Average
Net Assets................. 3.17% 3.55% 3.25% 2.93% 2.12%
</TABLE>
**Non-Annualized
(a) Total Return is based upon net asset value which does not include payment of
maximum sales charge or contingent deferred sales charge.
29
<PAGE> 215
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or redemptions, call
the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUND INFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN NEW YORK TAX FREE INCOME FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN INVESTMENT ADVISORY CORP. INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen New York Tax Free Income Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO Box 1713
Boston, MA 02105-1713
Attn: Van Kampen New York Tax Free Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 216
VAN KAMPEN
NEW YORK TAX FREE INCOME FUND
PROSPECTUS
JANUARY 28, 1999
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports,
which explain the market conditions and
investment strategies affecting the Fund's
recent performance.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling
(800)341-2911 from 7:00 a.m. to 7:00 p.m.,
Central time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800)421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC Public
Reference Room in Washington, DC or online at
the SEC's web site (http://www.sec.gov). For
more information, please call the SEC at
(800)SEC-0330. You can also request these
materials by writing the Public Reference
Section of the SEC, Washington DC, 20549-6009,
and paying a duplication fee.
[VAN KAMPEN FUNDS LOGO]
Investment Company Act File No.
811-4386.
NYTF PRO 1/99
<PAGE> 217
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN TAX FREE HIGH INCOME FUND
Van Kampen Tax Free High Income Fund (the "Fund") is a mutual fund with an
investment objective to provide investors with a high level of current income
exempt from federal income tax primarily through investment in a diversified
portfolio of medium and lower grade municipal securities.
The Fund is organized as a diversified series of Van Kampen Tax Free Trust,
an open-end, management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the
Fund's Prospectus (the "Prospectus") dated as of the same date as this Statement
of Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-2833
for the hearing impaired).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... B-2
Investment Objectives and Policies.......................... B-3
Investment Restrictions..................................... B-12
Trustees and Officers....................................... B-13
Investment Advisory and Other Services...................... B-22
Distribution and Service.................................... B-23
Transfer Agent.............................................. B-26
Portfolio Transactions and Brokerage Allocation............. B-26
Shareholder Services........................................ B-28
Redemption of Shares........................................ B-30
Contingent Deferred Sales Charge-Class A.................... B-30
Waiver of Class B and Class C Contingent Deferred Sales
Charge ("CDSC-Class B and C")............................. B-30
Taxation.................................................... B-32
Fund Performance............................................ B-35
Other Information........................................... B-38
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-18
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY 28, 1999.
B-1
<PAGE> 218
GENERAL INFORMATION
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated May 10, 1995. The Declaration of Trust permits the Trustees to
create one or more separate investment portfolios and issue a series of shares
for each portfolio. The Trustees can further sub-divide each series of shares
into one or more classes of shares for each portfolio.
The Trust was originally organized in 1985 under the name Van Kampen
Merritt Tax Free Trust as a Massachusetts business trust (the "Massachusetts
Trust"). The Massachusetts Trust was reorganized into the Trust under the name
Van Kampen American Capital Tax Free Trust on July 31, 1995. The Trust was
created for the purpose of facilitating the Massachusetts Trust reorganization
into a Delaware business trust. On July 14, 1998, the Trust adopted its current
name.
The Fund was originally organized in 1985 as a Maryland corporation under
the name Van Kampen Merritt Tax Free High Income Fund Inc. and was reorganized
in 1987 under the name Van Kampen Merritt Tax Free High Income Fund as a
sub-trust of the Massachusetts Trust. The Fund was reorganized as a series of
the Trust under the name Van Kampen American Capital Tax Free High Income Fund
on July 31, 1995. On July 14, 1998, the Fund adopted its current name.
Van Kampen Investment Advisory Corp. (the "Adviser" or "Advisory Corp."),
Van Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley Dean Witter & Co. The principal office of the Trust, the Fund,
the Adviser, the Distributor and Van Kampen Investments is located at 1 Parkview
Plaza, PO Box 5555, Oakbrook Terrace, Illinois 60181-5555.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and securities lending.
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest, par value $0.01 per share, which can be
divided into series such as the Fund and further subdivided into classes of each
series. Each share represents an equal proportionate interest in the assets of
the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.
The Fund currently offers three classes of shares, designated Class A
Shares, Class B Shares and Class C Shares. Other classes may be established from
time to time in accordance with provisions of the Declaration of Trust. Each
class of shares of the Fund generally are identical in all respects except that
each class bears certain distribution expenses and has exclusive voting rights
with respect to its distribution fee.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution fee for a class of a series
would be voted upon by shareholders of only the class of such series involved.
Except as otherwise described in the Prospectus or herein, shares do not have
cumulative voting rights, preemptive rights or any conversion, subscription or
exchange rights.
B-2
<PAGE> 219
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
In the event of liquidation, each of the shares of the Fund is entitled to
its portion of all of the Fund's net assets after all debts and expenses of the
Fund have been paid. Since Class B Shares and Class C Shares have higher
distribution fees and transfer agency costs, the liquidation proceeds to holders
of Class B Shares and Class C Shares are likely to be lower than to holders of
Class A Shares.
The Trustees may amend the Declaration of Trust (including with respect to
any series) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any series without approval by a majority of the shares of each affected series
present at a meeting of shareholders (or such higher vote as may be required by
the 1940 Act or other applicable law) and except that the Trustees cannot amend
the Declaration of Trust to impose any liability on shareholders, make any
assessment on shares or impose liabilities on the Trustees without approval from
each affected shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
As of January 4, 1999, no person was known by the Fund to own beneficially
or to hold of record 5% or more of the outstanding Class A Shares, Class B
Shares or Class C Shares of the Fund, except as follows:
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT
NAME AND ADDRESS JANUARY 4, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OWNERSHIP
- ------------------------------------------------ ---------------- ------------ ----------
<S> <C> <C> <C> <C>
Merrill Lynch Pierce Fenner & Smith Inc......... 1,680,895.17 B 8.60%
For the Sole Benefit of its Customers 875,836.54 C 19.36%
Attn: Fund Administration
4800 Deer Lake Drive East
2nd Floor
Jacksonville, FL 32246-6484
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to this
caption in the Prospectus for a complete presentation of the matters disclosed
below.
MUNICIPAL SECURITIES
Municipal securities include long-term obligations, which often are called
municipal bonds, as well as shorter term municipal notes, municipal leases, and
tax exempt commercial paper. Under normal market conditions, longer term
municipal securities generally provide a higher yield than shorter term
municipal securities, and therefore the Fund generally expects to be invested
primarily in longer term municipal securities. The Fund will, however, invest in
shorter term municipal securities when yields are greater than yields available
on longer term municipal securities, for temporary defensive purposes and when
redemption requests are expected. The two principal classifications of municipal
securities are "general obligation" and "revenue" or "special obligation"
securities, which include "industrial revenue bonds." General obligation
securities are secured by the issuer's pledge of its faith, credit, and taxing
power for the payment of principal and interest. Revenue or special obligation
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source, such as from the user of the facility
being financed. The Fund may also invest in
B-3
<PAGE> 220
"moral obligation" bonds which are normally issued by special purpose public
authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of state and local
governments or authorities used to finance the acquisition of equipment and
facilities. Lease obligations generally do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged. A lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. In addition to the "non-appropriation" risk, these securities represent
a relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. Additionally,
use of the leased property may be limited by state or local law to a specified
use thereby further limiting ability to rent. There is no limitation on the
percentage of the Fund's assets that may be invested in "non-appropriation"
lease obligations. In evaluating such lease obligations, the Adviser will
consider such factors as it deems appropriate, which factors may include (a)
whether the lease can be cancelled, (b) the ability of the lease obligee to
direct the sale of the underlying assets, (c) the general creditworthiness of
the lease obligor, (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality, (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding and (f) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services than those covered by the lease obligation.
Also included in the term municipal securities are participation
certificates issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participations in a
lease, an installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 15% of its total assets in derivative
variable rate municipal securities such as inverse floaters whose rates vary
inversely with changes in market rates of interest or range floaters or capped
floaters whose rates are subject to periodic or lifetime caps. Derivative
variable rate securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative variable rate securities in response to changes in market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity.
The Fund also may acquire custodial receipts or certificates underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain municipal securities. The
underwriter of these certificates or receipts typically purchases municipal
securities and deposits the securities in an irrevocable trust or custodial
account with a custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and the final
principal payment on the obligations. Although under the terms of a custodial
receipt, the Fund typically
B-4
<PAGE> 221
would be authorized to assert its rights directly against the issuer of the
underlying obligation, the Fund could be required to assert through the
custodian bank those rights as may exist against the underlying issuer. Thus, in
the event the underlying issuer fails to pay principal or interest when due, the
Fund may be subject to delays, expenses and risks that are greater than those
that would have been involved if the Fund had purchased a direct obligation of
the issuer. In addition, in the event that the trust or custodial account in
which the underlying security has been deposited is determined to be an
association taxable as a corporation, instead of a non-taxable entity, the yield
on the underlying security would be reduced in recognition of any taxes paid.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantor
of such payment obligations, of the municipal securities.
Municipal securities, like other debt obligations, are subject to the risk
of non-payment. The ability of issuers of municipal securities to make timely
payments of interest and principal may be adversely impacted in general economic
downturns and as relative governmental cost burdens are allocated and
reallocated among federal, state and local governmental units. Such non-payment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal security experiencing non-payment and a
potential decrease in the net asset value of the Fund. Issuers of municipal
securities might seek protection under the bankruptcy laws. In the event of
bankruptcy of such an issuer, the Fund could experience delays and limitations
with respect to the collection of principal and interest on such municipal
securities and the Fund may not, in all circumstances, be able to collect all
principal and interest to which it is entitled. To enforce its rights in the
event of a default in the payment of interest or repayment of principal, or
both, the Fund may take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase the Fund's operating
expenses and adversely affect the net asset value of the Fund. Any income
derived from the Fund's ownership or operation of such assets may not be
tax-exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the extent to which the Fund may exercise its rights by
taking possession of such assets, because as a regulated investment company the
Fund is subject to certain limitations on its investments and on the nature of
its income. Further, in connection with the working out or restructuring of a
defaulted security, the Fund may acquire additional securities of the issuer,
the acquisition of which may be deemed to be a loan of money or property. Such
additional securities should be considered speculative with respect to the
capacity to pay interest or repay principal in accordance with their terms.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell derivative instruments such as exchange-listed and
over-the-counter put and call options on securities, financial futures, interest
rate indices and other financial instruments, purchase and sell financial
futures contracts and options thereon, or enter into various interest rate
transactions such as swaps, caps, floors or collars (collectively, all the above
are called "Strategic Transactions"). Strategic Transactions may be used to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities.
Any or all of these investment techniques may be used at any time and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of
B-5
<PAGE> 222
numerous variables including market conditions. The ability of the Fund to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market movements, which cannot be assured. The Fund
will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of futures and options transactions should tend to minimize the
risk of loss due to a decline in the value of the hedged position, at the same
time they tend to limit any potential gain which might result from an increase
in value of such position. Finally, the daily variation margin requirements for
futures contracts would create a greater ongoing potential financial risk than
would purchases of options, where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Strategic Transactions would
reduce net asset value, and possibly income, and such losses can be greater than
if the Strategic Transactions had not been utilized. Income earned or deemed to
be earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
B-6
<PAGE> 223
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only enter into OTC options that have a buy-back provision permitting
the Fund to require the Counterparty to close the option at a formula price
within seven days. The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other NRSRO. The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on illiquid securities
described herein.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities that are traded on securities exchanges
and in the over-the-counter markets and related futures on such contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though
B-7
<PAGE> 224
the Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold. In the event of exercise of a call option
sold by the Fund with respect to securities not owned by the Fund, the Fund may
be required to acquire the underlying security at a disadvantageous price in
order to satisfy its obligation with respect to the call option.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and corporate debt securities (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate or fixed-income market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The purchase of a futures
contract creates a firm obligation by the Fund, as purchaser, to take delivery
from the seller the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission and will be
entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except
for closing transactions) for other than bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option,
B-8
<PAGE> 225
an amount of cash if the closing level of the index upon which the option is
based exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the excess of the
closing price of the index over the exercise price of the option, which also may
be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. The gain or
loss on an option on an index depends on price movements in the instruments
making up the market, market segment, industry or other composite on which the
underlying index is based, rather than price movements in individual securities,
as is the case with respect to options on securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which the Fund may enter are interest rate and index swaps and the purchase or
sale of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions,
in addition to other requirements, require that the Fund segregate cash and
liquid securities with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets
B-9
<PAGE> 226
must be covered at all times by the securities, instruments or currency required
to be delivered, or, subject to any regulatory restrictions, an amount of cash
or liquid securities at least equal to the current amount of the obligation must
be segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option written by the
Fund will require the Fund to hold the securities subject to the call (or
securities convertible into the needed securities without additional
consideration) or to segregate cash and liquid securities sufficient to purchase
and deliver the securities if the call is exercised. A call option sold by the
Fund on an index will require the Fund to own portfolio securities which
correlate with the index or to segregate cash and liquid securities equal to the
excess of the index value over the exercise price on a current basis. A put
option written by the Fund requires the Fund to segregate cash and liquid
securities equal to the exercise price.
OTC options entered into by the Fund, including those on securities,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of cash and liquid
securities equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out cash and liquid securities equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, and the Fund will segregate
an amount of cash and liquid securities equal to the full value of the option.
OTC options settling with physical delivery, or with an election of either
physical delivery or cash settlement, will be treated the same as other options
settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash and liquid securities sufficient to meet its obligation to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract.
With respect to swaps, the Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of cash and liquid securities with a value equal to the Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash and
liquid securities, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating cash and liquid
securities if the Fund held a futures or forward contract, it could purchase a
put option on the same futures or forward contract with a strike price as high
or higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction no segregation is required, but if it
terminates prior to such time, cash and liquid securities equal to any remaining
obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by
the requirements of the Code for qualification as a regulated investment
company.
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may also purchase and sell municipal securities on a "when-issued"
and "delayed delivery" basis. No income accrues to the Fund on municipal
securities in connection with such transactions prior to the date the Fund
actually takes delivery of such securities. These transactions are subject to
market fluctuation; the value of the municipal securities at delivery may be
more or less than their purchase price, and yields
B-10
<PAGE> 227
generally available on municipal securities when delivery occurs may be higher
or lower than yields on the municipal securities obtained pursuant to such
transactions. Because the Fund relies on the buyer or seller, as the case may
be, to consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash or liquid securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. The Fund will make
commitments to purchase municipal securities on such basis only with the
intention of actually acquiring these securities, but the Fund may sell such
securities prior to the settlement date if such sale is considered to be
advisable. To the extent the Fund engages in "when-issued" and "delayed
delivery" transactions, it will do so for the purpose of acquiring securities
for the Fund's portfolio consistent with the Fund's investment objectives and
policies and not for the purposes of investment leverage. No specific limitation
exists as to the percentage of the Fund's assets which may be used to acquire
securities on a "when-issued" or "delayed delivery" basis.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The Fund's portfolio turnover rate (the lesser of
the value of the securities purchased or securities sold divided by the average
value of the securities held in the Fund's portfolio excluding all securities
whose maturities at acquisition were one year or less) is shown in the table of
"Financial Highlights" in the Prospectus. A high portfolio turnover rate (100%
or more) increases the Fund's transaction costs, including brokerage
commissions, and may result in the realization of more short-term capital gains
than if the Fund had a lower portfolio turnover. The turnover rate will not be a
limiting factor, however, if the Adviser deems portfolio changes appropriate.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities,
which includes securities that are not readily marketable, repurchase agreements
which have a maturity of longer than seven days and generally includes
securities that are restricted from sale to the public without registration
under the Securities Act of 1933, as amended (the "1933 Act"). The sale of such
securities often requires more time and results in higher brokerage charges or
dealer discounts and other selling expenses than does the sale of liquid
securities trading on national securities exchanges or in the over-the-counter
markets. Restricted securities are often purchased at a discount from the market
price of unrestricted securities of the same issuer reflecting the fact that
such securities may not be readily marketable without some time delay.
Investments in securities which have no ready market are valued at fair value as
determined in good faith by the Adviser in accordance with procedures approved
by the Fund's Trustees. Ordinarily, the Fund would invest in restricted
securities only when it receives the issuer's commitment to register the
securities without expense to the Fund. However, registration and underwriting
expenses (which may range from 7% to 15% of the gross proceeds of the securities
sold) may be paid by the Fund. Restricted securities which can be offered and
sold to qualified institutional buyers under Rule 144A under the 1933 Act ("144A
Securities") and are determined to be liquid under guidelines adopted by and
subject to the supervision of the Fund's Board of Trustees are not subject to
the limitation on illiquid securities. Such 144A Securities are subject to
monitoring and may become illiquid to the extent qualified institutional buyers
become, for a time, uninterested in purchasing such securities. Factors used to
determine whether 144A Securities are liquid include, among other things, a
security's trading history, the availability of reliable pricing information,
the number of dealers making quotes or making a market in such security and the
number of potential purchasers in the market for such security. For purposes
hereof, investments by the Fund in securities of other investment companies will
not be considered investments in restricted securities to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
B-11
<PAGE> 228
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without approval by the vote of a majority of its
outstanding voting shares, which is defined by the 1940 Act as the lesser of (i)
67% or more of the voting securities present in person or by proxy at the
meeting, if the holders of more than 50% of the outstanding voting securities
are present in person or by proxy; or (ii) more than 50% of the outstanding
voting securities. The Fund may not:
1. Purchase any securities (other than tax exempt obligations guaranteed by
the United States Government or by its agencies or instrumentalities), if
as a result more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer or if as a
result the Fund would hold more than 10% of the outstanding voting
securities of any single issuer, except that the Fund may purchase
securities of other investment companies to the extent permitted by (i)
the 1940 Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time,
or (iii) an exemption or other relief from the provisions of the 1940 Act.
2. Invest more than 25% of its assets in a single industry; however, the Fund
may from time to time invest more than 25% of its assets in a particular
segment of the municipal bond market; however, the Fund will not invest
more than 25% of its assets in industrial development bonds in a single
industry; and except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
3. Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the total asset value of the Fund, or mortgage,
pledge or hypothecate any assets except in connection with a borrowing and
in amounts not in excess of 10% of the total asset value of the Fund.
Borrowings may not be made for investment leverage, but only to enable the
Fund to satisfy redemption requests where liquidation of portfolio
securities is considered disadvantageous or inconvenient. In this
connection, the Fund will not purchase portfolio securities during any
period that such borrowings exceed 5% of the total asset value of the
Fund. Notwithstanding this investment restriction, the Fund may enter into
"when issued" and "delayed delivery" transactions.
4. Make loans of money or property to any person, except to the extent the
securities in which the Fund may invest are considered to be loans and
except that the Fund may lend money or property in connection with
maintenance of the value of, or the Fund's interest with respect to, the
securities owned by the Fund.
5. Buy any securities "on margin." The deposit of initial or maintained
margin in connection with interest rate or other financial futures or
index contracts or related options is not considered the purchase of a
security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except as hedging
transactions in accordance with the requirements of the Securities and
Exchange Commission and the Commodity Futures Trading Commission.
7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in their respective portfolios.
8. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under agreements related to securities owned by the Fund would be deemed
to constitute such control or participation and except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
9. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except that the Fund
may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
10. Invest in equity interests in oil, gas or other mineral exploration of
development programs.
B-12
<PAGE> 229
11. Purchase or sell real estate, commodities or commodity contracts, except
to the extent the securities the Fund may invest in are considered to be
interest in real estate, commodities or commodity contracts or to the
extent the Fund exercises its rights under agreements relating to such
securities (in which case the Fund may own, hold, foreclose, liquidate or
otherwise dispose of real estate acquired as a result of a default on a
mortgage), and except to the extent the options and futures and index
contracts in which such Funds may invest for hedging and risk management
purposes are considered to be commodities or commodities contracts.
As long as the percentage restrictions described above are satisfied at the
time of the investment or borrowing, the Fund will be considered to have abided
by those restrictions even if, at a later time, a change in values or net assets
causes an increase or decrease in percentage beyond that allowed.
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and officers of the Fund and
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with Van
Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment
Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Management
Inc., Van Kampen Advisors Inc., Van Kampen Insurance Agency of Illinois Inc.,
Van Kampen Insurance Agency of Texas Inc., Van Kampen System Inc., Van Kampen
Recordkeeping Services Inc., American Capital Contractual Services, Inc., Van
Kampen Trust Company, Van Kampen Exchange Corp. and Van Kampen Investor Services
Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are
referred to herein collectively as the "Advisers". For purposes hereof, the term
"Fund Complex" includes each of the open-end investment companies advised by the
Advisers (excluding Van Kampen Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee/Director of each of the
funds in the Fund Complex.
</TABLE>
B-13
<PAGE> 230
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Richard M. DeMartini*..................... Chairman and Chief Executive Officer of International
Two World Trade Center Private Client Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Chairman of Dean Witter Futures & Currency
New York, NY 10048 Management Inc. and Demeter Management Corporation.
Date of Birth: 10/12/52 Director of Dean Witter Reynolds Inc. Chairman and
Director of Dean Witter Capital Corporation. Chairman,
Chief Executive Officer, President and a Director of Dean
Witter Alliance Capital Corporation, Director of the
National Healthcare Resources, Inc., Morgan Stanley Dean
Witter Distributors, Inc., Dean Witter Realty Inc., Dean
Witter Reynolds Venture Equities Inc., DW Window Covering
Holding, Inc., and is a member of the Morgan Stanley Dean
Witter Management Committee. Prior to December of 1998,
Mr. DeMartini was President and Chief Operating Officer
of Morgan Stanley Dean Witter Individual Asset Management
and a Director of Morgan Stanley Dean Witter Trust FSB.
Formerly Vice Chairman of the Board of the National
Association of Securities Dealers, Inc. and Chairman of
the Board of the Nasdaq Stock Market, Inc. Trustee of the
TCW/DW Funds, Director of the Morgan Stanley Dean Witter
Funds and Trustee/Director of each of the funds in the
Fund Complex.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board,
Vice Chair of the Board of The YMCA of Metropolitan
Chicago and a member of the Women's Board of the
University of Chicago. Prior to 1996, Trustee of The
International House Board. Trustee/Director of each of
the funds in the Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and Member of the Investment Committee
of the Joyce Foundation, a private foundation.
Trustee/Director of each of the funds in the Fund
Complex.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee/Director of each of
the funds in the Fund Complex.
</TABLE>
B-14
<PAGE> 231
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Don G. Powell*............................ Currently a member of the board of governors and
3 Wexford Court executive committee for the Investment Company Institute,
Houston, TX 77024 and a member of the Board of Trustees of the Houston
Date of Birth: 10/19/39 Museum of Natural Science. Immediate past Chairman of the
Investment Company Institute. Prior to January 1999,
Chairman and a Director of Van Kampen Investments, the
Advisers, the Distributor and Investor Services and
Director or officer of certain other subsidiaries of Van
Kampen Investments. Prior to July of 1998, Director and
Chairman of VK/AC Holding, Inc. Prior to November 1996,
President, Chief Executive Officer and a Director of
VK/AC Holding, Inc. Trustee/Director of each of the funds
in the Fund Complex and Trustee of other funds advised by
the Advisers or Van Kampen Management Inc.
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer services company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company and
Date of Birth: 07/08/44 the Urban Shopping Centers Inc., a retail mall management
company. Trustee, University of Notre Dame. Prior to
1998, Director of Stone Smurfit Container Corp., a paper
manufacturing company. Formerly, President, Chief
Executive Officer and Chief Operating Officer of Waste
Management, Inc., an environmental services company.
Trustee/Director of each of the funds in the Fund
Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen Management Inc.
Trustee/Director of each of the funds in the Fund
Complex, and Trustee/Managing General Partner of other
open-end and closed-end funds advised by the Advisers or
Van Kampen Management Inc.
Paul G. Yovovich.......................... Private investor. Prior to April 1996, President of
Sears Tower Advance Ross Corporation. Director of 3Com Corporation,
233 South Wacker Drive APAC Teleservices, Inc., and COMARCO, Inc.
Suite 9700 Trustee/Director of each of the Funds in the Fund
Chicago, IL 60606 Complex.
Date of Birth: 10/29/53
</TABLE>
- ------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
current or former positions with Morgan Stanley Dean Witter & Co. or its
affiliates.
B-15
<PAGE> 232
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Sullivan, Wood, Dalmaso, Martin,
Wetherell and Hill are located at 1 Parkview Plaza, PO Box 5555, Oakbrook
Terrace, IL 60181-5555. The Fund's other officers are located at 2800 Post Oak
Blvd., Houston, TX 77056.
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Dennis J. McDonnell.................. Executive Vice President and a Director of Van Kampen
Date of Birth: 05/20/42 Investments. President, Chief Operating Officer and a
President Director of the Advisers, Van Kampen Advisors Inc., and Van
Kampen Management Inc. Prior to July of 1998, Director and
Executive Vice President of VK/AC Holding, Inc. Prior to
April of 1998, President and a Director of Van Kampen
Merritt Equity Advisors Corp. Prior to April of 1997, Mr.
McDonnell was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996, Mr. McDonnell was
Chief Executive Officer and Director of MCM Group, Inc.,
McCarthy, Crisanti & Maffei, Inc. and Chairman and Director
of MCM Asia Pacific Company, Limited and MCM (Europe)
Limited. Prior to July of 1996, Mr. McDonnell was President,
Chief Operating Officer and Trustee of VSM Inc. and VCJ Inc.
President of each of the funds in the Fund Complex.
President, Chairman of the Board and Trustee/Managing
General Partner of other investment companies advised by the
Advisers or their affiliates.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Prior to July
Vice President of 1996, Mr. Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of McCarthy, Crisanti &
Maffei, Inc. Vice President of each of the funds in the Fund
Complex and certain other investment companies advised by
the Advisers or their affiliates.
John L. Sullivan..................... First Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Treasurer, Vice President and Chief Financial
Treasurer, Vice President and Chief Officer of each of the funds in the Fund Complex and certain
Financial Officer other investment companies advised by the Advisers or their
affiliates.
Curtis W. Morell..................... Senior Vice President of the Advisers, Vice President and
Date of Birth: 08/04/46 Chief Accounting Officer of each of the funds in the Fund
Vice President and Chief Accounting Complex and certain other investment companies advised by
Officer the Advisers or their affiliates.
</TABLE>
B-16
<PAGE> 233
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Ronald A. Nyberg..................... Executive Vice President, General Counsel, Secretary and
Date of Birth: 07/29/53 Director of Van Kampen Investments. Mr. Nyberg is Executive
Vice President and Secretary Vice President, General Counsel, Assistant Secretary and a
Director of the Advisers and the Distributor, Van Kampen
Advisors Inc., Van Kampen Management Inc., Van Kampen
Exchange Corp., American Capital Contractual Services, Inc.
and Van Kampen Trust Company. Executive Vice President,
General Counsel and Assistant Secretary of Investor Services
and River View International Inc. Director or officer of
certain other subsidiaries of Van Kampen Investments.
Director of ICI Mutual Insurance Co., a provider of
insurance to members of the Investment Company Institute.
Prior to July of 1998, Director and Executive Vice
President, General Counsel and Secretary of VK/AC Holding,
Inc. Prior to April of 1998, Executive Vice President,
General Counsel and Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he was Executive Vice
President, General Counsel and a Director of Van Kampen
Merritt Equity Holdings Corp. Prior to September of 1996, he
was General Counsel of McCarthy, Crisanti & Maffei, Inc.
Prior to July of 1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc. and Executive Vice
President and General Counsel of VCJ Inc. Vice President and
Secretary of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Paul R. Wolkenberg................... Executive Vice President and Director of Van Kampen
Date of Birth: 11/10/44 Investments. Executive Vice President of Asset Management
Vice President and the Distributor. President and a Director of Investor
Services. President and Chief Operating Officer of Van
Kampen Recordkeeping Services Inc. Prior to July of 1998,
Director and Executive Vice President of VK/AC Holding, Inc.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Edward C. Wood III................... Senior Vice President of the Advisers, Van Kampen
Date of Birth: 01/11/56 Investments and Van Kampen Management Inc. Senior Vice
Vice President President and Chief Operating Officer of the Distributor.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Tanya M. Loden....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 11/19/59 Controller of each of the funds in the Fund Complex and
Controller other investment companies advised by the Advisers or their
affiliates.
Nicholas Dalmaso..................... Associate General Counsel and Assistant Secretary of Van
Date of Birth: 03/01/65 Kampen Investments. Vice President, Associate General
Assistant Secretary Counsel and Assistant Secretary of the Advisers, the
Distributor, Van Kampen Advisors Inc. and Van Kampen
Management Inc. Assistant Secretary of each of the funds in
the Fund Complex and other investment companies advised by
the Advisers or their affiliates.
</TABLE>
B-17
<PAGE> 234
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Scott E. Martin...................... Senior Vice President, Deputy General Counsel and Assistant
Date of Birth: 08/20/56 Secretary of Van Kampen Investments. Senior Vice President,
Assistant Secretary Deputy General Counsel and Secretary of the Advisers, the
Distributor, Investor Services, American Capital Contractual
Services, Inc., Van Kampen Management Inc., Van Kampen
Exchange Corp., Van Kampen Advisors Inc., Van Kampen
Insurance Agency of Illinois Inc., Van Kampen System Inc.
and Van Kampen Recordkeeping Services Inc. Prior to July of
1998, Senior Vice President, Deputy General Counsel and
Assistant Secretary of VK/AC Holding, Inc. Prior to April of
1998, Van Kampen Merritt Equity Advisors Corp. Prior to
April of 1997, Senior Vice President, Deputy General Counsel
and Secretary of Van Kampen American Capital Services, Inc.
and Van Kampen Merritt Holdings Corp. Prior to September of
1996, Mr. Martin was Deputy General Counsel and Secretary of
McCarthy, Crisanti & Maffei, Inc., and prior to July of
1996, he was Senior Vice President, Deputy General Counsel
and Secretary of VSM Inc. and VCJ Inc. Assistant Secretary
of each of the funds in the Fund Complex and other
investment companies advised by the Advisers or their
affiliates.
Weston B. Wetherell.................. Vice President, Associate General Counsel and Assistant
Date of Birth: 06/15/56 Secretary of Van Kampen Investments, the Advisers, the
Assistant Secretary Distributor, Van Kampen Management Inc. and Van Kampen
Advisors Inc. Prior to September of 1996, Mr. Wetherell was
Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.
Assistant Secretary of each of the funds in the Fund Complex
and other investment companies advised by the Advisers or
their affiliates.
Steven M. Hill....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 10/16/64 Assistant Treasurer of each of the funds in the Fund Complex
Assistant Treasurer and other investment companies advised by the Advisers or
their affiliates.
Michael Robert Sullivan.............. Assistant Vice President of the Advisers. Assistant
Date of Birth: 03/30/33 Controller of each of the funds in the Fund Complex and
Assistant Controller other investment companies advised by the Advisers or their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 65 operating funds in the Fund Complex. Each trustee/director who is not an
affiliated person of Van Kampen Investments, the Advisers or the Distributor
(each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex (except the money market series of the Van Kampen Series Fund,
Inc.) provides a deferred compensation plan to its Non-Affiliated Trustees that
allows trustees/directors to defer receipt of their compensation and earn a
return on such deferred amounts. Deferring compensation has the economic effect
as if the Non-Affiliated Trustee reinvested his or her compensation into the
funds. Each fund in the Fund Complex (except the money market series of the Van
Kampen Series Fund, Inc.) provides a retirement plan to its Non-Affiliated
Trustees that provides Non-Affiliated Trustees with compensation after
retirement, provided that certain eligibility requirements are met as more fully
described below.
Effective January 1, 1998, the trustees adopted a standardized compensation
and benefits program for each fund in the Fund Complex. The compensation of each
Non-Affiliated Trustee includes an annual retainer in an amount equal to $50,000
per calendar year, due in four quarterly installments on the first business day
of each quarter. Payment of the annual retainer is allocated among the funds in
the Fund Complex (except the money market series of the Van Kampen Series Fund,
Inc.) on the basis of the relative
B-18
<PAGE> 235
net assets of each fund as of the last business day of the preceding calendar
quarter. The compensation of each Non-Affiliated Trustee includes a per meeting
fee from each fund in the Fund Complex (except the money market series of the
Van Kampen Series Fund, Inc.) in the amount of $200 per quarterly or special
meeting attended by the Non-Affiliated Trustee, due on the date of the meeting,
plus reasonable expenses incurred by the Non-Affiliated Trustee in connection
with his or her services as a trustee, provided that no compensation will be
paid in connection with certain telephonic special meetings.
Under the deferred compensation plan, each Non-Affiliated Trustee generally
can elect to defer receipt of all or a portion of the compensation earned by
such Non-Affiliated Trustee until retirement. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to the return on the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
----------------------------------------------------------
AGGREGATE AGGREGATE TOTAL
PENSION OR ESTIMATED MAXIMUM COMPENSATION
AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan $9,790 $35,691 $60,000 $125,200
Linda Hutton Heagy 8,390 3,861 60,000 112,800
R. Craig Kennedy 9,790 2,652 60,000 125,200
Jack E. Nelson 9,790 18,385 60,000 125,200
Phillip B. Rooney 9,790 6,002 60,000 125,200
Dr. Fernando Sisto 9,790 68,615 60,000 125,200
Wayne W. Whalen 9,790 12,658 60,000 125,200
Paul G. Yovovich(1) 0 0 60,000 25,300
</TABLE>
- ---------------
(1) Mr. Paul G. Yovovich became a member of the Board of Trustees effective
October 22, 1998 and thus does not have a full fiscal year of information to
report. Trustees not eligible for compensation or retirement benefits are
not shown in the table.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Trust's fiscal period ended September 30, 1998.
The detail of aggregate compensation before deferral for each series,
including the Fund, is shown in Table A below. The detail of amounts
deferred for each series, including the Fund, is shown in Table B below.
Amounts deferred are retained by the Fund and earn a rate of return
determined by reference to either the return on the common shares of the
Fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic
B-19
<PAGE> 236
effect as if such Non-Affiliated Trustee had invested in one or more funds in
the Fund Complex. To the extent permitted by the 1940 Act, each Fund may invest
in securities of those funds selected by the Non-Affiliated Trustees in order to
match the deferred compensation obligation. The detail of cumulative deferred
compensation (including interest) owed to current Trustees by each series,
including the Fund, is shown in Table C below. The deferred compensation plan
is described above the Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for their respective fiscal years ended in 1998. The retirement
plan is described above the Compensation Table.
(4) This is the sum of the estimated maximum annual benefits payable by the
operating investment companies in the Fund Complex for each year of the
10-year period commencing in the year of such trustee's anticipated
retirement. The Retirement Plan is described above the Compensation Table.
Each Non-Affiliated Trustee of the Board of Trustees has served as a member
of the Board of Trustees since he or she was first appointed or elected in
the year set forth in Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1998 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1998. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
trustees were not trustees of such investment companies. Combining the Fund
Complex with other investment companies advised by the Advisers and their
affiliates, Mr. Whalen received Total Compensation of $285,825 during the
calendar year ended December 31, 1998.
As of January 4, 1999, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
B-20
<PAGE> 237
TABLE A
1998 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL --------------------------------------------------------------------------
FUND NAME YEAR-END* BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............. 9/30 $2,352 $2,152 $2,352 $2,352 $2,352 $2,352 $2,352 $0
Tax Free High Income Fund................ 9/30 1,961 1,761 1,961 1,961 1,961 1,961 1,961 0
California Insured Tax Free Fund......... 9/30 1,005 805 1,005 1,005 1,005 1,005 1,005 0
Municipal Income Fund.................... 9/30 1,931 1,731 1,931 1,931 1,931 1,931 1,931 0
Intermediate Term Municipal Income
Fund................................... 9/30 841 641 841 841 841 841 841 0
Florida Insured Tax Free Income Fund..... 9/30 858 658 858 858 858 858 858 0
New York Tax Free Income Fund............ 9/30 842 642 842 842 842 842 842 0
------ ------ ------ ------ ------ ------ ------ --
Trust Total............................ $9,790 $8,390 $9,790 $9,790 $9,790 $9,790 $9,790 $0
====== ====== ====== ====== ====== ====== ====== ==
</TABLE>
*In 1998, the Fund changed its fiscal year-end from December 31 to September
30. Accordingly, the information reported in this column represents information
for the nine-month fiscal period ended September 30, 1998.
TABLE B
1998 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL --------------------------------------------------------------------------
FUND NAME YEAR-END* BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............. 9/30 $2,352 $2,152 $1,176 $2,352 $2,352 $1,176 $2,352 $0
Tax Free High Income Fund................ 9/30 1,961 1,761 981 1,961 1,961 981 1,961 0
California Insured Tax Free Fund......... 9/30 1,005 805 503 1,005 1,005 503 1,005 0
Municipal Income Fund.................... 9/30 1,931 1,731 966 1,931 1,931 966 1,931 0
Intermediate Term Municipal Income
Fund................................... 9/30 841 641 421 841 841 421 841 0
Florida Insured Tax Free Income Fund..... 9/30 858 658 429 858 858 429 858 0
New York Tax Free Income Fund............ 9/30 842 642 421 842 842 421 842 0
------ ------ ------ ------ ------ ------ ------ --
Trust Total............................ $9,790 $8,390 $4,897 $9,790 $9,790 $4,897 $9,790 $0
====== ====== ====== ====== ====== ====== ====== ==
</TABLE>
*In 1998, the Fund changed its fiscal year-end from December 31 to September
30. Accordingly, the information reported in this column represents information
for the nine-month fiscal period ended September 30, 1998.
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEES
FISCAL --------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- -------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund..................... 9/30 $ 6,579 $ 8,672 $12,057 $ 17,744 $ 3,758 $ 4,177 $15,328 $0
Tax Free High Income
Fund..................... 9/30 6,211 8,299 11,879 17,384 3,388 2,473 14,960 0
California Insured Tax Free
Fund..................... 9/30 5,320 7,393 11,446 16,513 2,492 2,035 14,067 0
Municipal Income Fund...... 9/30 7,043 9,700 15,366 22,215 3,622 8,799 19,040 0
Intermediate Term Municipal
Income Fund.............. 9/30 5,166 7,238 11,372 16,363 2,337 1,959 13,913 0
Florida Insured Tax Free
Income Fund.............. 9/30 5,183 7,254 7,093 11,846 2,354 1,967 10,870 0
New York Tax Free Income
Fund..................... 9/30 2,288 1,814 3,430 5,111 1,700 958 4,413 0
------- ------- ------- -------- ------- ------- ------- --
Trust Total............ $37,790 $50,370 $72,643 $107,176 $19,651 $22,368 $92,591 $0
======= ======= ======= ======== ======= ======= ======= ==
<CAPTION>
FORMER TRUSTEES
-----------------------------------------------------------------
FUND NAME CARUSO GAUGHAN LIPSHIE MILLER REES ROBINSON VERNON
--------- ------ ------- ------- ------ ---- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund..................... $2,695 $1,985 $ 212 $ 9,164 $ 0 $13,380 $ 327
Tax Free High Income
Fund..................... 0 1,985 0 9,164 0 13,380 0
California Insured Tax Free
Fund..................... 0 1,985 0 9,164 0 13,380 0
Municipal Income Fund...... 5,804 2,455 961 12,382 7,502 17,483 1,287
Intermediate Term Municipal
Income Fund.............. 0 1,985 0 9,164 0 13,380 0
Florida Insured Tax Free
Income Fund.............. 0 927 0 5,817 0 9,599 0
New York Tax Free Income
Fund..................... 0 295 0 2,344 0 3,740 0
------ ------- ------ ------- ------ ------- ------
Trust Total............ $8,499 $11,617 $1,173 $57,199 $7,502 $84,342 $1,614
====== ======= ====== ======= ====== ======= ======
</TABLE>
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------
FUND NAME BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......................... 1995 1995 1993 1984 1997 1995 1984 1998
Tax Free High Income Fund............................ 1995 1995 1993 1985 1997 1995 1985 1998
California Insured Tax Free Fund..................... 1995 1995 1993 1985 1997 1995 1985 1998
Municipal Income Fund................................ 1995 1995 1993 1990 1997 1995 1990 1998
Intermediate Term Municipal Income Fund.............. 1995 1995 1993 1993 1997 1995 1993 1998
Florida Insured Tax Free Income Fund................. 1995 1995 1994 1994 1997 1995 1994 1998
New York Tax Free Income Fund........................ 1995 1995 1994 1994 1997 1995 1994 1998
</TABLE>
B-21
<PAGE> 238
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate and
implement the Fund's investment objectives. The Adviser also furnishes the
services of the Fund's President and such other executive and clerical personnel
as are necessary to prepare the various reports and statements and conduct the
Fund's day-to-day operations. The Fund, however, bears the cost of its
accounting services, which include maintaining its financial books and records
and calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of the Fund's Treasurer and the
personnel operating under his direction. Charges are allocated among the
investment companies advised or subadvised by the Adviser or its affiliates. A
portion of these amounts is paid to the Adviser or its affiliates in
reimbursement of personnel, office space, facilities and equipment costs
attributable to the provision of accounting services to the Fund. See
"Accounting Services Agreement" below. The Fund also pays distribution fees,
service fees, custodian fees, legal and auditing fees, the costs of reports to
shareholders, and all other ordinary business expenses not specifically assumed
by the Adviser. The Advisory Agreement also provides that the Adviser shall not
be liable to the Fund for any error of judgment or of law, or for any loss
suffered by the Fund in connection with the matters to which the agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence on the part of the Adviser in the performance of its obligations and
duties, or by reason of its reckless disregard of its obligations and duties
under the agreement.
Under the Advisory Agreement, the Fund pays to the Adviser, as compensation
for the services rendered, facilities furnished, and expenses paid by it, a
monthly fee payable computed based upon an annual rate applied to the average
daily net assets of the Fund as follows: 0.50% on the first $500 million of
average daily net assets and 0.45% on the average daily net assets over $500
million.
The Fund's average net assets are determined by taking the average of all
of the determinations of the net assets during a given calendar month. Such fee
is payable for each calendar month as soon as practicable after the end of that
month.
The Advisory Agreement also provides that, in the event the annual expenses
of the Fund for any fiscal year exceed the most stringent limit in any state in
which the Fund's shares are offered for sale, the compensation due the Adviser
will be reduced by the amount of such excess and that, if a reduction in and
refund of the advisory fee is insufficient, the Adviser will pay the Fund
monthly an amount sufficient to make up the deficiency, subject to readjustment
during the year.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on 60 days' written notice.
During the fiscal period ended September 30, 1998 and the fiscal years
ended December 31, 1997 and 1996, the Adviser received $3,672,538, $4,318,581
and $3,953,376, respectively, in advisory fees from the Fund.
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which Advisory Corp. provides accounting services
to the Fund. The Fund shares together with the other Van Kampen funds in the
cost of providing such services, with 25% of such costs shared proportionately
based on the respective number of classes of securities issued per fund and the
remaining 75% of such cost based proportionally on their respective net assets
per fund.
B-22
<PAGE> 239
During the fiscal period ended September 30, 1998 and the fiscal years
ended December 31, 1997 and 1996, Advisory Corp. received approximately
$208,400, $166,000 and $39,200, respectively, in accounting services fees from
the Fund.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen funds
advised by the Adviser and distributed by the Distributor have entered into
Legal Services Agreements pursuant to which Van Kampen Investments provides
legal services, including without limitation: accurate maintenance of the fund's
minute books and records, preparation and oversight of the fund's regulatory
reports, and other information provided to shareholders, as well as responding
to day-to-day legal issues on behalf of the funds. Payment by the Fund for such
services is made on a cost basis for the salary and salary related benefits,
including but not limited to bonuses, group insurance and other regular wages
for the employment of personnel, as well as overhead and the expenses related to
the office space and the equipment necessary to render the legal services. Other
funds distributed by the Distributor also receive legal services from Van Kampen
Investments. Of the total costs for legal services provided to funds distributed
by the Distributor, one half of such costs are allocated equally to each fund
and the remaining one half of such costs are allocated to specific funds based
on monthly time records.
During the fiscal period ended September 30, 1998 and the fiscal years
ended December 31, 1997 and 1996, Van Kampen Investments received approximately
$14,400, $22,700 and $27,100, respectively, in legal services fees from the
Fund.
DISTRIBUTION AND SERVICE
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Fund through
authorized dealers on a continuous basis. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required to
take and pay for only such shares of the Fund as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and certain other costs including the cost of
supplemental sales literature and advertising. The Distribution and Service
Agreement is renewable from year to year if approved (a)(i) by the Fund's
Trustees or (ii) by the affirmative vote of a majority of the Fund's outstanding
voting securities and (b) by the affirmative vote of a majority of Trustees who
are not parties to the Distribution and Service Agreement or interested persons
of any party, by votes cast in person at a meeting called for such purpose. The
Distribution and Service Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on 90 days'
written notice. Total underwriting commissions on the sale of shares of the Fund
for the last three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
TOTAL UNDER- AMOUNTS
WRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------ --------------
<S> <C> <C>
Fiscal Period Ended September 30, 1998...................... $2,721,240 $288,491
Fiscal Year Ended December 31, 1997......................... $2,853,738 $312,163
Fiscal Year Ended December 31, 1996......................... $3,152,458 $365,176
</TABLE>
With respect to sales of Class A Shares of the Fund, the total sales
charges and concessions reallowed to authorized dealers at the time of purchase
are as follows:
CLASS A SHARES SALES CHARGE TABLE
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-------------------------------------------------
REALLOWED TO
AS % OF NET DEALERS AS
AS % OF AMOUNT A % OF
SIZE OF INVESTMENT OFFERING PRICE INVESTED OFFERING PRICE
------------------ ------------------ ----------- --------------
<S> <C> <C> <C>
Less than $100,000..................................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000........................ 3.75% 3.90% 3.25%
$250,000 but less than $500,000........................ 2.75% 2.83% 2.25%
</TABLE>
B-23
<PAGE> 240
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-------------------------------------------------
REALLOWED TO
AS % OF NET DEALERS AS
AS % OF AMOUNT A % OF
SIZE OF INVESTMENT OFFERING PRICE INVESTED OFFERING PRICE
------------------ ------------------ ----------- --------------
<S> <C> <C> <C>
$500,000 but less than $1,000,000...................... 2.00% 2.04% 1.75%
$1,000,000 or more..................................... * * *
</TABLE>
- ---------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a deferred
sales charge of 1.00% on certain redemptions made within one year of the
purchase. A commission or transaction fee will be paid by the Distributor at
the time of purchase directly out of the Distributor's assets (and not out of
the Fund's assets) to authorized dealers who initiate and are responsible for
purchases of $1 million or more computed based on a percentage of the dollar
value of such shares sold as follows: 1.00% on sales to $2 million, plus 0.80%
on the next $1 million and 0.50% on the excess over $3 million.
With respect to sales of Class B Shares and Class C Shares of the Fund, a
commission or transaction fee generally will be paid by the Distributor at the
time of purchase directly out of the Distributor's assets (and not out of the
Fund's assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 4.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any deferred sales charge and any distribution fees on Class
B Shares and Class C Shares of the Fund are paid to the Distributor and are used
by the Distributor to defray its distribution related expenses in connection
with the sale of the Fund's shares, such as the payment to authorized dealers
for selling such shares. With respect to Class C Shares, the authorized dealers
generally are paid the ongoing commission and transaction fees of up to 0.75% of
the average daily net assets of the Fund's Class C Shares annually commencing in
the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any authorized dealer that sponsors
sales contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the authorized dealer at the public offering price during such programs.
Other programs provide, among other things and subject to certain conditions,
for certain favorable distribution arrangements for shares of the Fund. Also,
the Distributor in its discretion may from time to time, pursuant to objective
criteria established by the Distributor, pay fees to, and sponsor business
seminars for, qualifying authorized dealers for certain services or activities
which are primarily intended to result in sales of shares of the Fund. Fees may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives for meetings or seminars
of a business nature. In some instances additional compensation or promotional
incentives may be offered to brokers, dealers or financial intermediaries that
have sold or may sell significant amounts of shares during specified periods of
time. The Distributor may provide additional compensation to Edward D. Jones &
Co. or an affiliate thereof based on a combination of its sales of shares and
increases in assets under management. All of the foregoing payments are made by
the Distributor out of its own assets. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of the Fund on an annual basis. These
programs will not change the price an investor will pay for shares or the amount
that a Fund will receive from such sale.
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. State securities
laws regarding registration of banks and other financial institutions may differ
from the interpretations of federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to
certain state laws.
B-24
<PAGE> 241
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans". The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Distribution Plan and the Service Plan are being implemented
through an agreement (the "Distribution and Service Agreement") with the
Distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance, which may include, but not
be limited to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
For shares sold prior to July 1, 1987, (the "Implementation Date"), the
financial intermediary was not eligible to receive compensation pursuant to such
Distribution and Service Agreement or Selling Agreement. To the extent that
there remain outstanding shares of the Fund that were purchased prior to the
Implementation Date, the percentage of the total average daily net asset value
of a class of shares that may be utilized pursuant to the Distribution and
Service Agreement will be less than the maximum percentage amount permissible
with respect to such class of shares under the Distribution and Service
Agreement.
The Distributor must submit quarterly reports to the Board of Trustees of
the Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Distribution Plan and the purposes for which
such expenditures were made, together with such other information as from time
to time is reasonably requested by the Trustees. The Plans provide that they
will continue in full force and effect from year to year so long as such
continuance is specifically approved by a vote of the Trustees, and also by a
vote of the disinterested Trustees, cast in person at a meeting called for the
purpose of voting on the Plans. Each of the Plans may not be amended to increase
materially the amount to be spent for the services described therein with
respect to any class of shares without approval by a vote of a majority of the
outstanding voting shares of such class, and all material amendments to either
of the Plans must be approved by the Trustees and also by the disinterested
Trustees. Each of the Plans may be terminated with respect to any class of
shares at any time by a vote of a majority of the disinterested Trustees or by a
vote of a majority of the outstanding voting shares of such class.
The Plans generally provide for the Fund to reimburse the lesser of (i) the
distribution and service fees at the rates specified in the prospectus or (ii)
the amount of the Distributor's actual expenses incurred less any deferred sales
charges it received. For Class A Shares, to the extent the Distributor is not
fully reimbursed in a given year, there is no carryover of such unreimbursed
amounts to succeeding years. For each of the Class B Shares and Class C Shares,
to the extent the Distributor is not fully reimbursed in a given year, any
unreimbursed expenses for such class will be carried forward and paid by the
Fund in future years so long as such Plans are in effect. Except as mandated by
applicable law, the Fund does not impose any limit with respect to the number of
years into the future that such unreimbursed expenses may be carried forward (on
a Fund level basis). Because such expenses are accounted on a Fund level basis,
in periods of extreme net asset value fluctuation such amounts with respect to a
particular Class B Share of Class C Share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such share. In such circumstances, a shareholder of a share may be
deemed to incur expenses attributable to other shareholders of such class. As of
September 30, 1998, there were $8,107,749 and $68,351 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 2.90% and 0.10% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Plan were terminated
or not continued, the Fund would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through deferred sales charge.
B-25
<PAGE> 242
Because the Fund is a series of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one series of the Trust may indirectly benefit
the other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution-related expenses
attributable to any other class of shares.
For the fiscal period ended September 30, 1998, the Fund's aggregate
expenses under the Plans for Class A Shares were $1,270,325 or 0.24% of the
Class A Shares' average daily net assets. Such expenses were paid to reimburse
the Distributor for payments made to financial intermediaries for servicing Fund
shareholders and for administering the Plans. For the fiscal period ended
September 30, 1998, the Fund's aggregate expenses under the Class B Plan were
$1,863,579 or 1.00% of the Class B Shares' average net assets. Such expenses
were paid to reimburse the Distributor for the following payments: $1,406,450
for commissions and transaction fees paid to financial intermediaries in respect
of sales of Class B Shares of the Fund and $457,129 for fees paid to financial
intermediaries for servicing Class B shareholders and administering the Plans.
For the fiscal period ended September 30, 1998, the Fund's aggregate expenses
under the Plans for Class C Shares were $365,251 or 1.00% of the Class C Shares'
average net assets. Such expenses were paid to reimburse the Distributor for the
following payments; $238,711 for commissions and transaction fees paid to
financial intermediaries in respect of sales of Class C Shares of the Fund and
$126,540 for fees paid to financial intermediaries for servicing Class C
shareholders and administering the Class C Plan.
TRANSFER AGENT
The Fund's transfer agent is Van Kampen Investor Services Inc., PO Box
418256, Kansas City, MO 64141-9256. During the fiscal period ended September 30,
1998 and the fiscal years ended December 31, 1997 and 1996, Investor Services,
shareholder service agent and dividend disbursing agent for the Fund, received
fees aggregating $415,330, $644,000 and $673,900, respectively for these
services. Prior to 1998, these services were provided at cost plus a profit.
Beginning in 1998, the transfer agency prices are determined through
negotiations with the Fund's Board of Trustees and are based on competitive
benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of the Fund's
portfolio business, the policies and practices in this regard will at all times
be subject to review by the trustees of the Fund.
As most transactions made by the Fund are principal transactions at net
prices, the Fund generally incurs little or no brokerage costs. The portfolio
securities in which the Fund invests are normally purchased directly from the
issuer or in the over-the-counter market from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include a spread or markup to the dealer
between the bid and asked price. Sales to dealers are effected at bid prices.
The Fund may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid, or may purchase and
sell listed bonds on a exchange, which are effected through brokers who charge a
commission for their services.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker/dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size and
breadth of the market for the security, the size of and difficulty in executing
the order, and the best net price. There are many instances when, in the
judgment of the Adviser, more than one firm can offer
B-26
<PAGE> 243
comparable execution services. In selecting among such firms, consideration may
be given to those firms which supply research and other services in addition to
execution services. The Adviser is authorized to pay higher commissions to
brokerage firms that provide it with investment and research information than to
firms which do not provide such services if the Adviser determines that such
commissions are reasonable in relation to the overall services provided. No
specific value can be assigned to such research services which are furnished
without cost to the Adviser. Since statistical and other research information is
only supplementary to the research efforts of the Adviser to the Fund and still
must be analyzed and reviewed by its staff, the receipt of research information
is not expected to reduce its expenses materially. The investment advisory fee
is not reduced as a result of the Adviser's receipt of such research services.
Services provided may include (a) furnishing advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or pur-chasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Fund.
The Adviser also may place portfolio transactions, to the extent permitted
by law, with brokerage firms affiliated with the Fund, the Adviser or the
Distributor and with brokerage firms participating in the distribution of the
Fund's shares if it reasonably believes that the quality of execution and the
commission are comparable to that available from other qualified firms.
Similarly, to the extent permitted by law and subject to the same considerations
on quality of execution and comparable commission rates, the Adviser may direct
an executing broker to pay a portion or all of any commissions, concessions or
discounts to a firm supplying research or other services or to a firm
participating in the distribution of the Fund's shares.
The Adviser may place portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for the Fund and another advisory account.
In some cases, this procedure could have an adverse effect on the price or the
amount of securities available to the Fund. In making such allocations among the
Fund and other advisory accounts, the main factors considered by the Adviser are
the respective sizes of the Fund and other advisory accounts, the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
Effective October 31, 1996, Morgan Stanley Group Inc. ("Morgan Stanley")
became an affiliate of the Adviser. Effective May 31, 1997, Dean Witter Discover
& Co. ("Dean Witter") became an affiliate of the Adviser. The trustees have
adopted certain policies incorporating the standards of Rule 17e-1 issued by the
SEC under the 1940 Act which requires that the commissions paid to affiliates of
the Fund must be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time. The rule and procedures also contain review requirements and require
the Adviser to furnish reports to the trustees and to maintain records in
connection with such reviews. After consideration of all factors deemed
relevant, the trustees will consider from time to time whether the advisory fee
for the Fund will be reduced by all or a portion of the brokerage commission
given to affiliated brokers.
B-27
<PAGE> 244
The Fund paid the following commissions to all brokers and affiliated
brokers during the periods shown:
<TABLE>
<CAPTION>
AFFILIATED BROKERS
-------------------
MORGAN DEAN
BROKERS STANLEY WITTER
-------- ---------- ------
<S> <C> <C> <C>
Commission paid:
Fiscal period September 30, 1998.......................... $234,816 -- --
Fiscal year December 31, 1997............................. -- -- --
Fiscal year December 31, 1996............................. -- -- --
Fiscal period September 30, 1998 Percentages:
Commissions with affiliate to total commissions........... -- --
Value of brokerage transactions with affiliate to total
transactions........................................... -- --
</TABLE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's
shares of the Fund are held by Investor Services, the Fund's transfer agent.
Investor Services performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. Except as described
in the Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in any of the
Participating Funds will receive statements quarterly from Investor Services
showing any reinvestments of dividends and capital gains distributions and any
other activity in the account since the preceding statement. Such shareholders
also will receive separate confirmations for each purchase or sale transaction
other than reinvestment of dividends and capital gains distributions and
systematic purchases or redemptions. Additions to an investment account may be
made at any time by purchasing shares through authorized dealers or by mailing a
check directly to Investor Services.
SHARE CERTIFICATES
Generally, the Fund will not issue share certificates. However, upon
written or telephone request to the Fund, a share certificate will be issued
representing shares (with the exception of fractional shares) of the Fund. A
shareholder will be required to surrender such certificates upon redemption
thereof. In addition, if such certificates are lost the shareholder must write
to Van Kampen Funds, c/o Investor Services, PO Box 418256, Kansas City, MO
64141-9256, requesting an "affidavit of loss" and obtain a Surety Bond in a form
acceptable to Investor Services. On the date the letter is received, Investor
Services will calculate a fee for replacing the lost certificate equal to no
more than 2.00% of the net asset value of the issued shares, and bill the party
to whom the replacement certificate was mailed.
RETIREMENT PLANS
Eligible investors may establish individual retirement accounts ("IRAs");
SEP; 401(k) plans; Section 403(b)(7) plans in the case of employees of public
school systems and certain non-profit organizations; or other pension or profit
sharing plans. Documents and forms containing detailed information regarding
these plans are available from the Distributor. Van Kampen Trust Company serves
as custodian under the IRA, 403(b)(7) and Keogh plans. Details regarding fees,
as well as full plan administration for profit sharing, pension and 401(k)
plans, are available from the Distributor.
B-28
<PAGE> 245
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS
Holders of Class A Shares can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemptions transferred to a bank
account via the ACH plan are available to be credited to the account on the
second business day following normal payment. In order to utilize this option,
the shareholder's bank must be a member of ACH. In addition, the shareholder
must fill out the appropriate section of the account application. The
shareholder must also include a voided check or deposit slip from the bank
account into which redemptions are to be deposited together with the completed
application. Once Investor Services has received the application and the voided
check or deposit slip, such shareholder's designated bank account, following any
redemption, will be credited with the proceeds of such redemption. Once enrolled
in the ACH plan, a shareholder may terminate participation at any time by
writing Investor Services.
DIVIDEND DIVERSIFICATION
A shareholder may, upon written request or by completing the appropriate
section of the application form accompanying the Prospectus or by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired), elect to have all dividends
and other distributions paid on a class of shares of the Fund invested into
shares of the same class of any Participating Fund so long as the investor has a
pre-existing account for such class of shares of the other fund. Both accounts
must be of the same type, either non-retirement or retirement. If the accounts
are retirement accounts, they must both be for the same class and of the same
type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for the benefit
of the same individual. If a qualified, pre-existing account does not exist, the
shareholder must establish a new account subject to minimum investment and other
requirements of the fund into which distributions would be invested.
Distributions are invested into the selected fund at its net asset value per
share as of the payable date of the distribution.
SYSTEMATIC WITHDRAWAL PLAN
Any investor whose shares in a single account total $10,000 or more at the
offering price next computed after receipt of instructions may establish a
monthly, quarterly, semi-annual or annual withdrawal plan. Any investor whose
shares in a single account total $5,000 or more at the offering price next
computed after receipt of instructions may establish a quarterly, semiannual or
annual withdrawal plan. This plan provides for the orderly use of the entire
account, not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which any capital gain or loss will be
recognized. The planholder may arrange for monthly, quarterly, semi-annual or
annual checks in any amount, not less than $25. Such a systematic withdrawal
plan may also be maintained by an investor purchasing shares for a retirement
plan established on a form made available by the Fund.
Class B shareholders and Class C shareholders who establish a withdrawal
plan may redeem up to 12% annually of the shareholder's initial account balance
without incurring a CDSC. Initial account balance means the amount of the
shareholder's investment at the time the election to participate in the plan is
made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plans are reinvested in additional shares
at the next determined net asset value per share. If periodic withdrawals
continuously exceed reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Withdrawals made concurrently with the purchase of additional shares
ordinarily will be disadvantageous to the shareholder because of the duplication
of sales charges. Any gain or loss realized by the shareholder upon redemption
of shares is a taxable event. The Fund reserves the right to amend or terminate
the systematic withdrawal program on 30 days' notice to its shareholders.
REINSTATEMENT PRIVILEGE
A Class A shareholder or Class B shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class A Shares of the Fund. A Class C shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption
B-29
<PAGE> 246
in Class C Shares of the Fund with credit given for any CDSC paid upon such
redemption. Such reinstatement is made at the net asset value per share (without
sales charge) next determined after the order is received, which must be within
180 days after the date of the redemption. Reinstatement at net asset value per
share is also offered to participants in those eligible retirement plans held or
administered by Van Kampen Trust Company for repayment of principal (and
interest) on their borrowings on such plans.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed. The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
Additionally, if the Board of Trustees determines that payment wholly or
partly in cash would be detrimental to the best interests of the remaining
shareholders of the Fund, the Fund may pay the redemption proceeds in whole or
in part by a distribution-in-kind of portfolio securities held by the Fund in
lieu of cash in conformity with applicable rules of the SEC. Shareholders may
incur brokerage charges upon the sale of portfolio securities so received in
payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
For purposes of the CDSC-Class A, when shares of one fund are exchanged for
shares of another fund, the purchase date for the shares of the fund exchanged
into will be assumed to be the date on which shares were purchased in the fund
from which the exchange was made. If the exchanged shares themselves are
acquired through an exchange, the purchase date is assumed to carry over from
the date of the original election to purchase shares subject to a CDSC-Class A
rather than a front-end load sales charge. In determining whether a CDSC-Class A
is payable, it is assumed that shares held the longest are the first to be
redeemed.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED
SALES CHARGE ("CDSC-CLASS B AND C")
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a CDSC. The CDSC-Class B
and C is waived on redemptions of Class B Shares and Class C Shares in the
circumstances described below:
REDEMPTION UPON DEATH OR DISABILITY
The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B shareholder and Class C shareholder. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Code, which in pertinent part
defines a person as disabled if such person "is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of
long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of death or disability before it determines to
waive the CDSC-Class B and C.
In cases of death or disability, the CDSC-Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC-Class B and C applies to a total
B-30
<PAGE> 247
or partial redemption, but only to redemptions of shares held at the time of the
death or initial determination of disability.
REDEMPTION IN CONNECTION WITH CERTAIN DISTRIBUTIONS FROM RETIREMENT PLANS
The Fund will waive the CDSC-Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more Participating Funds;
in such event, as described below, the Fund will "tack" the period for which the
original shares were held on to the holding period of the shares acquired in the
transfer or rollover for purposes of determining what, if any, CDSC-Class B and
C is applicable in the event that such acquired shares are redeemed following
the transfer or rollover. The charge also will be waived on any redemption which
results from the return of an excess contribution pursuant to Section 408(d)(4)
or (5) of the Code, the return of excess deferral amounts pursuant to Code
Section 401(k)(8) or 402(g)(2), or from the death or disability of the employee
(see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition, the charge will be
waived on any minimum distribution required to be distributed in accordance with
Code Section 401(a)(9).
The Fund does not intend to waive the CDSC-Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
REDEMPTION PURSUANT TO A FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC-Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from the Fund without the imposition of a CDSC-Class B
and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
The Fund will waive the CDSC-Class B and C in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase of shares.
INVOLUNTARY REDEMPTIONS OF SHARES
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC-Class B and C upon
such involuntary redemption.
REINVESTMENT OF REDEMPTION PROCEEDS
A shareholder who has redeemed Class C Shares of a Fund may reinvest at net
asset value, with credit for any CDSC-Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C Shares of the Fund, provided that the reinvestment is effected
within 180 days after such redemption and the shareholder has not previously
exercised this reinvestment privilege with respect to Class C Shares of the
Fund. Shares acquired in this manner will be deemed to have the original cost
and purchase date of the redeemed shares for purposes of applying the CDSC-Class
C to subsequent redemptions.
B-31
<PAGE> 248
REDEMPTION BY ADVISER
The Fund may waive the CDSC-Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
TAXATION
FEDERAL INCOME TAXATION. The Trust and each of its series, including the
Fund, will be treated as separate corporations for federal income tax purposes.
The Fund has elected and qualified, and intends to continue to qualify each
year, to be treated as a regulated investment company under Subchapter M of the
Code. To qualify as a regulated investment company, the Fund must comply with
certain requirements of the Code relating to, among other things, the source of
its income and diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gain, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses), it
will not be required to pay federal income taxes on any income distributed to
shareholders. The Fund intends to distribute at least the minimum amount of net
investment income necessary to satisfy the 90% distribution requirement. The
Fund will not be subject to federal income tax on any net capital gains
distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute,
by December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income (not including tax-exempt income) for such year and (ii) 98%
of its capital gain net income (the latter of which generally is computed on the
basis of the one-year period ending on October 31st of such year), plus any
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.
If the Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Fund would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions
of the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have
B-32
<PAGE> 249
continued to hold. A portion of the discount relating to certain stripped
tax-exempt obligations may constitute taxable income when distributed to
shareholders.
DISTRIBUTIONS. The Fund intends to invest in sufficient tax-exempt
municipal securities to permit payment of "exempt-interest dividends" (as
defined in the Code). Dividends paid by the Fund from the net tax-exempt
interest earned from municipal securities qualify as exempt-interest dividends
if, at the close of each quarter of its taxable year, at least 50% of the value
of the total assets of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
Exempt-interest dividends are included in determining what portion, if any,
of a person's social security and railroad retirement benefits will be
includable in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund. "Substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses in his trade or business a part
of any facilities financed with the tax-exempt obligations and whose gross
revenues derived from such facilities exceed 5% of the total revenues derived
from the facilities by all users, or who occupies more than 5% of the useable
area of the facilities or for whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
While the Fund expects that a major portion of its net investment income
will constitute tax-exempt interest, a significant portion may consist of
investment company taxable income. Distributions of the Fund's net investment
company taxable income are taxable to shareholders as ordinary income to the
extent of the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains ("capital gain
dividends"), if any, are taxable to shareholders as long-term capital gains
regardless of the length of time shares of the Fund have been held by such
shareholders. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming such shares are held as a capital asset). For a summary of the
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates" below. Interest on indebtedness which is incurred to
purchase or carry shares of a mutual fund which distributes exempt interest
dividends during the year is not deductible for
B-33
<PAGE> 250
federal income tax purposes. Tax-exempt shareholders not subject to federal
income tax on their income generally will not be taxed on distributions from the
Fund.
Shareholders receiving distributions in the form of additional shares
issued by the Fund will be treated for federal income tax purposes as receiving
a distribution in an amount equal to the fair market value of the shares
received, determined as of the distribution date. The basis of such shares will
equal the fair market value on the distribution date.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt-interest dividends cannot exceed the
excess of the amount of interest exempt from tax under Section 103 of the Code
received by the Fund during the year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code. Since the percentage of dividends
which are exempt-interest dividends is determined on an average annual method
for the taxable year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax exempt during the period covered by the dividend.
Fund distributions generally will not qualify for the dividends received
deduction for corporations.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
SALE OF SHARES. The sale of shares (including transfers in connection with
a redemption or repurchase of shares) will be a taxable transaction for federal
income tax purposes. Selling shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
shares and the amount received. If such shares are held as a capital asset, the
gain or loss will be a capital gain or loss. For a summary of the tax rates
applicable to capital gains (including capital gain dividends), see "Capital
Gains Rates" below. Any loss recognized upon a taxable disposition of shares
held for six months or less will be treated as a long-term capital loss to the
extent of any capital gain dividends received with respect to such shares. For
purposes of determining whether shares have been held for six months or less,
the holding period is suspended for any periods during which the shareholder's
risk of loss is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES. The maximum tax rate applicable to net capital gains
recognized by individuals and other non-corporate taxpayers is (i) the same as
the maximum ordinary income tax rate for capital assets held for one year or
less or (ii) 20% for capital assets held for more than one year. A special 28%
tax rate may apply to a portion of the capital gain dividends paid by the Fund
with respect to its taxable year ended September 30, 1998. The maximum long-term
capital gains rate for corporations is 35%.
BACKUP WITHHOLDING. The Fund may be required to withhold federal income tax
at a rate of 31% ("backup withholding") from dividends and redemption proceeds
paid to non-corporate shareholders. This tax may be withheld from dividends if
(i) the shareholder fails to furnish the Fund with its correct taxpayer
identification number, (ii) the IRS notifies the Fund that the shareholder has
failed to properly report certain interest and dividend income to the IRS and to
respond to notices to that effect or (iii) when required to do so, the
shareholder fails to certify that he or she is not subject to backup
withholding. Redemption proceeds may be subject to withholding under the
circumstances described in (i) above.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's United States federal income tax liability,
if any, provided that the required information is furnished to the IRS.
B-34
<PAGE> 251
GENERAL. The federal, income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal tax consequences of purchasing, holding and disposing of
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one year, five year and ten year periods. Other total
return quotations, aggregate or average, over other time periods may also be
included.
The total return of the Fund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the Fund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the current maximum public
offering price (which includes the maximum sales charge for Class A Shares);
that all income dividends or capital gains distributions during the period are
reinvested in Fund shares at net asset value; and that any applicable CDSC has
been paid. The Fund's total return will vary depending on market conditions, the
securities comprising the Fund's portfolio, the Fund's operating expenses and
unrealized net capital gains or losses during the period. Total return is based
on historical earnings and asset value fluctuations and is not intended to
indicate future performance. No adjustments are made to reflect any income taxes
payable by shareholders on dividends and distributions paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares.
Non-standardized total return calculations do not reflect the imposition of
a contingent deferred sales charge, and if any such contingent deferred sales
charge with respect to the CDSC imposed at the time of redemption were
reflected, it would reduce the performance quoted.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and
B-35
<PAGE> 252
principal value of an investment in the Fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
Yield and total return are calculated separately for Class A Shares, Class
B Shares and Class C Shares. Class A Shares total return figures include the
maximum sales charge; Class B Shares and Class C Shares total return figures
include any applicable CDSC. Because of the differences in sales charges and
distribution fees, the total returns for each of the classes will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield, which is a measure of
the income actually earned by the Fund's investments, and from total return
which is a measure of the income actually earned by the Fund's investments plus
the effect of any realized and unrealized appreciation or depreciation of such
investments during a stated period. Distribution rate is, therefore, not
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
From time to time marketing materials may provide a portfolio manager
update, an adviser update or discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top five sectors, ten largest holdings and other Fund asset
structures, such as duration, maturity, coupon, NAV, rating breakdown, AMT
exposure and number of issues in the portfolio. Materials may also mention how
the Distributor believes the Fund compares relative to other Van Kampen funds.
Materials may also discuss the Dalbar Financial Services study from 1984 to 1994
which studied investor cash flow into and out of all types of mutual funds. The
ten year study found that investors who bought mutual fund shares and held such
shares outperformed investors who bought and sold. The Dalbar study conclusions
were consistent regardless of if shareholders purchased their funds in direct or
sales force distribution channels. The study showed that investors working with
a professional representative have tended over time to earn higher returns than
those who invested directly. The Fund will also be marketed on the internet.
In reports or other communications to shareholders or in advertising
material, the Fund may compare its performance with that of other mutual funds
as listed in the rankings or ratings prepared by Lipper Analytical Services,
Inc., CDA, Morningstar Mutual Funds or similar independent services which
monitor the performance of mutual funds with the Consumer Price Index, other
appropriate indices of investment securities, or with investment or savings
vehicles. The performance information may also include evaluations of the Fund
published by nationally recognized ranking services and by nationally recognized
financial publications. Such comparative performance information will be stated
in the same terms in which the comparative data or indices are stated. Such
advertisements and sales material may also include a yield quotation as of a
current period. In each case, such total return and yield information, if any,
will be calculated pursuant to rules established by the SEC and will be computed
separately for each class of the Fund's shares. For these purposes, the
performance of the Fund, as well as the performance of other mutual funds or
indices, do not reflect sales charges, the inclusion of which would reduce Fund
performance. The Fund will include performance data for each class of shares of
the Fund in any advertisement or information including performance data of the
Fund.
The Fund may also utilize performance information in hypothetical
illustrations. For example, the Fund may, from time to time: (1) illustrate the
benefits of tax-deferral by comparing taxable investments to investments made
through tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
of different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return.
B-36
<PAGE> 253
Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
computed by dividing that portion of the yield of the Fund (as computed above)
which is tax-exempt by a percentage equal to 100% minus a stated percentage
income tax rate and adding the result to that portion of the Fund's yield, if
any, that is not tax-exempt.
The Fund's Annual Report and Semi-Annual Report contain additional
performance information. A copy of the Annual Report or Semi-Annual Report may
be obtained without charge by calling or writing the Fund at the telephone
number and address printed on the back cover of the Prospectus.
CLASS A SHARES
The average annualized total return, including payment of the sales charge,
with respect to the Class A Shares for (i) the one year period ended September
30, 1998 was 3.33%, (ii) the five year period ended September 30, 1998 was 5.24%
and (iii) the ten year period ended September 30, 1998 was 6.23%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.11%. The Fund's current distribution
rate with respect to the Class A Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 5.23%. The Fund's taxable equivalent distribution rate with
respect to the Class A Shares for the month ending September 30, 1998 was 8.17%.
The Class A Shares cumulative non-standardized total return, including
payment of the maximum sales charge, with respect to the Class A Shares from its
inception to September 30, 1998 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 166.61%.
The Fund's cumulative non-standardized total return, excluding payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to September 30, 1998 was 179.88%.
CLASS B SHARES
The average annualized total return, including payment of the CDSC, with
respect to the Class B Shares for (i) the one year period ended September 30,
1998 was 3.59%, (ii) the five year period ended September 30, 1998 was 5.19% and
(iii) the approximately five year, five month period of May 3, 1993
(commencement of investment operations of the Fund) through September 30, 1998
was 6.31%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.55%. The Fund's current distribution
rate with respect to the Class B Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.78%. The Fund's taxable equivalent distribution rate with
respect to the Class B Shares for the month ending September 30, 1998 was 7.47%.
The Fund's cumulative non-standardized total return, including payment of
the CDSC, with respect to the Class B Shares from its inception to September 30,
1998 (as calculated in the manner described in the Prospectus under the heading
"Fund Performance") was 39.24%.
The Fund's cumulative non-standardized total return, excluding payment of
the CDSC, with respect to the Class B Shares from its inception to September 30,
1998 was 40.24%.
CLASS C SHARES
The average annualized total return, including payment of the CDSC, with
respect to the Class C Shares for (i) the one year period ended September 30,
1998 was 6.59%, (ii) the five year period ended September 30, 1998 was 5.39% and
(iii) the approximately five year, one month period from August 13, 1993 (the
commencement of investment operations of the Fund) through September 30, 1998
was 5.92%.
B-37
<PAGE> 254
The Fund's yield with respect to the Class C Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.53%. The Fund's current distribution
rate with respect to the Class C Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.78%. The Fund's taxable equivalent distribution rate with
respect to the Class C Shares for the month ending September 30, 1998 was 7.47%.
The Fund's cumulative non-standardized total return, including payment of
the CDSC, with respect to the Class C Shares from its inception to September 30,
1998 (as calculated in the manner described in the Prospectus under the heading
"Fund Performance") was 34.35%.
The Fund's cumulative non-standardized total return, excluding payment of
the CDSC, with respect to the Class C Shares from its inception to September 30,
1998 was 34.35%.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash,
including proceeds from the sale of shares of the Fund and of securities in the
Fund's investment portfolio, are held by State Street Bank and Trust Company,
225 West Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual statements are furnished to
shareholders, and annually such statements are audited by the independent
accountants.
INDEPENDENT ACCOUNTANTS -- KPMG LLP, 303 East Wacker Drive, Chicago,
Illinois 60601, the independent accountants for the Fund, performs an annual
audit of the Fund's financial statements.
LEGAL COUNSEL -- Counsel to the Fund is Skadden, Arps, Slate, Meagher &
Flom (Illinois).
B-38
<PAGE> 255
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen Tax Free High Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Tax Free High Income Fund (the "Fund"), including the portfolio of
investments, as of September 30, 1998, and the related statement of operations
for the nine-month period ended September 30, 1998 and the year ended December
31, 1997, the statement of changes in net assets for the nine-month period ended
September 30, 1998 and for each of the two years in the period ended December
31, 1997, 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
September 30, 1998, 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 Tax Free High Income Fund as of September 30, 1998, the results of its
operations for the nine-month period ended September 30, 1998 and the year ended
December 31, 1997, the changes in its net assets for the nine-month period ended
September 30, 1998 and for each of the two years in the period ended December
31, 1997, and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
November 5, 1998
F-1
<PAGE> 256
PORTFOLIO OF INVESTMENTS
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 100.1%
ALABAMA 0.7%
$ 250 Mobile, AL Indl Dev Brd Solid Waste Disp Rev Mobile Energy
Svcs Co Proj Rfdg........................................... 6.950% 01/01/20 $ 130,000
2,150 Valley, AL Spl Care Fac Fin Auth Rev Lanier Mem Hosp Ser
A........................................................... 5.650 11/01/22 2,186,216
1,395 Valley, AL Spl Care Fac Fin Auth Rev Lanier Mem Hosp Ser
A........................................................... 5.600 11/01/16 1,430,255
1,000 West Jefferson Cnty, AL Amusement & Pub Park Auth........... 7.500 12/01/08 1,078,300
3,000 West Jefferson Cnty, AL Amusement & Pub Park Auth........... 8.000 12/01/26 3,245,910
--------------
8,070,681
--------------
ALASKA 0.2%
2,250 Seward, AK Rev AK Sealife Cent Proj......................... 7.650 10/01/16 2,442,330
--------------
ARIZONA 1.9%
6,250 Chandler, AZ Indl Dev Auth Rev Chandler Finl Cent Proj Ser
1986 (c) (g)................................................ 7.125 12/01/16 5,312,329
4,000 Maricopa Cnty, AZ Indl Dev Auth Multi-Family Hsg Rev........ 6.625 07/01/33 4,061,280
2,605 Maricopa Cnty, AZ Indl Dev Auth Sr Living Fac Rev........... 7.750 04/01/15 2,834,683
2,700 Maricopa Cnty, AZ Uni Sch Dist No 41 Gilbert Rfdg (FGIC
Insd)....................................................... * 01/01/08 1,829,655
2,160 Pima Cnty, AZ Indl Dev Auth Multi-Family Rev................ 6.625 10/01/28 2,206,634
2,420 Pima Cnty, AZ Indl Dev Auth Sr Living Facs Catilina Vlg Ser
A Rev....................................................... 6.500 07/01/29 2,460,463
580 Pinal Cnty, AZ Sch Dist No 8 Mammoth Ser A.................. 11.000 07/01/00 629,822
2,000 Red Hawk Canyon Cmnty Facs Dist No 2 AZ Dist Assmt Rev...... 6.500 12/01/12 2,030,340
--------------
21,365,206
--------------
CALIFORNIA 6.4%
2,000 Abag Fin Auth For Nonprofit Corps CA Ctfs Partn............. 6.375 11/15/28 2,016,620
33,150 Anaheim, CA Pub Fin Auth Lease Cap Apprec Sub Pub Impts Proj
Ser C (FSA Insd)............................................ * 09/01/36 5,030,181
12,800 Anaheim, CA Pub Fing Auth Lease Cap Apprec Sub Pub Impts
Proj Ser C (FSA Insd)....................................... * 09/01/29 2,757,504
11,280 Anaheim, CA Pub Fing Auth Lease Cap Apprec Sub Pub Impts
Proj Ser C (FSA Insd)....................................... * 09/01/30 2,308,113
16,080 Anaheim, CA Pub Fing Auth Lease Cap Apprec Sub Pub Impts
Proj Ser C (FSA Insd)....................................... * 03/01/37 2,380,001
1,310 California Edl Fac Auth Rev Univ of La Verne................ 6.375 04/01/13 1,409,128
1,000 Capistrano, CA Uni Sch Dist Cmnty Fac Dist Spl Tax
(Prerefunded @ 09/01/17).................................... 7.100 09/01/21 1,241,310
1,500 Colton, CA Pub Fin Auth Rev Elec Sys Impts (Prerefunded @
10/01/03)................................................... 7.500 10/01/20 1,767,630
5,000 Contra Costa, CA Home Mtg Fin Auth Home Mtg Rev (MBIA
Insd)....................................................... * 09/01/17 2,041,900
2,500 Corona, CA Ctfs Partn Vista Hosp Sys Inc Ser C.............. 8.375 07/01/11 2,862,300
2,000 Culver City, CA Redev Fin Auth Rev Tax Alloc Rfdg (AMBAC
Insd) (b)................................................... 5.500 11/01/14 2,233,220
3,465 Escondido, CA Jt Pwrs Fin Auth Lease Rev CA Cent for the
Arts (AMBAC Insd)........................................... * 09/01/15 1,316,735
3,480 Escondido, CA Jt Pwrs Fin Auth Lease Rev CA Cent for the
Arts (AMBAC Insd)........................................... * 09/01/18 1,074,972
990 Indio, CA Pub Fin Auth Rev Tax Increment.................... 6.500 08/15/27 1,044,965
1,450 Irwindale, CA Pub Fin Auth Spl Cmnty Facs Dist No 1 Rfdg.... 6.000 11/01/20 1,488,178
2,000 Lake Elsinore, CA Pub Fin Auth Local Agy Rev................ 7.100 09/01/20 2,182,740
1,500 Millbrae, CA Residential Fac Rev Magnolia of Millbrae Proj
Ser A....................................................... 7.375 09/01/27 1,602,465
6,350 Riverside Cnty, CA Air Force Vlg West Inc Ser A Rfdg (b).... 8.125 06/15/20 7,057,390
5,500 Riverside Cnty, CA Asset Leasing Corp Leasehold Rev (MBIA
Insd)....................................................... * 06/01/22 1,695,100
8,255 Riverside Cnty, CA Asset Leasing Corp Leasehold Rev (MBIA
Insd)....................................................... * 06/01/26 2,068,455
2,000 San Diego Cnty, CA Ctfs Partn (AMBAC Insd) (b).............. 5.500 08/15/10 2,227,980
1,900 San Diego Cnty, CA Ctfs Partn (AMBAC Insd).................. 5.500 08/15/11 2,107,024
7,625 San Francisco, CA City & Cnty Redev Agy Lease Rev Gains
(Crossover Rfdg @ 07/01/04) (h)............................. 0/8.500 07/01/14 6,947,519
3,300 San Francisco, CA City & Cnty Redev Fin Auth Tax Alloc
Rev......................................................... 5.250 08/01/21 3,347,982
1,000 San Luis Obispo, CA Ctfs Partn Vista Hosp Sys Inc........... 8.375 07/01/29 1,121,710
3,000 Santa Ana, CA Cmnty Redev Agy Tax Alloc Ser B Rfdg.......... 7.500 09/01/16 3,117,540
1,500 Simi Valley, CA Cmnty Dev Agy Coml Sycamore Plaza II Rfdg... 6.000 09/01/12 1,524,000
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 257
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA (CONTINUED)
$ 2,000 Ventura, CA Port Dist Ctfs Partn............................ 6.375% 08/01/28 $ 2,036,400
3,000 Westminster, CA Redev Agy Tax Alloc Rev Coml Redev Proj No 1
(Prerefunded @ 08/01/02).................................... 6.200 08/01/23 3,343,410
--------------
71,352,472
--------------
COLORADO 6.3%
11,920 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy (Prerefunded @
08/31/05)................................................... * 08/31/10 6,432,270
19,000 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy Rev E-470 Proj Ser
C (Prerefunded @ 08/31/05).................................. * 08/31/26 2,993,830
66 Arapahoe Cnty, CO Centennial Downs Metro Dist Cash Payment
Deficiency Bond (g)......................................... 8.090 12/01/34 66,488
378 Arapahoe Cnty, CO Centennial Downs Metro Dist Int Ctf (e)
(g)......................................................... 5.700 12/01/34 302,184
650 Arapahoe Cnty, CO Centennial Downs Metro Dist Ltd Tax Bond
Ser 1993 Rfdg (g)........................................... 8.090 12/01/34 652,528
1,000 Bowles Metro Dist CO........................................ 7.750 12/01/15 1,067,380
2,000 Colorado Hlth Fac Auth Rev Baptist Home Assn Ser A.......... 6.375 08/15/24 2,131,520
1,590 Colorado Hlth Fac Auth Rev Christian Living Campus Proj..... 6.850 01/01/15 1,734,213
1,060 Colorado Hlth Fac Auth Rev Christian Living Campus Proj..... 7.050 01/01/19 1,166,329
6,200 Colorado Hlth Fac Auth Rev Christian Living Campus Proj
(b)......................................................... 9.000 01/01/25 7,415,200
6,310 Colorado Hlth Fac Auth Rev Christian Living Campus Proj
(Prerefunded @ 01/01/99) (b)................................ 10.500 01/01/19 6,610,608
1,000 Denver, CO City & Cnty Arpt Rev Ser A (b)................... 6.900 11/15/98 1,003,940
1,175 Denver, CO City & Cnty Arpt Rev Ser A....................... 8.400 11/15/98 1,181,768
2,205 Denver, CO City & Cnty Arpt Rev Ser A....................... 8.875 11/15/12 2,540,733
865 Denver, CO City & Cnty Arpt Rev Ser A (Prerefunded @
11/15/00)................................................... 8.500 11/15/23 966,335
795 Denver, CO City & Cnty Arpt Rev Ser A (Prerefunded @
11/15/01)................................................... 8.875 11/15/12 929,745
2,500 Denver, CO City & Cnty Arpt Rev Ser D....................... 7.750 11/15/13 3,215,825
795 East River Regl Santn Dist CO Var Rfdg (Var Rate Cpn) (g)... 4.000 12/01/97 568,544
5,715 Greeley, CO Multi-Family Rev Hsg Mtg Creek Stone (FHA
Gtd)........................................................ 6.050 07/01/37 5,967,374
2,616 Gunnison Cnty, CO Indl Rev Bond Crested Butte Mtn Resort
Inc......................................................... 9.250 10/01/07 2,670,858
4,163 Himalaya Wtr & Santn Dist Adams Cnty, CO Genl Oblig Ltd Tax
Bond Ser 1995 (d) (g)....................................... 9.500 12/01/24 2,997,241
2,130 Lafayette, CO Indl Dev Rev Rocky Medium Term Note Instr Proj
A........................................................... 7.000 10/01/18 2,137,881
2,000 Northern Metro Dist CO Adams Cnty Rfdg...................... 6.500 12/01/16 2,172,900
4,605 Skyland Metro Dist CO Gunnison Cnty Rfdg (Var Rate Cpn)
(g)......................................................... 4.000 12/01/97 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 9,985,000
--------------
70,205,746
--------------
CONNECTICUT 2.1%
3,740 Connecticut St Hlth & Edl Fac Auth Rev Nursing Home Pgm
AHF/Windsor Proj (b)........................................ 7.125 11/01/24 4,370,115
2,980 Mashantucket Western Pequot Tribe CT Spl Rev Ser A, 144A
(Prerefunded @ 09/01/07) (f)................................ 6.400 09/01/11 3,533,130
12,000 Mashantucket Western Pequot Tribe CT Spl Rev Ser B, 144A
(f)......................................................... 5.750 09/01/27 12,630,960
3,020 Mashantucket Western Pequot Tribe CT Spl Rev Ser B, 144A
(f)......................................................... 6.400 09/01/11 3,349,980
--------------
23,884,185
--------------
DISTRICT OF COLUMBIA 0.4%
2,000 Dist of Columbia Ser E (FSA Insd) (b)....................... 6.000 06/01/11 2,198,800
1,615 District of Columbia A-1 Rfdg (MBIA Insd)................... 6.500 06/01/10 1,914,518
85 District of Columbia Prerefunded A-1 Rfdg (MBIA Insd)....... 6.500 06/01/10 102,229
--------------
4,215,547
--------------
FLORIDA 11.2%
2,700 Brevard Cnty, FL Sch Brd Ctfs Ser A (AMBAC Insd) (b)........ 5.100 07/01/07 2,920,455
28,000 Dade Cnty, FL Gtd Entitlement Rev Cap Apprec Ser A Rfdg
(MBIA Insd) (b)............................................. * 02/01/18 9,740,920
4,780 Escambia Cnty, FL Rev ICF/MR Pensacola Care Dev Cent (g)
(b)......................................................... 10.250 07/01/11 4,541,000
2,010 Escambia Cnty, FL Rev ICF/MR Pensacola Care Dev Cent Ser A
(g)......................................................... 10.250 07/01/11 2,010,000
1,135 Fishhawk Cmnty, FL Dev Dist Spl Assmt Rev................... 7.625 05/01/18 1,235,947
3,000 Florida Hsg Fin Corp Rev Hsg Beacon Hill Apts Ser C......... 6.610 07/01/38 3,058,560
4,000 Florida Hsg Fin Corp Rev Hsg Cypress Trace Apts Ser G....... 6.600 07/01/38 4,074,800
4,000 Florida Hsg Fin Corp Rev Hsg Westchase Apts Ser B........... 6.610 07/01/38 4,078,080
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 258
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FLORIDA (CONTINUED)
$ 1,000 Heritage Harbor Cmnty Dev Dist Spl Assmt Ser A.............. 6.700% 05/01/19 $ 1,027,300
1,300 Heritage Harbor Cmnty Dev Dist FL Rev Rectl................. 7.750 05/01/19 1,320,475
5,000 Hillsborough Cnty, FL Edl Fac Univ Tampa Proj Rfdg.......... 5.750 04/01/18 5,222,400
980 Lake Saint Charles, FL Cmnty Dev Dist Spl Assmt Rev......... 7.875 05/01/17 1,058,351
3,000 Leon Cnty, FL Edl Facs Auth Rev Southgate Residence Hall Ser
A Rfdg...................................................... 6.750 09/01/28 3,072,960
28,500 Miami Dade Cnty, FL Sch Brd Ctfs Partn Ser B (AMBAC Insd)... 4.875 08/01/27 28,215,000
5,500 Miramar, FL Wastewater Impt Assmt Rev (FGIC Insd) (b)....... 6.750 10/01/25 6,402,605
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 3,759,323
1,250 North Springs, FL Impt Dist Spl Assmt Rev................... 6.250 05/01/05 1,289,450
2,425 Northern Palm Beach Cnty Impt Dist FL Wtr Ctl & Impt Unit
Dev 5A Rfdg................................................. 6.000 08/01/10 2,494,161
1,500 Orange Cnty, FL Hlth Fac Auth Rev First Mtg Orlando Lutheran
Twr......................................................... 8.750 07/01/26 1,790,850
1,300 Orange Cnty, FL Hlth Fac Auth Rev First Mtg Orlando Lutheran
Twr Rfdg.................................................... 8.625 07/01/20 1,544,777
2,395 Pinellas Cnty, FL Edl Fac Auth Rev College Harbor Proj Ser
A........................................................... 8.250 12/01/21 2,663,743
6,000 Sarasota Cnty, FL Hlth Fac Auth Hlth Fac Sunnyside Prty
(b)......................................................... 6.700 07/01/25 6,408,780
5,175 Seminole Cnty, FL Sch Brd Ctfs Partn Ser A (MBIA Insd)...... 4.875 07/01/15 5,252,573
16,065 Sun N Lake of Sebring, FL Impt Dist Spl Assmt Ser A (d)
(g)......................................................... 10.000 12/15/11 6,426,000
10,000 Sunrise, FL Utility Sys Rev Rfdg (AMBAC Insd)............... 5.000 10/01/28 10,300,900
880 Tampa Palms, FL Open Space & Transn Cmnty Dev Dist Rev Cap
Impt Area 7 Proj............................................ 8.500 05/01/17 978,965
1,870 Volusia Cnty, FL Indl Dev Auth Bishops Glen Proj Rfdg....... 7.500 11/01/16 2,087,294
2,000 Volusia Cnty, FL Indl Dev Auth Bishops Glen Proj Rfdg....... 7.625 11/01/26 2,247,620
--------------
125,223,289
--------------
GEORGIA 5.2%
1,000 Atlanta, GA Urban Residential Fin Auth Multi-family Rev..... 6.750 07/01/30 1,022,670
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 21,712,820
4,000 Fulton Cnty, GA Hsg Auth Multi-Family Hsg Rev............... 6.500 02/01/28 4,076,680
32,000 Georgia Local Govt Ctfs Partn Grantor Trust Ser A (MBIA
Insd)....................................................... 4.750 06/01/28 31,606,400
--------------
58,418,570
--------------
IDAHO 1.3%
8,000 Idaho Hlth Fac Auth Rev IHC Hosp Inc Rfdg (Inverse Fltg)
(b)......................................................... 8.450 02/15/21 9,933,840
4,300 Owyhee Cnty, ID Indl Dev Corp Indl Dev Rev Envirosafe
Services of ID Inc.......................................... 8.250 11/01/02 4,570,599
--------------
14,504,439
--------------
ILLINOIS 8.9%
1,850 Bridgeview, IL Tax Increment Rev Rfdg....................... 9.000 01/01/11 2,160,985
7,560 Chicago, IL O'Hare Intl Arpt Spl Fac Rev (b)................ 6.450 05/01/18 8,083,303
3,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev American Airls Inc
Proj Ser A (b).............................................. 7.875 11/01/25 3,250,830
23,470 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc
Proj Ser 84A (b)............................................ 8.850 05/01/18 26,141,355
2,625 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc
Ser B (b)................................................... 8.950 05/01/18 2,924,486
3,875 Chicago, IL Rev Chatham Ridge Tax Increment................. 10.250 01/01/07 4,006,905
1,000 Chicago, IL Tax Increment................................... 7.250 01/01/14 1,095,120
300 Crestwood, IL Tax Increment Rev Bank Qualified Rfdg......... 6.000 12/01/99 306,738
1,015 Du Page Cnty, IL Sch Dist Cap Apprec (FGIC Insd)............ * 02/01/14 494,823
1,000 Du Page Cnty, IL Sch Dist Cap Apprec (FGIC Insd)............ * 02/01/18 392,170
2,000 Huntley, IL Increment Alloc Rev Huntley Redev Proj Ser A.... 8.500 12/01/15 2,357,620
3,000 Illinois Dev Fin Auth Pollutn Ctl Rev IL Pwr Co Proj Ser A
Rfdg (MBIA Insd)............................................ 5.400 03/01/28 3,068,550
1,405 Illinois Dev Fin Auth Rev Cmnty Fac Clinic Altgeld Proj..... 8.000 11/15/16 1,580,709
7,100 Illinois Dev Fin Auth Rev Mercy Hsg Corp Proj Rfdg
(Prerefunded @ 08/01/04) (b)................................ 7.000 08/01/24 8,182,963
1,000 Illinois Edl Fac Auth Rev Peace Mem Ministries Proj......... 7.500 08/15/26 1,112,850
3,730 Illinois Edl Fac Auth Rev Trinity Med Cent (FSA Insd)....... 6.000 07/01/28 4,100,128
3,000 Illinois Hlth Fac Auth Rev Fairview Oblig Group Ser A
Rfdg........................................................ 7.400 08/15/23 3,377,640
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 259
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 4,550 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D (b)...... 9.500% 11/15/15 $ 5,182,723
1,000 Illinois Hlth Fac Auth Rev Lifelink Corp Oblig Group Ser B
(Prerefunded @ 02/15/05).................................... 8.000 02/15/25 1,225,900
4,905 Illinois Hlth Fac Auth Rev Midwest Physician Group Ltd Proj
(Prerefunded @ 11/15/04) (b)................................ 8.100 11/15/14 6,072,145
1,135 Mill Creek Wtr Reclamation Dist IL Sewage Rev............... 8.000 03/01/10 1,315,624
685 Mill Creek Wtr Reclamation Dist IL Wtrwks Rev............... 8.000 03/01/10 794,011
1,500 Palatine, IL Tax Increment Rev Rand/Dundee Cent Proj........ 7.750 01/01/17 1,833,210
1,800 Peoria, IL Spl Tax Weaver Ridge Spl Svc Area................ 8.050 02/01/17 2,010,744
2,095 Regional Tran Auth IL Ser B (AMBAC Insd).................... 8.000 06/01/17 2,949,467
7,000 Robbins, IL Res Recovery Rev................................ 8.375 10/15/16 5,600,000
--------------
99,620,999
--------------
INDIANA 0.7%
825 Crawfordsville, IN Redev Comm Redev Dist Tax Increment
Rev......................................................... 7.000 02/01/12 862,867
2,000 East Chicago, IN Exempt Fac Inland Steel Co Proj No 14...... 6.700 11/01/12 2,193,800
3,190 Kokomo, IN School Bldg Corp First Mtg (AMBAC Insd).......... 4.125 07/15/17 2,941,946
1,500 Marion Cnty, IN Convention & Recnl Facs Auth Excise Tax Rev
(MBIA Insd)................................................. 5.000 06/01/27 1,498,755
--------------
7,497,368
--------------
IOWA 0.1%
1,500 Cedar Rapids, IA Rev First Mtg Cottage Grove................ 5.875 07/01/28 1,508,700
--------------
KANSAS 0.2%
760 Kansas City, KS Crawford Cnty Leavenworth Single Family Mtg
Rev (AMBAC Insd) (b)........................................ * 04/01/16 118,492
1,000 Lawrence, KS Coml Dev Rev Holiday Inn Sr Ser A.............. 8.000 07/01/16 1,123,740
1,000 Manhattan, KS Coml Dev Rev Holiday Inn Sr Ser A Rfdg........ 8.000 07/01/16 1,123,740
--------------
2,365,972
--------------
KENTUCKY 0.3%
2,700 Jefferson Cnty, KY Hosp Rev Alliant Hlth Sys Proj (Inverse
Fltg) (MBIA Insd) (b)....................................... 8.566 10/09/08 3,236,625
--------------
LOUISIANA 0.7%
4,000 Louisiana Hsg Fin Agy Rev Multi-Family Hsg Plantation Ser
A........................................................... 7.125 01/01/28 4,041,000
1,910 Louisiana Pub Fac Auth Rev Student Ln SubSer A3 (b)......... 7.000 09/01/06 2,035,315
1,435 Webster Parish, LA Pollutn Ctl Rev Intl Paper Co Proj Ser B
Rfdg........................................................ 5.200 03/01/13 1,508,702
--------------
7,585,017
--------------
MAINE 0.1%
1,225 Maine Hlth & Higher Edl Facs Auth Rev Ser B (Prerefunded @
07/01/04) (FSA Insd)........................................ 7.000 07/01/24 1,441,653
25 Maine Hlth & Higher Edl Facs Auth Rev Ser B (FSA Insd)...... 7.000 07/01/24 28,943
--------------
1,470,596
--------------
MARYLAND 0.9%
1,440 Maryland St Cmnty Dev Admin Dept Hsg & Cmnty Dev
Multi-Family Hsg Rev Ser A Rfdg............................. 8.300 05/15/17 1,459,872
1,725 Maryland St Cmnty Dev Admin Dept Hsg & Cmnty Dev Rev Single
Family Pgm Seventh Ser (b).................................. 7.300 04/01/25 1,866,364
3,000 Montgomery Cnty, MD Econ Dev Editorial Projs In Edl Ser A... 6.540 09/01/28 3,017,430
3,000 Prince Georges Cnty, MD Spl Oblig Spl Assmt Woodview Ser
A........................................................... 8.000 07/01/26 3,261,870
--------------
9,605,536
--------------
MASSACHUSETTS 2.8%
7,000 Massachusetts St Hlth & Edl Fac Auth Rev New England Med
Cent Hosp Ser G (Embedded Swap) (MBIA Insd) (h)............. 3.1/5.0 07/01/13 6,971,790
1,670 Massachusetts St Hlth & Edl Fac Auth Rev Saint Anne's Hosp
Ser A....................................................... 9.375 07/01/14 1,676,212
2,099 Massachusetts St Hsg Fin Agy Hsg Rev Insd Rental Ser A Rfdg
(AMBAC Insd)................................................ 6.650 07/01/19 2,284,904
2,965 Massachusetts St Indl Fin Agy Greater Lynn Mental Hlth...... 6.375 06/01/18 3,022,136
1,360 Massachusetts St Indl Fin Agy Greater Lynn Mental Hlth...... 6.200 06/01/08 1,383,188
1,650 Massachusetts St Indl Fin Agy Rev Wentworth Inst
Technology.................................................. 5.750 10/01/28 1,731,031
4,000 Massachusetts St Indl Fin Agy Rev Cent For Autism........... 9.500 11/01/17 4,334,880
575 Massachusetts St Indl Fin Agy Rev Dimmock Cmnty Hlth Cent... 8.000 12/01/06 659,744
1,085 Massachusetts St Indl Fin Agy Rev Dimmock Cmnty Hlth Cent... 8.375 12/01/13 1,286,333
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 260
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MASSACHUSETTS (CONTINUED)
$ 675 Massachusetts St Indl Fin Agy Rev Dimmock Cmnty Hlth Cent... 8.500% 12/01/20 $ 803,662
6,400 Massachusetts St Indl Fin Agy Rev Swr Fac Res Ctl Composting
(g)......................................................... 9.250 06/01/10 6,655,296
--------------
30,809,176
--------------
MICHIGAN 4.6%
2,000 Battle Creek, MI Downtown Dev Auth Tax Increment Rev
(Prerefunded @ 05/01/04).................................... 7.600 05/01/16 2,392,000
2,000 Brandon Sch Dist, MI Rfdg (AMBAC Insd)...................... 5.000 05/01/22 2,003,680
6,000 Detroit, MI Downtown Dev Auth Dev Area No. 1 Projs A Rfdg
(MBIA Insd)................................................. 4.750 07/01/18 5,845,740
1,000 Detroit, MI Local Dev Fin Auth Ser C........................ 6.850 05/01/21 1,048,960
5,000 Detroit, MI Wtr Supply Sys Rev Rfdg (FGIC Insd)............. 5.000 07/01/23 5,007,600
2,000 Grosse Ile Twp, MI Sch Dist Rfdg (FGIC Insd)................ 5.000 05/01/22 2,003,680
2,390 Meridian, MI Econ Dev Corp Ltd Oblig Rev First Mtg Burcham
Hills Ser A................................................. 7.500 07/01/13 2,634,856
3,430 Meridian, MI Econ Dev Corp Ltd Oblig Rev First Mtg Burcham
Hills Ser A................................................. 7.750 07/01/19 3,822,563
3,250 Michigan St Hosp Fin Auth Rev Detroit Med Cent Oblig Ser
A........................................................... 5.250 08/15/28 3,247,367
3,000 Michigan St Hosp Fin Auth Rev Detroit Med Cent Oblig Ser
A........................................................... 5.250 08/15/23 3,001,050
2,250 Michigan St Hosp Fin Auth Rev Hosp Genesys Regl Med Rfdg
(ACA Insd).................................................. 5.500 10/01/18 2,306,970
9,000 Michigan St Hosp Fin Auth Rev Hosp Genesys Regl Med Rfdg
(ACA Insd).................................................. 5.500 10/01/27 9,197,550
7,682 Michigan St Strategic Fd Ltd Oblig Rev Great Lakes Pulp &
Fiber Proj (e).............................................. 8.000 12/01/27 6,939,407
1,000 Michigan St Strategic Fd Res Recovery Ltd Oblig Rev Central
Wayne Energy Rec Ser A...................................... 7.000 07/01/27 1,018,370
615 Saint Clair Cnty, MI Econ Dev Corp Kmart Proj............... 9.500 02/01/06 622,331
--------------
51,092,124
--------------
MINNESOTA 1.5%
1,425 Columbia Heights, MN Multi-Family Crest View Corp Proj...... 6.000 03/01/33 1,452,631
5,490 Eden Prairie, MN Multi-Family Hsg Rev Sterling Ponds Proj
Ser A (g) (b)............................................... 10.000 01/15/20 5,710,259
495 Eden Prairie, MN Multi-Family Hsg Rev Sterling Ponds Proj
Ser B Cap Apprec (g)........................................ * 01/15/20 767,250
850 Little Canada, MN Fac Rev Hsg Alt Dev Co Proj Ser A......... 6.100 12/01/17 867,246
1,450 Little Canada, MN Fac Rev Hsg Alt Dev Co Proj Ser A......... 6.250 12/01/27 1,479,232
6,000 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser A Rfdg (MBIA
Insd)....................................................... 4.750 01/01/16 6,000,720
--------------
16,277,338
--------------
MISSISSIPPI 0.1%
1,000 Claiborne Cnty, MS Pollutn Ctl Rev Sys Energy Res Inc
Rfdg........................................................ 7.300 05/01/25 1,053,840
--------------
MISSOURI 0.7%
615 Ferguson, MO Tax Increment Rev Crossings At Halls Ferry
Proj........................................................ 7.250 04/01/07 630,178
3,095 Ferguson, MO Tax Increment Rev Crossings At Halls Ferry
Proj........................................................ 7.625 04/01/17 3,198,837
675 Ferguson, MO Tax Increment Rev Crossings At Halls Ferry
Proj........................................................ 7.625 04/01/18 697,646
955 Jefferson Cnty, MO Indl Dev Auth Indl Rev Cedars Hlthcare
Cent Proj Ser A Rfdg........................................ 8.250 12/01/15 1,080,621
1,000 Sikeston, MO Elec Rev Rfdg (MBIA Insd) (b).................. 6.000 06/01/15 1,163,580
1,000 West Plains, MO Indl Dev Auth Hosp Rev Ozark Med Cent....... 5.600 11/15/17 1,024,480
--------------
7,795,342
--------------
NEBRASKA 0.4%
1,900 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg)
(GNMA Collateralized)....................................... 9.862 10/17/23 2,362,500
1,900 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg)
(GNMA Collateralized)....................................... 11.287 09/10/30 2,458,500
--------------
4,821,000
--------------
NEVADA 0.2%
1,945 Reno, NV Redev Agy Tax Alloc Downtown Redev Proj Ser E Rfdg
(Prerefunded @ 09/01/03).................................... 5.600 09/01/09 2,106,999
--------------
NEW HAMPSHIRE 1.3%
2,000 New Hampshire Higher Edl & Hlth Fac Auth Rev
Havenwood-Heritage Heights.................................. 7.350 01/01/18 2,210,720
2,000 New Hampshire Higher Edl & Hlth Fac Auth Rev
Havenwood-Heritage Heights.................................. 7.450 01/01/25 2,222,440
4,000 New Hampshire Higher Edl & Hlth Fac Auth Rev Hosp Catholic
Med Cent Rfdg (b)........................................... 8.250 07/01/13 4,171,440
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 261
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW HAMPSHIRE (CONTINUED)
$ 3,390 New Hampshire Higher Edl & Hlth Fac Auth Rev Vly Regl
Hosp........................................................ 7.350% 04/01/23 $ 3,396,204
2,000 New Hampshire St Business Fin Auth Pollutn Ctl & Solid Waste
Disposal Rev................................................ 7.750 01/01/22 2,245,320
--------------
14,246,124
--------------
NEW JERSEY 2.3%
2,240 Camden Cnty, NJ Impt Auth Lease Rev Dockside Refrig......... 8.400 04/01/24 2,541,885
1,000 New Jersey Econ Dev Auth Econ Dev Rev....................... 6.375 04/01/18 1,004,930
4,000 New Jersey Econ Dev Auth Econ Dev Rev....................... 6.375 04/01/31 4,019,720
1,250 New Jersey Econ Dev Auth Rev First Mortgage Keswick Pines
Rfdg........................................................ 5.700 01/01/18 1,268,550
6,420 New Jersey Econ Dev Auth Rev First Mtg Gross Rev Oakridge
Manor Proj Rfdg............................................. 9.500 11/01/14 6,567,853
1,000 New Jersey Econ Dev Auth Rev First Mtg Winchester Gardens
Ser A....................................................... 8.500 11/01/16 1,135,070
1,500 New Jersey Econ Dev Auth Rev First Mtg Winchester Gardens
Ser A....................................................... 8.625 11/01/25 1,714,245
1,875 New Jersey Econ Dev Auth Rev Kullman Assoc Proj Ser A....... 6.125 06/01/18 1,907,062
3,000 New Jersey Econ Dev Auth Rev Sr Mtg Arbor Glen Proj Ser A... 8.750 05/15/26 3,592,050
1,275 New Jersey St Edl Fac Auth Rev Felician College of Lodi Ser
D........................................................... 7.375 11/01/22 1,397,285
--------------
25,148,650
--------------
NEW MEXICO 0.7%
2,250 Albuquerque, NM Retirement Fac Rev La Vida Liena Proj Ser A
Rfdg........................................................ 8.850 02/01/23 2,480,152
1,000 Bernalillo Cnty, NM Multi-Family Rev Hsg Topke
Commons/Arbors Proj Ser D................................... 7.700 04/01/27 1,043,890
3,600 Farmington, NM Pollutn Ctl Rev Pub Svc Co San Juan Proj D
Rfdg........................................................ 6.375 04/01/22 3,943,368
--------------
7,467,410
--------------
NEW YORK 5.6%
1,195 Clifton Springs, NY Hosp & Clinic Ser B Rfdg & Impt......... 7.000 01/01/05 1,270,452
1,500 Islip, NY Cmnty Dev Agy Cmnty Dev Rev NY Institute of
Technology Rfdg............................................. 7.500 03/01/26 1,680,210
1,000 Monroe Cnty, NY Indl Dev Agy Rev Indl Dev Empire Sports Proj
Ser A....................................................... 6.250 03/01/28 1,011,740
1,500 New York City Indl Dev Agy Rev Visy Paper Inc Proj.......... 7.950 01/01/28 1,707,390
5,000 New York City Ser A (b)..................................... 7.000 08/01/07 5,960,000
3,000 New York City Ser D Rfdg (b)................................ 8.000 02/01/05 3,640,260
10,330 New York City Subser A1 (Embedded Swap)..................... 5.540 11/27/97 10,994,529
4,250 New York City Tran Auth Tran Fac Livingston Plaza Proj Rfdg
(FSA Insd) (b).............................................. 5.400 01/01/18 4,615,372
5,000 New York St Dorm Auth Rev City Univ Ser F (b)............... 5.500 07/01/12 5,262,750
3,000 New York St Energy Resh & Dev Auth Gas Fac Rev (Inverse
Fltg) (MBIA Insd)........................................... 7.000 07/08/26 3,232,500
2,500 New York St Energy Resh & Dev Auth Gas Fac Rev (Inverse
Fltg)....................................................... 8.406 04/01/20 3,278,125
225 New York St Energy Resh & Dev Auth St Svc Contract Rev
Western NY Nuclear Svc Cent Ser B........................... 5.500 04/01/00 230,850
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 1,039,860
750 New York St Energy Resh & Dev Auth St Svc Contract Rev
Western NY Nuclear Svc Cent Ser B........................... 5.250 04/01/02 782,723
1,500 New York St Thruway Auth Hwy & Brdg Tr Fund Ser A
(Prerefunded @ 04/01/04).................................... 6.000 04/01/14 1,682,475
2,000 New York, NY City Indl Dev Agy Field Hotel Assoc Lp Jfk Rfdg
(a)......................................................... 6.000 11/01/28 2,030,640
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 3,406,890
1,500 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl
Tennis Cent Proj (FSA Insd) (b)............................. 6.375 11/15/07 1,717,935
2,000 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl
Tennis Cent Proj (FSA Insd) (b)............................. 6.500 11/15/09 2,304,060
6,775 Triborough Bridge & Tunnel Auth NY Rev Ser 1994A............ 4.750 01/01/19 6,657,725
--------------
62,506,486
--------------
NORTH CAROLINA 0.8%
7,510 Eastern Band Cherokee Indians NC Spl Oblig Rev Carolina
Mirror Co Proj (g).......................................... 10.250 09/01/09 7,510,000
1,000 North Carolina Muni Pwr Agy No 1 Catawba Electric Rev (MBIA
Insd)....................................................... 5.125 01/01/17 1,023,990
--------------
8,533,990
--------------
NORTH DAKOTA 0.2%
1,000 Grand Forks, ND Sr Hsg Rev 4000 Vly Square Proj............. 6.250 12/01/34 1,022,640
1,000 Grand Forks, ND Sr Hsg Rev Spl Term 4000 Vly Square Proj.... 6.375 12/01/34 1,048,680
--------------
2,071,320
--------------
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 262
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
OHIO 4.5%
$ 6,400 Cleveland, OH Arpt Spl Rev Continental Airls Inc Proj....... 5.375% 09/15/27 $ 6,290,944
6,000 Cleveland, OH Arpt Spl Rev Continental Airls Inc Rfdg (a)... 5.700 12/01/19 6,042,360
1,500 Cuyahoga Cnty, OH Multi-Family Rev Hsg Park Lane Apts Proj
Ser A....................................................... 8.250 07/01/28 1,545,000
2,000 East Liverpool, OH Hosp Rev East Liverpool City Hosp Ser A
(Prerefunded @ 10/01/01).................................... 8.125 10/01/11 2,287,940
11,275 Hamilton Cnty, OH Hosp Facs Rev Childrens Hosp Med Cent Ser
G (MBIA Insd)............................................... 5.000 05/15/23 11,299,805
2,000 Hamilton Cnty, OH Sales Tax Hamilton Cnty Football Proj Ser
A (MBIA Insd)............................................... 4.750 12/01/27 1,960,860
2,000 Madison Cnty, OH Hosp Impt Rev Madison Cnty Hosp Proj
Rfdg........................................................ 6.400 08/01/28 2,036,540
5,900 Ohio Hsg Fin Agy Single Family Mtg Rev Ser B (Inverse Fltg)
(GNMA Collateralized) (b)................................... 9.770 03/31/31 6,637,500
2,500 Ohio St Solid Waste Rev CSC Ltd Proj........................ 8.500 08/01/22 2,650,425
3,700 Ohio St Solid Waste Rev Republic Engineered Steels Proj..... 8.250 10/01/14 3,848,962
1,000 Ohio St Solid Waste Rev Republic Engineered Steels Proj..... 9.000 06/01/21 1,087,090
4,490 Reynoldsburg, OH Hlthcare Fac Rev Wesley Ridge Proj (GNMA
Collateralized)............................................. 6.150 10/20/38 4,958,936
--------------
50,646,362
--------------
OKLAHOMA 0.1%
1,000 Oklahoma Cnty, OK Fin Auth Epworth Villa Proj Ser A Rfdg.... 7.000 04/01/25 1,058,700
--------------
OREGON 0.7%
1,245 Clatsop Care Cent Hlth Dist OR Rev Sr Hsg................... 6.000 08/01/14 1,267,696
2,145 Clatsop Care Cent Hlth Dist OR Rev Sr Hsg................... 6.875 08/01/28 2,182,259
4,000 Oregon St Hlth Hsg Edl & Cultural Facs Auth................. 7.250 06/01/28 4,075,080
--------------
7,525,035
--------------
PENNSYLVANIA 7.3%
5,255 Allegheny Cnty, PA Indl Dev Auth Rev Environmental Impt Usx
Proj Rfdg................................................... 6.100 01/15/18 5,645,131
6,000 Beaver Cnty, PA Indl Dev Auth Pollutn Ctl Rev Collateral
Toledo Edison Co Proj Ser A Rfdg (b)........................ 7.750 05/01/20 6,972,480
1,000 Berks Cnty, PA Muni Auth Rev Phoebe Berks Vlg Inc Proj
Rfdg........................................................ 7.700 05/15/22 1,129,910
4,000 Cambria Cnty, PA Indl Dev Auth Pollutn Ctl Rev Bethlehem
Steel Corp Proj Rfdg........................................ 7.500 09/01/15 4,482,120
1,670 Clarion Cnty, PA Hosp Auth Hosp Rev Clarion Hosp Proj
(Prerefunded @ 07/01/01).................................... 8.500 07/01/13 1,885,346
2,000 Cumberland Cnty, PA Auth Rev First Mtg Carlisle Hosp & Hlth
Rfdg........................................................ 6.800 11/15/14 2,202,840
3,000 Dauphin Cnty, PA Genl Auth Rev Office & Pkg Riverfront
Office...................................................... 6.000 01/01/25 3,040,560
5,000 Dauphin Cnty, PA Genl Auth Rev Hotel & Conf Cent Hyatt
Regency..................................................... 6.200 01/01/29 5,047,500
1,500 Delaware Cnty, PA Auth First Mtg Rev Riddle Vlg Proj........ 7.000 06/01/21 1,598,070
2,890 Erie, PA Sch Dist Cap Apprec Rfdg (FSA Insd)................ * 09/01/21 948,007
2,405 Harrisburg, PA Cap Apprec Rfdg Notes Ser F (AMBAC Insd)..... * 03/15/16 1,034,703
3,500 Harrisburg, PA Auth Wtr Rev (Inverse Fltg) (FGIC Insd)...... 7.520 01/08/98 4,038,125
2,000 Lehigh Cnty, PA Genl Purp Auth Rev Kidspeace Oblig Group.... 6.000 11/01/23 2,022,160
1,000 Lehigh Cnty, PA Indl Dev Auth Hlth Fac Rev Lifepath Inc
Proj........................................................ 6.300 06/01/28 987,980
2,000 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp Proj
(Crossover Rfdg @ 10/01/00)................................. 8.875 10/01/20 2,227,960
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 9,293,454
500 Montgomery Cnty, PA Indl Dev Auth Rev First Mtg The
Meadowood Corp Rfdg......................................... 7.000 12/01/10 542,750
2,500 Montgomery Cnty, PA Indl Dev Auth Rev First Mtg The
Meadowood Corp Rfdg......................................... 7.250 12/01/15 2,734,575
6,000 Montgomery Cnty, PA Indl Dev Auth Rev First Mtg The
Meadowood Corp Rfdg......................................... 7.400 12/01/20 6,567,000
1,000 Montgomery Cnty, PA Indl Dev Auth Rev Wordsworth Academy.... 7.750 09/01/24 1,125,320
3,000 Pennsylvania Econ Dev Fin Auth Res Recovery Rev Colver Proj
Ser D (b)................................................... 7.050 12/01/10 3,361,890
5,000 Philadelphia, PA Auth For Indl Dev Rev Long-Term Care
Maplewood................................................... 8.000 01/01/24 5,590,400
5,170 Pittsburgh, PA Wtr & Swr Auth Wtr & Swr Sys Rev (FSA
Insd)....................................................... 5.000 09/01/19 5,218,133
1,500 Scranton Lackawanna, PA Hlth & Welfare Auth Rev Rfdg........ 7.250 01/15/17 1,652,220
2,000 Scranton Lackawanna, PA Hlth & Welfare Auth Rev Rfdg........ 7.350 01/15/22 2,215,940
--------------
81,564,574
--------------
RHODE ISLAND 0.2%
1,975 Providence, RI Redev Agy Ctfs Partn Ser A................... 8.000 09/01/24 2,191,006
--------------
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 263
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SOUTH CAROLINA 1.2%
$ 115 Charleston Cnty, SC Ctfs Partn Ser B (MBIA Insd)............ 7.000% 06/01/19 $ 132,304
2,385 Charleston Cnty, SC Ctfs Partn Ser B (Prerefunded @
06/01/04) (MBIA Insd) (b)................................... 7.000 06/01/19 2,804,641
5,000 Florence Cnty, SC Hosp Rev Mcleod Regl Med Cent Proj Ser A
(MBIA Insd)................................................. 4.750 11/01/27 4,816,650
1,000 Oconee Cnty, SC Indl Rev Bond Johnson Ctl Inc Ser 84 (Var
Rate Cpn)................................................... 6.335 06/15/04 1,000,000
4,000 South Carolina St Hsg Fin & Dev Auth Multi-Family Rev....... 6.750 05/01/28 4,109,720
--------------
12,863,315
--------------
SOUTH DAKOTA 0.2%
805 Keystone, SD Econ Dev Rev Wtr Quality Mgmt Corp Ser A....... 5.500 12/15/08 824,191
1,810 Keystone, SD Econ Dev Rev Wtr Quality Mgmt Corp Ser A....... 6.000 12/15/18 1,856,517
--------------
2,680,708
--------------
TENNESSEE 3.6%
2,750 Chattanooga, TN Hlth Edl & Hsg Fac Brd Rev.................. 5.000 12/01/18 2,767,958
10,000 Chattanooga, TN Hlth Edl & Hsg Fac Brd Rev.................. 5.000 12/01/28 9,991,600
3,000 SCA Tax Exempt Trust Multi-Family Mtg Memphis Hlth Edl Rev
Bond Receipt Ser A6 (FSA Insd).............................. 7.350 01/01/30 3,373,380
4,485 Shelby Cnty, TN Hlth Edl & Hsg Fac Brd Rev ICF/MR Open Arms
Dev Cent Ser A (Prerefunded @ 08/01/99)..................... 9.750 08/01/19 4,848,285
4,545 Shelby Cnty, TN Hlth Edl & Hsg Fac Brd Rev ICF/MR Open Arms
Dev Cent Ser C (Prerefunded @ 08/01/99)..................... 9.750 08/01/19 4,913,145
2,000 Springfield, TN Hlth & Edl Fac Brd Hosp Rev Jesse Holman
Jones Hosp Proj (Prerefunded @ 04/01/06).................... 8.250 04/01/12 2,577,640
6,185 Sullivan Cnty, TN Hlth Edl & Hsg Facs Brd Rev............... 8.410 11/01/19 7,210,287
3,240 Trenton, TN Hlth & Edl Facs Brd Rev Rha/Trenton Mr Inc Proj
Ser A....................................................... 10.000 11/01/19 3,821,612
1,160 Trenton, TN Hlth & Edl Facs Brd Rev Rha/Trenton Mr Inc Proj
Ser B (d)................................................... 10.000 11/01/20 150,800
--------------
39,654,707
--------------
TEXAS 6.3%
1,500 Abilene, TX Hlth Facs Dev Sears Methodist Retirement Ser
A........................................................... 5.875 11/15/18 1,506,990
2,000 Amarillo, TX Hlth Fac Corp Hosp Rev High Plains Baptist Hosp
(Inverse Fltg) (FSA Insd) (b)............................... 8.987 01/01/22 2,337,500
2,000 Bell Cnty, TX Indl Dev Corp Solid Waste Disposal Rev........ 7.600 12/01/17 2,045,140
1,000 Bexar Cnty, TX Hlth Fac Dev Corp Rev Rfdg Baptist Hlth Sys
Ser A (MBIA Insd)........................................... 6.000 11/15/12 1,152,650
2,370 Bexar Cnty, TX Hlth Fac Dev Corp Rev Rfdg Baptist Hlth Sys
Ser A (MBIA Insd)........................................... 6.000 11/15/13 2,738,440
5,000 Brazos River Auth TX Rev Houston Inds Inc Proj D Rfdg....... 4.900 10/01/15 5,136,900
665 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... * 08/01/00 580,651
1,165 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... * 08/01/01 943,510
335 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... * 08/01/02 251,870
1,825 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... * 08/01/11 670,487
775 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... 8.750 08/01/11 799,753
2,670 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg.................... 8.750 08/01/12 2,755,280
1,635 Garland, TX Independent Sch Dist............................ 4.000 02/15/15 1,500,832
2,500 Garland, TX Indl Dev Auth Rev Bond Ashland Oil Proj Ser 84
Rfdg (Var Rate Cpn)......................................... 5.3625 04/01/04 2,502,550
2,500 Houston, TX Arpt Sys Rev Spl Fac Continental Airl Term Impt
Ser B....................................................... 6.125 07/15/27 2,628,875
1,880 Laredo, TX Ctfs Oblig Ser B (MBIA Insd)..................... 4.500 02/15/17 1,817,133
2,655 Leander, TX Indpt Sch Dist Cap Apprec Rfdg.................. * 08/15/18 934,746
4,820 Leander, TX Indpt Sch Dist Cap Apprec Rfdg.................. * 08/15/21 1,434,769
3,990 Leander, TX Indpt Sch Dist Rfdg............................. 4.750 08/15/12 4,018,289
5,000 Lower Neches Vly Auth TX Indl Dev Corp Rev.................. 5.550 03/01/33 5,253,100
2,000 Matagorda Cnty, TX Nav Dist No 1 Rev (MBIA Insd)............ 5.150 11/01/29 2,029,600
1,070 Mc Allen, TX Dev Corp Inc Sales Tax Rev (FSA Insd).......... 5.250 02/15/18 1,081,374
1,000 Nacogdoches, TX Indl Dev Auth Inc Pollutn Ctl Rev........... 5.300 12/01/11 1,060,450
1,180 Pottsboro, TX Indpt Sch Dist Cap Apprec Rfdg................ * 08/15/17 444,211
1,175 Pottsboro, TX Indpt Sch Dist Cap Apprec Rfdg................ * 08/15/20 372,264
</TABLE>
See Notes to Financial Statements
F-9
<PAGE> 264
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TEXAS (CONTINUED)
$ 1,175 Pottsboro, TX Indpt Sch Dist Cap Apprec Rfdg................ * 08/15/23 $ 312,985
6,000 Rockwall, TX Indpt Sch Dist Cap Apprec Rfdg................. * 08/15/18 2,145,120
2,533 Texas Genl Svcs Comm Partn Int Lease Purch Ctfs............. 7.250% 08/15/11 2,593,023
8,000 Texas St Dept Hsg & Cmnty Affairs Home Mtg Rev (GNMA
Collateralized)............................................. 6.900 07/02/24 9,191,600
2,000 Texas St Tpk Auth Dallas North Thruway Rev Addison Arpt Toll
Tunnel Proj (FGIC Insd)..................................... 6.750 01/01/15 2,344,240
2,000 Texas St Tpk Auth Dallas North Thruway Rev Addison Arpt Toll
Tunnel Proj (FGIC Insd) (b)................................. 6.600 01/01/23 2,327,740
5,000 West Side Calhoun Cnty, TX Navig Dist Solid Waste Disp Union
Carbide Chem & Plastics (b)................................. 8.200 03/15/21 5,511,150
--------------
70,423,222
--------------
UTAH 1.7%
1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 7.800 09/01/15 1,070,930
1,165 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 8.000 09/01/20 1,262,814
1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 7.800 09/01/25 1,069,700
4,000 Intermountain Pwr Agy UT Pwr Supply Rev Ser B Rfdg (MBIA
Insd)....................................................... 5.750 07/01/19 4,401,600
2,500 Intermountain Pwr Agy UT Rev Ser A Rfdg (a)................. 5.000 07/01/19 2,472,225
250 Saint George, UT Indl Dev Rev Kmart Corp Ser 1984A.......... 10.750 10/15/08 256,250
3,270 Salt Lake Cnty, UT Hsg Auth Multi-Family Hsg Rev (FHA
Gtd)........................................................ 6.375 11/01/33 3,525,812
2,500 Tooele Cnty, UT Pollutn Ctl Rev Rfdg Laidlaw Environmental
Ser A....................................................... 7.550 07/01/27 2,802,550
1,395 Utah St Hsg Fin Agy Single Family Mtg Mezz A1 (AMBAC Insd)
(b)......................................................... 6.100 07/01/13 1,495,691
--------------
18,357,572
--------------
VIRGINIA 1.5%
5,000 Alexandria, VA Redev & Hsg Auth 3001 Park Cent Apts Ser A
Rfdg........................................................ 6.375 04/01/34 5,049,500
5,000 Chesapeake Bay Bridge & Tunnel VA Genl Resolution Rfdg (MBIA
Insd) (a)................................................... 5.500 07/01/25 5,584,600
1,000 Dulles Town Cent Cmnty Dev Auth Dulles Town Cent Proj....... 6.250 03/01/26 1,030,400
2,650 Fairfax Cnty, VA Park Auth Park Fac Rev..................... 6.625 07/15/20 2,883,120
1,500 Pittsylvania Cnty, VA Indl Dev Auth Rev Exempt Fac Ser A.... 7.450 01/01/09 1,670,970
--------------
16,218,590
--------------
WASHINGTON 0.8%
3,500 Spokane Cnty, WA Indl Dev Corp Solid Waste Disp Rev......... 7.600 03/01/27 3,910,725
2,000 Tacoma, WA Hsg Auth Rev Hsg Wedgewood Homes Proj (a)........ 6.000 04/01/28 1,982,500
525 Washington St Hlth Care Facs Auth Rev Multicare Hlth Sys
(MBIA Insd)................................................. 5.000 08/15/18 526,601
5,500 Washington St Pub Pwr Supply Comp Interest Ser C Rfdg (MBIA
Insd)....................................................... * 07/01/17 2,174,535
--------------
8,594,361
--------------
WISCONSIN 1.9%
800 Baldwin, WI Hosp Rev Mtg Ser A.............................. 6.125 12/01/18 817,640
2,590 Baldwin, WI Hosp Rev Mtg Ser A.............................. 6.375 12/01/28 2,646,488
1,000 Oconto Falls, WI Cmnty Dev Oconto Falls Tissue Inc Proj..... 7.750 12/01/22 1,075,230
4,455 Southeast WI Prof Baseball Prk Ser A Rfdg................... 5.500 12/15/21 4,931,462
4,105 Wisconsin St Hlth & Edl Fac Auth Rev Chippewa Vly Hosp Ser F
Rfdg (b).................................................... 9.500 11/15/12 4,810,567
2,070 Wisconsin St Hlth & Edl Fac Auth Rev Eau Claire Manor....... 9.625 06/01/13 2,097,614
1,500 Wisconsin St Hlth & Edl Facs Auth Rev Franciscan Sisters
Christian Ser A............................................. 5.500 02/15/28 1,537,530
3,000 Wisconsin St Hlth & Edl Milwaukee Catholic Home Proj........ 7.500 07/01/26 3,340,020
--------------
21,256,551
--------------
GUAM 0.3%
3,500 Guam Arpt Auth Rev Ser B.................................... 6.700 10/01/23 3,866,800
--------------
</TABLE>
See Notes to Financial Statements
F-10
<PAGE> 265
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PUERTO RICO 1.0%
$ 1,647 Centro de Recaudaciones de Ingresos Muni Ctfs Partn PR...... 6.850% 10/17/03 $ 1,723,588
10,000 Puerto Rico Comwlth Hwy & Tran Auth Tran Rev Ser A.......... 4.750 07/01/38 9,815,100
--------------
11,538,688
--------------
TOTAL LONG-TERM INVESTMENTS 100.1%
(Cost $1,045,752,590)................................................................... 1,114,943,268
SHORT-TERM INVESTMENTS 0.2%
(Cost $3,178,570)....................................................................... 2,750,000
--------------
TOTAL INVESTMENTS 100.3%
(Cost $1,048,931,160)................................................................... 1,117,693,268
LIABILITIES IN EXCESS OF OTHER ASSETS (0.3%)............................................. (3,486,337)
--------------
NET ASSETS 100.0%........................................................................ $1,114,206,931
------------
</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.
(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.
(h) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
See Notes to Financial Statements
F-11
<PAGE> 266
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $1,048,931,160)..................... $1,117,693,268
Receivables:
Interest.................................................. 20,721,508
Investments Sold.......................................... 14,850,004
Fund Shares Sold.......................................... 4,337,899
Other....................................................... 38,608
--------------
Total Assets.......................................... 1,157,641,287
--------------
LIABILITIES:
Payables:
Investments Purchased..................................... 20,696,273
Bank Borrowings........................................... 17,046,644
Income Distributions...................................... 2,694,815
Fund Shares Repurchased................................... 1,048,265
Distributor and Affiliates................................ 697,150
Investment Advisory Fee................................... 426,230
Variation Margin on Futures............................... 118,750
Accrued Expenses............................................ 345,858
Options at Market Value (Net premiums received of $9,550)... 203,125
Trustees' Deferred Compensation and Retirement Plans........ 157,246
--------------
Total Liabilities..................................... 43,434,356
--------------
NET ASSETS.................................................. $1,114,206,931
==============
NET ASSETS CONSIST OF:
Capital..................................................... $1,150,498,956
Net Unrealized Appreciation................................. 68,326,173
Accumulated Distributions in Excess of Net Investment
Income.................................................... (9,019,837)
Accumulated Net Realized Loss............................... (95,598,361)
--------------
NET ASSETS.................................................. $1,114,206,931
==============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $771,367,472 and 51,164,482 shares of
beneficial interest issued and outstanding)............ $ 15.08
Maximum sales charge (4.75%* of offering price)......... .75
--------------
Maximum offering price to public........................ $ 15.83
==============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $279,631,431 and 18,554,723 shares of
beneficial interest issued and outstanding)............ $ 15.07
==============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $63,208,028 and 4,194,703 shares of
beneficial interest issued and outstanding)............ $ 15.07
==============
*On sales of $100,000 or more, the sales charge will be
reduced.
</TABLE>
See Notes to Financial Statements
F-12
<PAGE> 267
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998
and the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest.................................................... $51,036,492 $63,584,303
----------- -----------
EXPENSES:
Investment Advisory Fee..................................... 3,672,538 4,318,581
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $1,313,887, $1,907,516 and $381,087,
respectively, for the nine months ended 9/30/98 and
$1,563,986, $1,983,980 and $263,926, respectively, for the
year ended 12/31/97)...................................... 3,602,490 3,811,892
Shareholder Services........................................ 570,794 970,151
Legal....................................................... 178,222 350,742
Custody..................................................... 101,721 84,770
Trustees' Fees and Expenses................................. 28,855 50,600
Other....................................................... 594,746 661,264
----------- -----------
Total Operating Expenses................................ 8,749,366 10,248,000
Interest Expense........................................ 132,020 -0-
----------- -----------
NET INVESTMENT INCOME....................................... $42,155,106 $53,336,303
=========== ===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments (Including reorganization and restructuring
costs of $46,545 and $275,074, respectively)............ $ 1,335,890 $ 6,836,534
Options................................................... (3,171) 98,094
Futures................................................... (2,193,972) (6,543,274)
----------- -----------
Net Realized Gain/Loss...................................... (861,253) 391,354
----------- -----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 50,697,747 26,675,438
----------- -----------
End of the Period:
Investments............................................. 68,762,108 50,876,144
Options................................................. (193,575) -0-
Futures................................................. (242,360) (178,397)
----------- -----------
68,326,173 50,697,747
----------- -----------
Net Unrealized Appreciation During the Period............... 17,628,426 24,022,309
----------- -----------
NET REALIZED AND UNREALIZED GAIN............................ $16,767,173 $24,413,663
=========== ===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $58,922,279 $77,749,966
=========== ===========
</TABLE>
See Notes to Financial Statements
F-13
<PAGE> 268
STATEMENT OF CHANGES IN NET ASSETS
For the Nine Months Ended September 30, 1998 and
the Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Year Ended
September 30, 1998 December 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income....................................... $ 42,155,106 $53,336,303 $53,036,530
Net Realized Gain/Loss...................................... (861,253) 391,354 (15,209,862)
Net Unrealized Appreciation/Depreciation During the
Period.................................................... 17,628,426 24,022,309 (12,362,837)
-------------- ------------ ------------
Change in Net Assets from Operations........................ 58,922,279 77,749,966 25,463,831
-------------- ------------ ------------
Distributions from Net Investment Income.................... (42,128,701) (53,336,303) (53,036,530)
Distributions in Excess of Net Investment Income............ -0- (664,960) (228,957)
-------------- ------------ ------------
Total Distributions from and in Excess of Net Investment
Income*................................................. (42,128,701) (54,001,263) (53,265,487)
-------------- ------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES......... 16,793,578 23,748,703 (27,801,656)
-------------- ------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold................................... 205,313,493 198,765,477 164,096,198
Net Asset Value of Shares Issued Through Dividend
Reinvestment.............................................. 18,455,824 23,168,036 22,996,285
Cost of Shares Repurchased.................................. (100,827,970) (135,758,091) (108,010,178)
-------------- ------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.......... 122,941,347 86,175,422 79,082,305
-------------- ------------ ------------
TOTAL INCREASE IN NET ASSETS................................ 139,734,925 109,924,125 51,280,649
NET ASSETS:
Beginning of the Period..................................... 974,472,006 864,547,881 813,267,232
-------------- ------------ ------------
End of the Period (Including accumulated distributions in
excess of net investment income of $9,019,837, $9,046,242
and $8,821,755, respectively)............................. $1,114,206,931 $974,472,006 $864,547,881
============== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Year Ended
*Distributions by Class September 30, 1998 December 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Distributions from and in Excess of Net Investment Income:
Class A Shares............................................ $(30,895,725) $ (41,926,549) $(43,633,838)
Class B Shares............................................ (9,369,462) (10,667,625) (8,865,546)
Class C Shares............................................ (1,863,514) (1,407,089) (766,103)
------------ ------------ ------------
$(42,128,701) $(54,001,263) $(53,265,487)
============ ============ ============
</TABLE>
See Notes to Financial Statements
F-14
<PAGE> 269
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Year Ended December 31,
Ended -----------------------------------------------
Class A Shares September 30, 1998 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period............... $14.845 $14.474 $14.984 $13.848 $15.629 $14.529
------- ------- ------- ------- ------- -------
Net Investment Income................................ .643 .895 .963 1.024 .956 1.052
Net Realized and Unrealized Gain/Loss................ .217 .376 (.513) 1.072 (1.717) 1.158
------- ------- ------- ------- ------- -------
Total from Investment Operations....................... .860 1.271 .450 2.096 (.761) 2.210
Less Distributions from and in Excess of Net Investment
Income............................................... .629 .900 .960 .960 1.020 1.110
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period..................... $15.076 $14.845 $14.474 $14.984 $13.848 $15.629
======= ======= ======= ======= ======= =======
Total Return (a)....................................... 6.00%* 9.05% 3.21% 15.52% (4.93%) 15.82%
Net Assets at End of the Period (In millions).......... $771.4 $706.3 $ 671.9 $665.8 $603.0 $636.2
Ratio of Expenses to Average Net Assets (b)............ .92% .94% .99% .95% .87% 1.03%
Ratio of Net Investment Income to Average Net Assets
(b).................................................. 5.66% 6.09% 6.60% 7.05% 6.48% 6.95%
Portfolio Turnover..................................... 66%* 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 and 1996, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen's
reimbursement of certain expenses was less than 0.01%.
See Notes to Financial Statements
F-15
<PAGE> 270
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
Nine Months Year Ended December 31, (Commencement
Ended ------------------------------------- of Distributions) to
Class B Shares September 30, 1998 1997 1996 1995 1994 December 31, 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.... $14.844 $14.474 $14.983 $13.850 $15.621 $14.670
------- ------- ------- ------- ------- -------
Net Investment Income..................... .545 .774 .843 .908 .841 .656
Net Realized and Unrealized Gain/Loss..... .229 .384 (.506) 1.071 (1.718) .945
------- ------- ------- ------- ------- -------
Total from Investment Operations............ .774 1.158 .337 1.979 (.877) 1.601
Less Distributions from and in Excess of Net
Investment Income......................... .547 .788 .846 .846 .894 .650
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period.......... $15.071 $14.844 $14.474 $14.983 $13.850 $15.621
======= ======= ======= ======= ======= =======
Total Return (a)............................ 5.35%* 8.23% 2.40% 14.62% (5.69%) 11.12%*
Net Assets at End of the Period (In
millions)................................. $ 279.6 $ 229.6 $ 173.8 $ 137.9 $ 112.4 $ 56.6
Ratio of Expenses to Average Net Assets
(b)....................................... 1.68% 1.71% 1.75% 1.70% 1.64% 1.74%
Ratio of Net Investment Income to Average
Net Assets (b)............................ 4.90% 5.30% 5.84% 6.25% 5.70% 5.95%
Portfolio Turnover.......................... 66%* 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 and 1996, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen's
reimbursement of certain expenses was less than 0.01%.
See Notes to Financial Statements
F-16
<PAGE> 271
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
Nine Months Year Ended December 31, (Commencement
Ended ------------------------------------- of Distributions) to
Class C Shares September 30, 1998 1997 1996 1995 1994 December 31, 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.... $14.842 $14.474 $14.987 $13.846 $15.610 $15.030
------- ------- ------- ------- ------- -------
Net Investment Income..................... .549 .778 .851 .910 .824 .369
Net Realized and Unrealized Gain/Loss..... .225 .378 (.518) 1.077 (1.694) .580
------- ------- ------- ------- ------- -------
Total from Investment Operations............ .774 1.156 .333 1.987 (.870) .949
Less Distributions from and in Excess of Net
Investment Income......................... .547 .788 .846 .846 .894 .369
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period.......... $15.069 $14.842 $14.474 $14.987 $13.846 $15.610
======= ======= ======= ======= ======= =======
Total Return (a)............................ 5.35%* 8.23% 2.33% 14.70% (5.62%) 6.37%*
Net Assets at End of the Period (In
millions)................................. $ 63.2 $ 38.6 $ 18.8 $ 9.5 $ 7.6 $ 5.2
Ratio of Expenses to Average Net
Assets (b)................................ 1.68% 1.71% 1.75% 1.69% 1.64% 1.82%
Ratio of Net Investment Income to Average
Net Assets (b)............................ 4.90% 5.24% 5.84% 6.19% 5.71% 5.21%
Portfolio Turnover.......................... 66%* 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 and 1996, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen's
reimbursement of certain expenses was less than 0.01%.
See Notes to Financial Statements
F-17
<PAGE> 272
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Tax Free High Income Fund (the "Fund") is organized as a series of
the Van Kampen 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. In July, 1998, the Fund's Board of
Trustees approved a change in the Fund's fiscal year end from December 31 to
September 30. As a result, this financial report reflects the nine month period
commencing on January 1, 1998, and ending on September 30, 1998.
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 September 30, 1998, the Fund had an accumulated
capital loss carryforward for tax purposes of $93,730,196 which expires between
September 30, 1999 and September 30, 2006. Of this amount, $1,295,852 will
expire on September 30, 1999. Net realized gains or losses may differ for
financial reporting and tax
F-18
<PAGE> 273
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
purposes primarily as a result of the capitalization of reorganization and
restructuring costs for tax purposes, and gains and losses recognized for tax
purposes on open options and futures positions at September 30, 1998.
At September 30, 1998, for federal income tax purposes, cost of long- and
short-term investments is $1,050,605,522, the aggregate gross unrealized
appreciation is $88,005,962 and the aggregate gross unrealized depreciation is
$20,918,216, resulting in net unrealized appreciation on long- and short-term
investments of $67,087,746.
E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually.
Due to inherent differences in the recognition of interest income under
generally accepted accounting principles and federal income tax purposes, for
those securities which the Fund has placed on non-accrual status, the amount of
distributable net investment income may differ between book and federal income
tax purposes for a particular period. These differences are temporary in nature,
but may result in book basis distributions in excess of net investment income
for certain periods. At December 31, 1997, permanent book and tax differences
totaling ($440,473) were reclassified from accumulated distributions in excess
of net investment income to capital.
For the nine months ended September 30, 1998, 99.6% of the income
distributions made by the Fund were exempt from federal income taxes. In
January, 1999, the Fund will provide tax information to shareholders for the
1998 calendar year.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
Investment Advisory Corp. (the "Adviser") will provide investment advice and
facilities to the Fund for an annual fee payable monthly as follows:
<TABLE>
<CAPTION>
% PER
AVERAGE NET ASSETS ANNUM
- ------------------------------------------------------------------------
<S> <C>
First $500 million.......................................... .50 of 1%
Over $500 million........................................... .45 of 1%
</TABLE>
For the nine months ended September 30, 1998, and the year ended December
31, 1997, the Fund recognized expenses of approximately $22,900 and $35,100,
respectively, 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 nine months ended September 30, 1998 and the year ended December
31, 1997, the Fund recognized expenses of approximately $222,800 and $188,700,
respectively, representing Van Kampen Funds Inc.'s or its affiliates'
(collectively "Van Kampen") cost of providing accounting and legal services to
the Fund.
Van Kampen Investor Services Inc. ("VKIS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the nine months ended
September 30, 1998 and the year ended December 31, 1997, the Fund recognized
expenses of approximately $415,300 and $644,000, respectively. Beginning in
1998, the transfer agency fees are determined through negotiations with the
Fund's Board of Trustees and are based on competitive market benchmarks.
Certain officers and trustees of the Fund are also officers and directors
of Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their
F-19
<PAGE> 274
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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 $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 September 30, 1998, capital aggregated $814,716,102, $273,821,581 and
$61,961,273 for Classes A, B and C, respectively. For the nine months ended
September 30, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................................. 7,418,156 $ 110,301,687
Class B.................................................. 4,566,294 67,862,636
Class C.................................................. 1,827,970 27,149,170
---------- -------------
Total Sales................................................ 13,812,420 $ 205,313,493
========== =============
Dividend Reinvestment:
Class A.................................................. 923,639 $ 13,739,535
Class B.................................................. 245,550 3,652,560
Class C.................................................. 71,508 1,063,729
---------- -------------
Total Dividend Reinvestment................................ 1,240,697 $ 18,455,824
========== =============
Repurchases:
Class A.................................................. (4,753,839) $ (70,664,021)
Class B.................................................. (1,723,537) (25,610,245)
Class C.................................................. (306,853) (4,553,704)
---------- -------------
Total Repurchases.......................................... (6,784,229) $(100,827,970)
========== =============
</TABLE>
F-20
<PAGE> 275
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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>
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). Class B shares will
automatically convert to Class A shares after the eighth year
F-21
<PAGE> 276
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
following purchase. 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 nine months ended September 30, 1998 and the year ended December
31, 1997, Van Kampen, as distributor for the Fund, received commissions on sales
of the Fund's Class A shares of approximately $294,400 and $315,200,
respectively, and CDSC on redeemed shares of approximately $470,000 and
$520,700, respectively. Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
For the nine months ended September 30, 1998, the cost of purchases and proceeds
from sales of investments, excluding short-term investments, were $823,883,011
and $687,842,578, respectively. For the year ended December 31, 1997, 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.
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.
F-22
<PAGE> 277
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
Transactions in options for the nine months ended September 30, 1998, and
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-
Options Written and Purchased (Net)......................... 11,650 (157,409)
Options Terminated in Closing Transactions (Net)............ (5,050) (274,812)
Options Expired (Net)....................................... (5,850) 441,771
------ -----------
Outstanding at September 30, 1998........................... 750 $ 9,550
====== ===========
</TABLE>
The description and market values of the option contracts outstanding as
of September 30, 1998 are as follows:
<TABLE>
<CAPTION>
MARKET
EXP. MONTH/ VALUE
DESCRIPTION CONTRACTS STRIKE PRICE OF OPTION
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. TREASURY BOND FUTURES
November 1998- Written Call........................ 500 Nov/132 $(492,188)
November 1998- Purchased Call...................... 250 Nov/131 289,063
--- ---------
750 $(203,125)
=== =========
</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). The potential risk of loss associated
with a futures contract could be in excess of the variation margin reflected on
the Statement of Assets and Liabilities.
F-23
<PAGE> 278
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
Transactions in futures contracts for the nine months ended September 30,
1998, and 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
Futures Opened.............................................. 8,900
Futures Closed.............................................. (8,748)
-------
Outstanding at September 30, 1998........................... 600
=======
</TABLE>
The futures contracts outstanding as of September 30, 1998, 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 Dec. 1998
(Current notional value $131,469 per contract)............ 200 $ 392,130
Short Contracts -- Municipal Bond Futures Dec. 1998 (Current
notional value $128,375 per contract)..................... 400 ( 634,490)
--- ---------
600 ($242,360)
=== =========
</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 nine months ended September 30, 1998 and the year ended
December 31, 1997 are payments retained by Van Kampen of approximately
$1,677,200 and $1,751,600, respectively.
F-24
<PAGE> 279
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
7. BORROWINGS
In accordance with its investment policies, the Fund may borrow money from banks
in an amount up to 5% of its net assets. The Fund, in combination with two other
funds in the fund complex, has entered into a $100 million revolving credit
agreement which expires September 27, 1999. The maximum amount available to any
single fund is $75 million. Interest is charged under the agreement at a rate of
.45% above the federal funds rate. The interest rate in effect at September 30,
1998 was 6.20%. An annual facility fee of .06% is charged on the unused portion
of the credit facility.
The average daily balance of bank borrowings for the nine months ended
September 30, 1998 was approximately $3,003,400 with an average interest rate of
5.98%. At September 30, 1998, borrowings under this agreement represented 1.5%
of the Fund's net assets.
8. YEAR 2000 COMPLIANCE (UNAUDITED)
Van Kampen utilizes a number of computer programs across its entire operation
relying on both internal software systems as well as external software systems
provided by third parties. In 1996 Van Kampen initiated a CountDown 2000 Project
to review both the internal systems and external vendor connections. The goal of
this project is to position its business to continue unaffected as a result of
the century change. At this time, there can be no assurance that the steps taken
will be sufficient to avoid any adverse impact to the Trust, but Van Kampen does
not anticipate that the move to Year 2000 will have a material impact on its
ability to continue to provide the Trust with service at current levels. In
addition, it is possible that the securities markets in which the Trust invests
may be detrimentally affected by computer failures throughout the financial
services industry beginning January 1, 2000. Improperly functioning trading
systems may result in settlement problems and liquidity issues.
F-25
<PAGE> 280
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN INSURED TAX FREE INCOME FUND
Van Kampen Insured Tax Free Income Fund (the "Fund") is a mutual fund with
an investment objective to provide investors with a high level of current income
exempt from federal income taxes, with liquidity and safety of principal,
primarily through investment in a diversified portfolio of insured municipal
securities.
The Fund is organized as a diversified series of Van Kampen Tax Free Trust,
an open-end, management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the
Fund's Prospectus (the "Prospectus") dated as of the same date as this Statement
of Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-2833
for the hearing impaired).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... B-2
Investment Objective and Policies........................... B-3
Investment Restrictions..................................... B-16
Description of Securities Ratings........................... B-17
Description of Insurance Company Claims Paying Ability
Ratings................................................... B-22
Trustees and Officers....................................... B-23
Investment Advisory and Other Services...................... B-32
Distribution and Service.................................... B-33
Transfer Agent.............................................. B-36
Portfolio Transactions and Brokerage Allocation............. B-36
Shareholder Services........................................ B-38
Redemption of Shares........................................ B-40
Contingent Deferred Sales Charge-Class A.................... B-40
Waiver of Class B and Class C Contingent Deferred Sales
Charge.................................................... B-40
Taxation.................................................... B-42
Fund Performance............................................ B-45
Other Information........................................... B-48
Report of Independent Accountants........................... F- 1
Financial Statements........................................ F- 2
Notes to Financial Statements............................... F-17
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY 28, 1999.
B-1
<PAGE> 281
GENERAL INFORMATION
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated May 10, 1995. The Declaration of Trust permits the Trustees to
create one or more separate investment portfolios and issue a series of shares
for each portfolio. The Trustees can further sub-divide each series of shares
into one or more classes of shares for each portfolio.
The Trust was originally organized in 1985 under the name Van Kampen
Merritt Tax Free Trust as a Massachusetts business trust (the "Massachusetts
Trust"). The Massachusetts Trust was reorganized into the Trust under the name
Van Kampen American Capital Tax Free Trust on July 31, 1995. The Trust was
created for the purpose of facilitating the Massachusetts Trust reorganization
into a Delaware business trust. On July 14, 1998, the Trust adopted its current
name.
The Fund was originally organized as a Maryland corporation under the name
Van Kampen Merritt Insured Tax Free Fund Inc. The Fund was subsequently
reorganized into a sub-trust of the Massachusetts Trust under the name Van
Kampen Merritt Insured Tax Free Income Fund as of February 22, 1998. The Fund
was reorganized as a series of the Trust under the name Van Kampen American
Capital Insured Tax Free Fund on July 31, 1995. On July 14, 1998, the Fund
adopted its current name.
Van Kampen Investment Advisory Corp. (the "Adviser" or "Advisory Corp"),
Van Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley Dean Witter & Co. The principal office of the Trust, the Fund,
the Adviser, the Distributor and Van Kampen Investments is located at 1 Parkview
Plaza, PO Box 5555, Oakbrook Terrace, Illinois 60181-5555.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and securities lending.
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest, par value $0.01 per share, which can be
divided into series such as the Fund and further subdivided into classes of each
series. Each share represents an equal proportionate interest in the assets of
the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.
The Fund currently offers three classes of shares, designated Class A
Shares, Class B Shares and Class C Shares. Other classes may be established from
time to time in accordance with provisions of the Declaration of Trust. Each
class of shares of the Fund generally are identical in all respects except that
each class bears certain distribution expenses and has exclusive voting rights
with respect to its distribution fee.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution fee for a class of a series
would be voted upon by shareholders of only the class of such series involved.
Except as otherwise described in the Prospectus or herein, shares do not have
cumulative voting rights, preemptive rights or any conversion, subscription or
exchange rights.
B-2
<PAGE> 282
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
In the event of liquidation, each of the shares of the Fund is entitled to
its portion of all of the Fund's net assets after all debts and expenses of the
Fund have been paid. Since Class B Shares and Class C Shares have higher
distribution fees and transfer agency costs, the liquidation proceeds to holders
of Class B Shares and Class C Shares are likely to be lower than to holders of
Class A Shares.
The Trustees may amend the Declaration of Trust (including with respect to
any series) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any series without approval by a majority of the shares of each affected series
present at a meeting of shareholders (or such higher vote as may be required by
the 1940 Act or other applicable law) and except that the Trustees cannot amend
the Declaration of Trust to impose any liability on shareholders, make any
assessment on shares or impose liabilities on the Trustees without approval from
each affected shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
As of January 4, 1999, no person was known by the Fund to own beneficially
or to hold of record 5% or more of the outstanding Class A Shares, Class B
Shares or Class C Shares of the Fund, except as follows:
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT
NAME AND ADDRESS JANUARY 4, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OWNERSHIP
- ------------------------------------------------------------ ------------ --------- ----------
<S> <C> <C> <C>
R T Kelley.................................................. 61,196.24 C 16.54%
PO Box 237
Canadian, TX 79014-0237
Merrill Lynch Pierce Fenner & Smith Inc..................... 24,559.09 C 6.64%
for the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East
2nd Floor
Jacksonville, FL 32246-6484
Donaldson Lufkin Jenrette................................... 21,478.68 C 5.81%
Securities Corp Inc
PO Box 2052
Jersey City, NJ 07303-2052
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to this
caption in the Prospectus for a complete presentation of the matters disclosed
below.
MUNICIPAL SECURITIES
Municipal securities include long-term obligations, which often are called
municipal bonds, as well as shorter term municipal notes, municipal leases, and
tax exempt commercial paper. Under normal market conditions, longer term
municipal securities generally provide a higher yield than shorter term
municipal securities, and therefore the Fund generally expects to be invested
primarily in longer term municipal securities. The Fund will, however, invest in
shorter term municipal securities when yields are greater than
B-3
<PAGE> 283
yields available on longer term municipal securities, for temporary defensive
purposes and when redemption requests are expected. The two principal
classifications of municipal securities are "general obligation" and "revenue"
or "special obligation" securities, which include "industrial revenue bonds."
General obligation securities are secured by the issuer's pledge of its faith,
credit, and taxing power for the payment of principal and interest. Revenue or
special obligation securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source, such as from the user
of the facility being financed. The Fund may also invest in "moral obligation"
bonds which are normally issued by special purpose public authorities. If an
issuer of moral obligation bonds is unable to meet its obligations, the
repayment of such bonds becomes a moral commitment but not a legal obligation of
the state or municipality in question.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of state and local
governments or authorities used to finance the acquisition of equipment and
facilities. Lease obligations generally do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged. A lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. In addition to the "non-appropriation" risk, these securities represent
a relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. Additionally,
use of the leased property may be limited by state or local law to a specified
use thereby further limiting ability to rent. There is no limitation on the
percentage of the Fund's assets that may be invested in "non-appropriation"
lease obligations. In evaluating such lease obligations, the Adviser will
consider such factors as it deems appropriate, which factors may include (a)
whether the lease can be cancelled, (b) the ability of the lease obligee to
direct the sale of the underlying assets, (c) the general creditworthiness of
the lease obligor, (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality, (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding and (f) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services than those covered by the lease obligation.
Also included in the term municipal securities are participation
certificates issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participations in a
lease, an installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 15% of its total assets in derivative
variable rate municipal securities such as inverse floaters whose rates vary
inversely with changes in market rates of interest or range floaters or capped
floaters whose rates are subject to periodic or lifetime caps. Derivative
variable rate securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative variable rate securities in response to changes in market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity.
B-4
<PAGE> 284
The Fund also may acquire custodial receipts or certificates underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain municipal securities. The
underwriter of these certificates or receipts typically purchases municipal
securities and deposits the securities in an irrevocable trust or custodial
account with a custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and the final
principal payment on the obligations. Although under the terms of a custodial
receipt, the Fund typically would be authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund could be required to
assert through the custodian bank those rights as may exist against the
underlying issuer. Thus, in the event the underlying issuer fails to pay
principal or interest when due, the Fund may be subject to delays, expenses and
risks that are greater than those that would have been involved if the Fund had
purchased a direct obligation of the issuer. In addition, in the event that the
trust or custodial account in which the underlying security has been deposited
is determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantor
of such payment obligations, of the municipal securities.
Although the municipal securities in which the Fund may invest will be
insured as to timely payment of principal and interest, municipal securities,
like other debt obligations, are subject to the risk of non-payment. The ability
of issuers of municipal securities to make timely payments of interest and
principal may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal,
state and local governmental units. Such non-payment would result in a reduction
of income to the Fund, and could result in a reduction in the value of the
municipal security experiencing non-payment and a potential decrease in the net
asset value of the Fund. Issuers of municipal securities might seek protection
under the bankruptcy laws. In the event of bankruptcy of such an issuer, the
Fund could experience delays and limitations with respect to the collection of
principal and interest on such municipal securities and the Fund may not, in all
circumstances, be able to collect all principal and interest to which it is
entitled. To enforce its rights in the event of a default in the payment of
interest or repayment of principal, or both, the Fund may take possession of and
manage the assets securing the issuer's obligations on such securities, which
may increase the Fund's operating expenses and adversely affect the net asset
value of the Fund. Any income derived from the Fund's ownership or operation of
such assets may not be tax-exempt. In addition, the Fund's intention to qualify
as a "regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), may limit the extent to which the Fund may exercise its
rights by taking possession of such assets, because as a regulated investment
company the Fund is subject to certain limitations on its investments and on the
nature of its income. Further, in connection with the working out or
restructuring of a defaulted security, the Fund may acquire additional
securities of the issuer, the acquisition of which may be deemed to be a loan of
money or property. Such additional securities should be considered speculative
with respect to the capacity to pay interest or repay principal in accordance
with their terms.
INSURANCE
As described in the Prospectus, the Fund invests primarily in municipal
securities which are either pre-insured under a policy obtained for such
securities prior to the purchase of such securities or will be insured under
policies obtained by the Fund to cover otherwise uninsured securities.
ORIGINAL ISSUE INSURANCE. Original Issue Insurance is purchased with
respect to a particular issue of municipal securities by the issuer thereof or a
third party in conjunction with the original issuance of such municipal
securities. Under such insurance, the insurer unconditionally guarantees to the
holder of the insured municipal security the timely payment of principal and
interest on such obligation when and as such payments shall become due but shall
not be paid by the issuer; except that in the event of any acceleration of the
due date of the principal by reason of mandatory or optional redemption (other
than acceleration by reason of a mandatory sinking fund payment), default or
otherwise, the insured payments may be made in such amounts and at such times as
payments of principal would have been due had there not been such acceleration.
The
B-5
<PAGE> 285
insurer is responsible for such payments less any amounts received by the holder
from any trustee for the municipal security issuers or from any other source.
Original Issue Insurance generally does not insure payment on an accelerated
basis, the payment of any redemption premium (except with respect to certain
premium payments in the case of certain small issue industrial development and
pollution control municipal securities), the value of the shares of the Fund or
the market value of municipal securities, or payments of any tender purchase
price upon the tender of the municipal securities. Original Issue Insurance also
does not insure against nonpayment of principal of or interest on municipal
securities resulting from the insolvency, negligence or any other act or
omission of the trustee or other paying agent for such obligations.
In the event that interest on or principal of a municipal security covered
by insurance is due for payment but is unpaid by reason of nonpayment by the
issuer thereof, the applicable insurer will make payments to its fiscal agent
(the "Fiscal Agent") equal to such unpaid amounts of principal and interest not
later than one business day after the insurer has been notified that such
nonpayment has occurred (but not earlier than the date of such payment is due).
The Fiscal Agent will disburse to the Fund the amount of principal and interest
which is then due for payment but is unpaid upon receipt by the Fiscal Agent of
(i) evidence of the Fund's right to receive payment of such principal and
interest and (ii) evidence, including any appropriate instrument of assignment,
that all of the rights of payment of such principal or interest then due for
payment shall thereupon vest in the insurer. Upon payment by the insurer of any
principal or interest payments with respect to any municipal securities, the
insurer shall succeed to the rights of the Fund with respect to such payment.
Original Issue Insurance remains in effect as long as the municipal
securities covered thereby remain outstanding and the insurer remains in
business, regardless of whether the Fund ultimately disposes of such municipal
securities. Consequently, Original Issue Insurance may be considered to
represent an element of market value with respect to the municipal securities so
insured, but the exact effect, if any, of this insurance on such market value
cannot be estimated.
SECONDARY MARKET INSURANCE. Subsequent to the time of original issuance of
a municipal security, the Fund or a third party may, upon the payment of a
single premium, purchase insurance on such municipal security. Secondary Market
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance and, as is the case with Original Issue Insurance,
Secondary Market Insurance remains in effect as long as the municipal security
covered thereby remains outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal security.
All premiums respecting municipal securities covered by Original Issue Insurance
or Secondary Market Insurance are paid in advance by the issuer or other party
obtaining the insurance.
One of the purposes of acquiring Secondary Market Insurance with respect to
a particular municipal security would be to enhance the value of such municipal
security. The Fund, for example, might seek to purchase a particular municipal
security and obtain Secondary Market Insurance with respect thereto if, in the
opinion of the Adviser, the market value of such municipal security, as insured,
would exceed the current value of the municipal security without insurance plus
the cost of the Secondary Market Insurance. Similarly, if the Fund owns but
wishes to sell a municipal security that is then covered by Portfolio Insurance,
the Fund might seek to obtain Secondary Market Insurance with respect thereto
if, in the opinion of the Adviser, the net proceeds of a sale by the Fund of
such obligation, as insured, would exceed the current value of such obligation
plus the cost of the Secondary Market Insurance.
PORTFOLIO INSURANCE. The Portfolio Insurance policies obtained by the Fund
would insure the payment of principal and interest on specified eligible
municipal securities purchased by the Fund. Except as described below, Portfolio
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance or Secondary Market Insurance. Municipal securities
insured under one Portfolio Insurance policy generally would not be insured
under any other policy purchased by the Fund. A municipal security is eligible
for coverage under a policy if it meets certain requirements of the insurer.
Portfolio Insurance is intended to reduce financial risk, but the cost thereof
and compliance with investment restrictions imposed under the policy will reduce
the yield to shareholders of the Fund. If a municipal security already is
covered by Original Issue Insurance of Secondary Market Insurance, the Fund is
not required to additionally insure any such municipal security under any policy
of Portfolio Insurance that the Fund may purchase.
B-6
<PAGE> 286
Portfolio Insurance policies are effective only as to municipal securities
owned and held by the Fund, and do not cover municipal securities for which the
contract for purchase fails. A "when-issued" municipal security will be covered
under a Portfolio Insurance policy upon the settlement date of the issue of such
"when-issued" municipal security.
In determining whether to insure municipal securities held by the Fund, an
insurer will apply its own standards, which correspond generally to the
standards it has established for determining the insurability of new issues of
municipal securities. See "Original Issue Insurance" above.
Each Portfolio Insurance policy will be non-cancellable and will remain in
effect so long as the Fund is in existence, the municipal securities covered by
the policy continue to be held by the Fund, and the Fund pays the premiums for
the policy. Each insurer generally will reserve the right at any time upon 90
days written notice to the Fund to refuse to insure any additional securities
purchased by the Fund after the effective date of such notice. The Board of
Trustees of the Fund generally will reserve the right to terminate each policy
upon seven days written notice to an insurer if it determines that the cost of
such policy is not reasonable in relation to the value of the insurance to the
Fund.
Each Portfolio Insurance policy shall terminate as to any municipal
security that has been redeemed from or sold by the Fund on the date of such
redemption or the settlement date of such sale, and an insurer shall not have
any liability thereafter under a policy as to any such municipal security,
except that if the date of such redemption or the settlement date of such sale
occurs after a record date and before the related payment date with respect to
any such municipal security, the policy will terminate as to such municipal
security on the business day immediately following such payment date. Each
policy will terminate as to all municipal securities covered thereby on the date
on which the last of the covered municipal securities mature, are redeemed or
are sold by the Fund.
One or more policies of Portfolio Insurance may provide the Fund, pursuant
to an irrevocable commitment of the insurer, with the option to exercise the
right to obtain permanent insurance ("Permanent Insurance") with respect to a
municipal security that is to be sold by the Fund. The Fund would exercise the
right to obtain Permanent Insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such municipal
security. It is expected that the Fund will exercise the right to obtain
Permanent Insurance for a municipal security only if, in the opinion of the
Adviser, upon such exercise the net proceeds from the sale by the Fund of such
obligation, as insured, would exceed the proceeds from the sale of such
obligation without insurance. The Permanent Insurance premium with respect to
each such obligation is determined based upon the insurability of each such
obligation as of the date of purchase by the Fund and will not be increased or
decreased for any change in the creditworthiness of such obligation unless such
obligation is in default as to payment of principal or interest, or both. In
such event, the Permanent Insurance premium shall be subject to an increase
predetermined at the date of purchase by the Fund.
Because each Portfolio Insurance policy will terminate as to municipal
securities sold by the Fund on the date of sale, in which event the insurer will
be liable only for those payments of principal and interest that are then due
and owing (unless Permanent Insurance is obtained by the Fund), the provision
for this insurance will not enhance the marketability of securities held by the
Fund, whether or not the securities are in default or in significant risk of
default. On the other hand, since Original Issue Insurance and Secondary Market
Insurance will remain in effect as long as municipal securities covered thereby
are outstanding, such insurance may enhance the marketability of such securities
even when such securities are in default or in significant risk of default, but
the exact effect, if any, on the marketability cannot be estimated. Accordingly,
the Fund may determine to retain or, alternatively, to sell municipal securities
covered by Original Issue Insurance or Secondary Market Insurance that are in
default or in significant risk of default.
GENERAL. It is anticipated that certain of the municipal securities to be
purchased by the Fund will be insured under policies obtained by persons other
than the Fund. In instances in which the Fund purchases municipal securities
insured under policies obtained by persons other than the Fund, the Fund does
not pay the premiums for such policies; rather the cost of such policies may be
reflected in a higher purchase price for such municipal securities. Accordingly,
the yield on such municipal securities may be lower than that on similar
uninsured municipal securities. Premiums for a Portfolio Insurance Policy
generally are paid by the
B-7
<PAGE> 287
Fund monthly, and are adjusted for purchases and sales of municipal securities
covered by the policy during the month. The yield on the Fund's portfolio is
reduced to the extent of the insurance premiums paid by the Fund which, in turn,
will depend upon the characteristics of the covered municipal securities held by
the Fund. In the event the Fund were to purchase Secondary Market Insurance with
respect to any municipal securities then covered by a Portfolio Insurance
policy, the coverage and the obligation of the Fund to pay monthly premiums
under such policy would cease with such purchase.
There can be no assurance that insurance of the kind described above will
continue to be available to the Fund. In the event that such insurance is no
longer available or that the cost of such insurance outweighs the benefits to
the Fund in the view of the Board of Trustees, the Board will consider whether
to modify the investment policies of the Fund, which may require the approval of
shareholders. In the event the claims-paying ability rating of an insurer of
municipal securities in the Fund's portfolio were to be lowered from AAA by
Standard and Poor's ("S&P"), Aaa by Moody's Investor Services, Inc. ("Moody's")
or an equivalent rating by another nationally recognized statistical ratings
organization ("NRSRO"), or if the Adviser anticipates such a lowering or
otherwise does not believe an insurer's claims-paying ability merits its
existing triple-A rating, the Fund could seek to obtain additional insurance
from an insurer whose claims-paying ability is rated AAA by S&P, Aaa by Moody's
or an equivalent rating by another NRSRO, or if the Adviser determines that the
cost of obtaining such additional insurance outweigh the benefits, the Fund may
elect not to obtain additional insurance. In making such determination, the
Adviser will consider the cost of the additional insurance, the new
claims-paying ability rating and financial condition of the existing insurer and
the creditworthiness of the issuer or guarantor of the underlying municipal
securities. The Adviser also may determine not to purchase additional insurance
in such circumstances if it believes that the insurer is taking steps which will
cause its triple-A claims paying ability rating to be restored promptly.
Although the Adviser periodically reviews the financial condition of each
insurer, there can be no assurance that the insurers will be able to honour
their obligations under all circumstances. The Fund cannot predict the
consequences of a state takeover of an insurer's obligations and, in particular,
whether such an insurer (or its state regulatory agency) could or would honour
all of the insurer's contractual obligations including any outstanding insurance
contracts insuring the timely payment of principal and interest on municipal
securities. The Fund cannot predict the impact which such events might have on
the market values of such municipal security. In the event of a default by an
insurer on its obligations with respect to any municipal securities in the
Fund's portfolio, the Fund would look to the issuer or guarantor of the relevant
municipal securities for payments of principal and interest and such issuer or
guarantor may not be rated AAA by S&P, Aaa by Moody's or an equivalent rating by
another NRSRO. Accordingly, the Fund could be exposed to greater risk of
non-payment in such circumstances which could adversely affect the Fund's net
asset value. Alternatively, the Fund could elect to dispose of such municipal
securities; however, the market prices for such municipal securities may be
lower than the Fund's purchase price for them and the Fund could sustain a
capital loss as a result.
Although the insurance on municipal securities reduces financial or credit
risk in respect of the insured obligations (i.e., the possibility that owners of
the insured municipal securities will not receive timely scheduled payments of
principal or interest), insured municipal securities remain subject to market
risk
(i.e., fluctuations in market value as a result of changes in prevailing
interest rates). Accordingly, insurance on municipal securities does not insure
the market value of the Fund's assets or the net asset value.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
B-8
<PAGE> 288
In the course of pursuing these investment strategies, the Fund may
purchase and sell derivative instruments such as exchange-listed and
over-the-counter put and call options on securities, financial futures, interest
rate indices and other financial instruments, purchase and sell financial
futures contracts and options thereon, or enter into various interest rate
transactions such as swaps, caps, floors or collars (collectively, all the above
are called "Strategic Transactions"). Strategic Transactions may be used to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities.
Any or all of these investment techniques may be used at any time and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of futures and options transactions should tend to minimize the
risk of loss due to a decline in the value of the hedged position, at the same
time they tend to limit any potential gain which might result from an increase
in value of such position. Finally, the daily variation margin requirements for
futures contracts would create a greater ongoing potential financial risk than
would purchases of options, where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Strategic Transactions would
reduce net asset value, and possibly income, and such losses can be greater than
if the Strategic Transactions had not been utilized. Income earned or deemed to
be earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security,
B-9
<PAGE> 289
financial future, index, or other instrument might be intended to protect the
Fund against an increase in the price of the underlying instrument that it
intends to purchase in the future by fixing the price at which it may purchase
such instrument. An American style put or call option may be exercised at any
time during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as a paradigm, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only enter into OTC options that have a buy-back provision permitting
the Fund to require the Counterparty to close the option at a formula price
within seven days. The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other NRSRO. The staff of the SEC
currently
B-10
<PAGE> 290
takes the position that, in general, OTC options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities "covering"
the amount of the Fund's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on illiquid securities described herein.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities that are traded on securities exchanges
and in the over-the-counter markets and related futures on such contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold. In the event of exercise of a call option
sold by the Fund with respect to securities not owned by the Fund, the Fund may
be required to acquire the underlying security at a disadvantageous price in
order to satisfy its obligation with respect to the call option.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and corporate debt securities (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate or fixed-income market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The purchase of a futures
contract creates a firm obligation by the Fund, as purchaser, to take delivery
from the seller the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission and will be
entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
B-11
<PAGE> 291
The Fund will not enter into a futures contract or related option (except
for closing transactions) for other than bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which the Fund may enter are interest rate and index swaps and the purchase or
sale of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the
B-12
<PAGE> 292
time of entering into such transaction, the unsecured long-term debt of the
Counterparty, combined with any credit enhancements, is rated at least "A" by
S&P or Moody's or has an equivalent equity rating from an NRSRO or is determined
to be of equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions,
in addition to other requirements, require that the Fund segregate cash and
liquid securities with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid securities at least
equal to the current amount of the obligation must be segregated with the
custodian. The segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. For example, a call option written by the Fund will require the Fund to
hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate cash and
liquid securities sufficient to purchase and deliver the securities if the call
is exercised. A call option sold by the Fund on an index will require the Fund
to own portfolio securities which correlate with the index or to segregate cash
and liquid securities equal to the excess of the index value over the exercise
price on a current basis. A put option written by the Fund requires the Fund to
segregate cash and liquid securities equal to the exercise price.
OTC options entered into by the Fund, including those on securities,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of cash and liquid
securities equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out cash and liquid securities equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, and the Fund will segregate
an amount of cash and liquid securities equal to the full value of the option.
OTC options settling with physical delivery, or with an election of either
physical delivery or cash settlement, will be treated the same as other options
settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash and liquid securities sufficient to meet its obligation to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract.
With respect to swaps, the Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of cash and liquid securities with a value equal to the Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash and
liquid securities, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating cash and liquid
securities if the Fund held a futures or forward contract, it could purchase a
put option on the same
B-13
<PAGE> 293
futures or forward contract with a strike price as high or higher than the price
of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash and liquid securities equal to any remaining obligation would
need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by
the requirements of the Code for qualification as a regulated investment
company.
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may also purchase and sell municipal securities on a "when-issued"
and "delayed delivery" basis. No income accrues to the Fund on municipal
securities in connection with such transactions prior to the date the Fund
actually takes delivery of such securities. These transactions are subject to
market fluctuation; the value of the municipal securities at delivery may be
more or less than their purchase price, and yields generally available on
municipal securities when delivery occurs may be higher or lower than yields on
the municipal securities obtained pursuant to such transactions. Because the
Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. When the Fund is the buyer in such a transaction, however, it
will maintain, in a segregated account with its custodian, cash or liquid
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. The Fund will make commitments to purchase
municipal securities on such basis only with the intention of actually acquiring
these securities, but the Fund may sell such securities prior to the settlement
date if such sale is considered to be advisable. To the extent the Fund engages
in "when-issued" and "delayed delivery" transactions, it will do so for the
purpose of acquiring securities for the Fund's portfolio consistent with the
Fund's investment objectives and policies and not for the purposes of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when-issued" or "delayed
delivery" basis.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The Fund's portfolio turnover rate (the lesser of
the value of the securities purchased or securities sold divided by the average
value of the securities held in the Fund's portfolio excluding all securities
whose maturities at acquisition were one year or less) is shown in the table of
"Financial Highlights" in the Prospectus. A high portfolio turnover rate (100%
or more) increases the Fund's transaction costs, including brokerage
commissions, and may result in the realization of more short-term capital gains
than if the Fund had a lower portfolio turnover. The turnover rate will not be a
limiting factor, however, if the Adviser deems portfolio changes appropriate.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities,
which includes repurchase agreements which have a maturity of longer than seven
days and generally includes securities that are restricted from sale to the
public without registration under the Securities Act of 1933, as amended (the
"1933 Act"). The sale of such securities often requires more time and results in
higher brokerage charges or dealer discounts and other selling expenses than
does the sale of liquid securities trading on national securities exchanges or
in the over-the-counter markets. Restricted securities are often purchased at a
discount from the market price of unrestricted securities of the same issuer
reflecting the fact that such securities may not be readily marketable without
some time delay. Investments in securities which have no ready market are valued
at fair value as determined in good faith by the Adviser in accordance with
procedures approved by the Fund's Trustees. Ordinarily, the Fund would invest in
restricted securities only when it receives the issuer's commitment to register
the securities without expense to the Fund. However, registration and
underwriting
B-14
<PAGE> 294
expenses (which may range from 7% to 15% of the gross proceeds of the securities
sold) may be paid by the Fund. Restricted securities which can be offered and
sold to qualified institutional buyers under Rule 144A under the 1933 Act ("144A
Securities") and are determined to be liquid under guidelines adopted by and
subject to the supervision of the Fund's Board of Trustees are not subject to
the limitation on illiquid securities. Such 144A Securities are subject to
monitoring and may become illiquid to the extent qualified institutional buyers
become, for a time, uninterested in purchasing such securities. Factors used to
determine whether 144A Securities are liquid include, among other things, a
security's trading history, the availability of reliable pricing information,
the number of dealers making quotes or making a market in such security and the
number of potential purchasers in the market for such security. For purposes
hereof, investments by the Fund in securities of other investment companies will
not be considered investments in restricted securities to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the 1940 Act.
B-15
<PAGE> 295
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without approval by the vote of a majority of its
outstanding voting shares, which is defined by the 1940 Act as the lesser of (i)
67% or more of the voting securities present in person or by proxy at the
meeting, if the holders of more than 50% of the outstanding voting securities
are present in person or by proxy; or (ii) more than 50% of the outstanding
voting securities. The Fund may not:
1. Purchase any securities (other than tax exempt obligations guaranteed by
the United States Government or by its agencies or instrumentalities),
if as a result more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer or if as
a result the Fund would hold more than 10% of the outstanding voting
securities of any single issuer, except that the Fund may purchase
securities of other investment companies to the extent permitted by (i)
the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions
of the 1940 Act.
2. Invest more than 25% of its assets in a single industry; however, the
Fund may from time to time invest more than 25% of its assets in a
particular segment of the municipal bond market; however, the Fund will
not invest more than 25% of its assets in industrial development bonds
in a single industry, and except that the Fund may purchase securities
of other investment companies to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time,
or (iii) an exemption or other relief from the provisions of the 1940
Act.
3. Borrow money, except from banks for temporary purposes and then in
amounts not in excess of 5% of the total asset value of the Fund, or
mortgage, pledge or hypothecate any assets except in connection with a
borrowing and in amounts not in excess of 10% of the total asset value
of the Fund. Borrowings may not be made for investment leverage, but
only to enable the Fund to satisfy redemption requests where liquidation
of portfolio securities is considered disadvantageous or inconvenient.
In this connection, the Fund will not purchase portfolio securities
during any period that such borrowings exceed 5% of the total asset
value of the Fund. Notwithstanding this investment restriction, the Fund
may enter into "when issued" and "delayed delivery" transactions as
described in the Prospectus.
4. Make loans, except to the extent the tax exempt obligations the Fund may
invest in are considered to be loans.
5. Buy any securities "on margin." The deposit of initial or maintained
margin in connection with interest rate or other financial futures or
index contracts or related options is not considered the purchase of a
security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other
financial futures or index contracts or related options, except as
hedging transactions in accordance with the requirements of the
Securities and Exchange Commission and the Commodity Futures Trading
Commission.
7. Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of securities
held in its portfolio.
8. Make investments for the purpose of exercising control or participation
in management, except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
9. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and extent permitted by
(i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions
of the 1940 Act.
10. Invest in equity interests in oil, gas or other mineral exploration or
development programs.
B-16
<PAGE> 296
11. Purchase or sell real estate, commodities or commodity contracts,
except as set forth in item 6 above and except to the extent the
municipal securities the Fund may invest in are considered to be
interests in real estate.
As long as the percentage restrictions described above are satisfied at the
time of investment or borrowing, the Fund will be considered to have abided by
those restrictions even if, at a later time, a change in values or net assets
causes an increase or decrease in percentage beyond that allowed.
DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S--A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P follows):
A S&P corporate or municipal debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment--capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the
terms of the obligation:
2. Nature of and provisions of the obligation:
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditor's rights.
LONG-TERM DEBT--INVESTMENT GRADE
<TABLE>
<S> <C>
AAA: Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to meet its financial commitment on the obligation
is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only
in small degree. Capacity to meet its financial commitment
on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions
than obligations in higher rated categories. Capacity to
meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
to meet its financial commitment on the obligation.
</TABLE>
B-17
<PAGE> 297
SPECULATIVE GRADE
BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and "C" are regarded
as having significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
<TABLE>
<S> <C>
BB: Debt rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the
obligation.
B: Debt rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the
capacity to meet its financial commitment on the obligation.
Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and
economic conditions for the obligor to meet its financial
commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is
not likely to have the capacity to meet its financial
commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to
nonpayment.
C: The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being
continued.
D: Debt rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made
on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period. The "D" rating also will be used
upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
R: This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to
principal or volatility of expected returns which are not
addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment
risk--such as interest-only or principal-only mortgage
securities; and obligations with unusually risky interest
terms, such as inverse floaters.
</TABLE>
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating.
The following criteria will be used in making that assessment.
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note).
B-18
<PAGE> 298
Note rating symbols are as follows:
<TABLE>
<S> <C>
SP-1: Strong or strong capacity to pay principal and interest.
Issues determined to possess very strong characteristics are
a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse Financial and economic changes
over the term of the notes.
SP-3: Speculative capacity to pay principal and interest.
</TABLE>
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from
'A-1' for the highest quality obligations to 'D' for the lowest. These
categories are as follows:
<TABLE>
<S> <C>
A-1: A short-term obligation rated A-1 is rated in the highest
category by S&P. The obligor's capacity to meet its
financial commitment on the obligation is strong. Within
this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is
extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is
satisfactory.
A-3: A short-term obligation rated A-3 exhibits adequate
protection parameters. However, adverse economic conditions
or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated B is regarded as having
significant speculative characteristics. The obligor
currently has the capacity to meet its financial commitment
on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C: A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent on favorable business,
financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D: A short-term obligation rated D is in payment default. The D
rating is used when payments on an obligation are not made
on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
</TABLE>
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by
the issuer or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in
or unavailability of, such information.
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option
or demand feature as part of their structure.
The first rating addresses the likelihood of repayment of principal
and interest as due, and the second rating addresses only the demand
feature. The long-term debt rating symbols are used for bonds to denote the
long-term maturity and the commercial paper rating symbols for the put
option (for example, 'AAA/
B-19
<PAGE> 299
A-1+'). With short-term demand debt, S&P's note rating symbols are used
with the commercial paper rating symbols (for example, 'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE INC.--A brief description of the applicable
Moody's Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
<TABLE>
<S> <C>
AAA: Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edged." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some
time in the future.
BAA: Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor
poorly secured). Interest payment and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may
be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
CA: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers, 1, 2, and 3 in each
generic rating classification from Aa to B. The modifier 1
indicates that the issue ranks in the higher end of its
generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
</TABLE>
Absence of Rating: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the
quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
B-20
<PAGE> 300
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date date to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term ratings, while other factors of major importance
in bond risk, long-term secular trends for example, may be less important
over the short run. A short-term rating may also be assigned on an issue
having a demand feature-variable rate demand obligation. Such ratings will
be designated as VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
SG. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity
in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933,
nor does it represent that any specific note is a valid obligation of a
rated issuer or issued in conformity with any applicable law.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Issuers rated Prime-1 (on supporting institutions) have a superior
ability for repayment of short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
B-21
<PAGE> 301
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well established access to a ranges of financial markets and
assured sources of alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or supported institutions) have an acceptable
ability for repayment of short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the prime rating
categories.
DESCRIPTION OF INSURANCE COMPANY CLAIMS PAYING ABILITY RATINGS
RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
The claims-paying ability of insurance companies is rated by S&P and
Moody's. Descriptions of these ratings are set forth below:
DESCRIPTION OF S&P'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
AAA. Superior financial security on an absolute and relative basis.
Capacity to meet policyholder obligations is overwhelming under a variety of
economic and underwriting conditions.
AA. Excellent financial security. Capacity to meet policyholder obligations
is strong under a variety of economic and underwriting conditions.
A. Good financial security, but capacity to meet policyholder obligations
is somewhat susceptible to adverse economic and underwriting conditions.
BBB. Adequate financial security, but capacity to meet policyholder
obligations is susceptible to adverse economic and underwriting conditions.
Note: Plus (+) and minus (-) signs indicate relative standing within a category,
and are not indications of likely upgrades or downgrades.
DESCRIPTION OF MOODY'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
AAA. Insurance companies rated Aaa offer exceptional financial security.
While the financial strength of these companies is likely to change, such
changes as can be visualized are most unlikely to impair their fundamentally
strong position.
AA. Insurance companies rated Aa offer excellent financial security.
Together with the Aaa group they constitute what are generally known as high
grade companies. They are rated lower than Aaa companies because long-term risks
appear somewhat larger.
B-22
<PAGE> 302
A. Insurance companies rated A offer good financial security. However,
elements may be present which suggest a susceptibility to impairment sometime in
the future.
BAA. Insurance companies rated Baa offer adequate financial security.
However, certain protective elements may be lacking or may be characteristically
unreliable over any great length of time.
Note: Numeric modifiers are used to refer to the ranking within the group -- one
being the highest and three being the lowest. However, the financial strength of
companies within a generic rating symbol (Aa, for example) is broadly the same.
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and officers of the Fund and
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with Van
Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment
Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Management
Inc., Van Kampen Advisors Inc., Van Kampen Insurance Agency of Illinois Inc.,
Van Kampen Insurance Agency of Texas Inc., Van Kampen System Inc., Van Kampen
Recordkeeping Services Inc., American Capital Contractual Services, Inc., Van
Kampen Trust Company, Van Kampen Exchange Corp. and Van Kampen Investor Services
Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are
referred to herein collectively as the "Advisers". For purposes hereof, the term
"Fund Complex" includes each of the open-end investment companies advised by the
Advisers (excluding Van Kampen Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee/Director of each of the
funds in the Fund Complex.
</TABLE>
B-23
<PAGE> 303
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Richard M. DeMartini*..................... Chairman and Chief Executive Officer of International
Two World Trade Center Private Client Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Chairman of Dean Witter Futures & Currency
New York, NY 10048 Management Inc. and Demeter Management Corporation.
Date of Birth: 10/12/52 Director of Dean Witter Reynolds Inc. Chairman and
Director of Dean Witter Capital Corporation. Chairman,
Chief Executive Officer, President and a Director of Dean
Witter Alliance Capital Corporation, Director of the
National Healthcare Resources, Inc., Morgan Stanley Dean
Witter Distributors, Inc., Dean Witter Realty Inc., Dean
Witter Reynolds Venture Equities Inc., DW Window Covering
Holding, Inc., and is a member of the Morgan Stanley Dean
Witter Management Committee. Prior to December of 1998,
Mr. DeMartini was President and Chief Operating Officer
of Morgan Stanley Dean Witter Individual Asset Management
and a Director of Morgan Stanley Dean Witter Trust FSB.
Formerly Vice Chairman of the Board of the National
Association of Securities Dealers, Inc. and Chairman of
the Board of the Nasdaq Stock Market, Inc. Trustee of the
TCW/DW Funds, Director of the Morgan Stanley Dean Witter
Funds and Trustee/Director of each of the funds in the
Fund Complex.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board,
Vice Chair of the Board of The YMCA of Metropolitan
Chicago and a member of the Women's Board of the
University of Chicago. Prior to 1996, Trustee of The
International House Board. Trustee/Director of each of
the funds in the Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and Member of the Investment Committee
of the Joyce Foundation, a private foundation.
Trustee/Director of each of the funds in the Fund
Complex.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee/Director of each of
the funds in the Fund Complex.
</TABLE>
B-24
<PAGE> 304
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Don G. Powell*............................ Currently a member of the board of governors and
3 Wexford Court executive committee for the Investment Company Institute,
Houston, TX 77024 and a member of the Board of Trustees of the Houston
Date of Birth: 10/19/39 Museum of Natural Science. Immediate past Chairman of the
Investment Company Institute. Prior to January 1999,
Chairman and a Director of Van Kampen Investments, the
Advisers, the Distributor and Investor Services and
Director or officer of certain other subsidiaries of Van
Kampen Investments. Prior to July of 1998, Director and
Chairman of VK/AC Holding, Inc. Prior to November 1996,
President, Chief Executive Officer and a Director of
VK/AC Holding, Inc. Trustee/Director of each of the funds
in the Fund Complex and Trustee of other funds advised by
the Advisers or Van Kampen Management Inc.
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer services company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company and
Date of Birth: 07/08/44 the Urban Shopping Centers Inc., a retail mall management
company. Trustee, University of Notre Dame. Prior to
1998, Director of Stone Smurfit Container Corp., a paper
manufacturing company. Formerly, President, Chief
Executive Officer and Chief Operating Officer of Waste
Management, Inc., an environmental services company.
Trustee/Director of each of the funds in the Fund
Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen Management Inc.
Trustee/Director of each of the funds in the Fund
Complex, and Trustee/Managing General Partner of other
open-end and closed-end funds advised by the Advisers or
Van Kampen Management Inc.
Paul G. Yovovich.......................... Private investor. Prior to April 1996, President of
Sears Tower Advance Ross Corporation. Director of 3Com Corporation,
233 South Wacker Drive APAC Teleservices, Inc., and COMARCO, Inc.
Suite 9700 Trustee/Director of each of the Funds in the Fund
Chicago, IL 60606 Complex.
Date of Birth: 10/29/53
</TABLE>
- ------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
current or former positions with Morgan Stanley Dean Witter & Co. or its
affiliates.
B-25
<PAGE> 305
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Sullivan, Wood, Dalmaso, Martin,
Wetherell and Hill are located at 1 Parkview Plaza, PO Box 5555, Oakbrook
Terrace, IL 60181-5555. The Fund's other officers are located at 2800 Post Oak
Blvd., Houston, TX 77056.
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Dennis J. McDonnell.................. Executive Vice President and a Director of Van Kampen
Date of Birth: 05/20/42 Investments. President, Chief Operating Officer and a
President Director of the Advisers, Van Kampen Advisors Inc., and Van
Kampen Management Inc. Prior to July of 1998, Director and
Executive Vice President of VK/AC Holding, Inc. Prior to
April of 1998, President and a Director of Van Kampen
Merritt Equity Advisors Corp. Prior to April of 1997, Mr.
McDonnell was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996, Mr. McDonnell was
Chief Executive Officer and Director of MCM Group, Inc.,
McCarthy, Crisanti & Maffei, Inc. and Chairman and Director
of MCM Asia Pacific Company, Limited and MCM (Europe)
Limited. Prior to July of 1996, Mr. McDonnell was President,
Chief Operating Officer and Trustee of VSM Inc. and VCJ Inc.
President of each of the funds in the Fund Complex.
President, Chairman of the Board and Trustee/Managing
General Partner of other investment companies advised by the
Advisers or their affiliates.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Prior to July
Vice President of 1996, Mr. Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of McCarthy, Crisanti &
Maffei, Inc. Vice President of each of the funds in the Fund
Complex and certain other investment companies advised by
the Advisers or their affiliates.
John L. Sullivan..................... First Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Treasurer, Vice President and Chief Financial
Treasurer, Vice President and Chief Officer of each of the funds in the Fund Complex and certain
Financial Officer other investment companies advised by the Advisers or their
affiliates.
Curtis W. Morell..................... Senior Vice President of the Advisers, Vice President and
Date of Birth: 08/04/46 Chief Accounting Officer of each of the funds in the Fund
Vice President and Chief Accounting Complex and certain other investment companies advised by
Officer the Advisers or their affiliates.
</TABLE>
B-26
<PAGE> 306
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Ronald A. Nyberg..................... Executive Vice President, General Counsel, Secretary and
Date of Birth: 07/29/53 Director of Van Kampen Investments. Mr. Nyberg is Executive
Vice President and Secretary Vice President, General Counsel, Assistant Secretary and a
Director of the Advisers and the Distributor, Van Kampen
Advisors Inc., Van Kampen Management Inc., Van Kampen
Exchange Corp., American Capital Contractual Services, Inc.
and Van Kampen Trust Company. Executive Vice President,
General Counsel and Assistant Secretary of Investor Services
and River View International Inc. Director or officer of
certain other subsidiaries of Van Kampen Investments.
Director of ICI Mutual Insurance Co., a provider of
insurance to members of the Investment Company Institute.
Prior to July of 1998, Director and Executive Vice
President, General Counsel and Secretary of VK/AC Holding,
Inc. Prior to April of 1998, Executive Vice President,
General Counsel and Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he was Executive Vice
President, General Counsel and a Director of Van Kampen
Merritt Equity Holdings Corp. Prior to September of 1996, he
was General Counsel of McCarthy, Crisanti & Maffei, Inc.
Prior to July of 1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc. and Executive Vice
President and General Counsel of VCJ Inc. Vice President and
Secretary of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Paul R. Wolkenberg................... Executive Vice President and Director of Van Kampen
Date of Birth: 11/10/44 Investments. Executive Vice President of Asset Management
Vice President and the Distributor. President and a Director of Investor
Services. President and Chief Operating Officer of Van
Kampen Recordkeeping Services Inc. Prior to July of 1998,
Director and Executive Vice President of VK/AC Holding, Inc.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Edward C. Wood III................... Senior Vice President of the Advisers, Van Kampen
Date of Birth: 01/11/56 Investments and Van Kampen Management Inc. Senior Vice
Vice President President and Chief Operating Officer of the Distributor.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Tanya M. Loden....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 11/19/59 Controller of each of the funds in the Fund Complex and
Controller other investment companies advised by the Advisers or their
affiliates.
Nicholas Dalmaso..................... Associate General Counsel and Assistant Secretary of Van
Date of Birth: 03/01/65 Kampen Investments. Vice President, Associate General
Assistant Secretary Counsel and Assistant Secretary of the Advisers, the
Distributor, Van Kampen Advisors Inc. and Van Kampen
Management Inc. Assistant Secretary of each of the funds in
the Fund Complex and other investment companies advised by
the Advisers or their affiliates.
</TABLE>
B-27
<PAGE> 307
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Scott E. Martin...................... Senior Vice President, Deputy General Counsel and Assistant
Date of Birth: 08/20/56 Secretary of Van Kampen Investments. Senior Vice President,
Assistant Secretary Deputy General Counsel and Secretary of the Advisers, the
Distributor, Investor Services, American Capital Contractual
Services, Inc., Van Kampen Management Inc., Van Kampen
Exchange Corp., Van Kampen Advisors Inc., Van Kampen
Insurance Agency of Illinois Inc., Van Kampen System Inc.
and Van Kampen Recordkeeping Services Inc. Prior to July of
1998, Senior Vice President, Deputy General Counsel and
Assistant Secretary of VK/AC Holding, Inc. Prior to April of
1998, Van Kampen Merritt Equity Advisors Corp. Prior to
April of 1997, Senior Vice President, Deputy General Counsel
and Secretary of Van Kampen American Capital Services, Inc.
and Van Kampen Merritt Holdings Corp. Prior to September of
1996, Mr. Martin was Deputy General Counsel and Secretary of
McCarthy, Crisanti & Maffei, Inc., and prior to July of
1996, he was Senior Vice President, Deputy General Counsel
and Secretary of VSM Inc. and VCJ Inc. Assistant Secretary
of each of the funds in the Fund Complex and other
investment companies advised by the Advisers or their
affiliates.
Weston B. Wetherell.................. Vice President, Associate General Counsel and Assistant
Date of Birth: 06/15/56 Secretary of Van Kampen Investments, the Advisers, the
Assistant Secretary Distributor, Van Kampen Management Inc. and Van Kampen
Advisors Inc. Prior to September of 1996, Mr. Wetherell was
Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.
Assistant Secretary of each of the funds in the Fund Complex
and other investment companies advised by the Advisers or
their affiliates.
Steven M. Hill....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 10/16/64 Assistant Treasurer of each of the funds in the Fund Complex
Assistant Treasurer and other investment companies advised by the Advisers or
their affiliates.
Michael Robert Sullivan.............. Assistant Vice President of the Advisers. Assistant
Date of Birth: 03/30/33 Controller of each of the funds in the Fund Complex and
Assistant Controller other investment companies advised by the Advisers or their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 65 operating funds in the Fund Complex. Each trustee/director who is not an
affiliated person of Van Kampen Investments, the Advisers or the Distributor
(each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex (except the money market series of the Van Kampen Series Fund,
Inc.) provides a deferred compensation plan to its Non-Affiliated Trustees that
allows trustees/directors to defer receipt of their compensation and earn a
return on such deferred amounts. Deferring compensation has the economic effect
as if the Non-Affiliated Trustee reinvested his or her compensation into the
funds. Each fund in the Fund Complex (except the money market series of the Van
Kampen Series Fund, Inc.) provides a retirement plan to its Non-Affiliated
Trustees that provides Non-Affiliated Trustees with compensation after
retirement, provided that certain eligibility requirements are met as more fully
described below.
Effective January 1, 1998, the trustees adopted a standardized compensation
and benefits program for each fund in the Fund Complex. The compensation of each
Non-Affiliated Trustee includes an annual retainer in an amount equal to $50,000
per calendar year, due in four quarterly installments on the first business day
of each quarter. Payment of the annual retainer is allocated among the funds in
the Fund Complex (except the money market series of the Van Kampen Series Fund,
Inc.) on the basis of the relative
B-28
<PAGE> 308
net assets of each fund as of the last business day of the preceding calendar
quarter. The compensation of each Non-Affiliated Trustee includes a per meeting
fee from each fund in the Fund Complex (except the money market series of the
Van Kampen Series Fund, Inc.) in the amount of $200 per quarterly or special
meeting attended by the Non-Affiliated Trustee, due on the date of the meeting,
plus reasonable expenses incurred by the Non-Affiliated Trustee in connection
with his or her services as a trustee, provided that no compensation will be
paid in connection with certain telephonic special meetings.
Under the deferred compensation plan, each Non-Affiliated Trustee generally
can elect to defer receipt of all or a portion of the compensation earned by
such Non-Affiliated Trustee until retirement. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to the return on the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
----------------------------------------------------------
AGGREGATE AGGREGATE TOTAL
PENSION OR ESTIMATED MAXIMUM COMPENSATION
AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan $9,790 $35,691 $60,000 $125,200
Linda Hutton Heagy 8,390 3,861 60,000 112,800
R. Craig Kennedy 9,790 2,652 60,000 125,200
Jack E. Nelson 9,790 18,385 60,000 125,200
Phillip B. Rooney 9,790 6,002 60,000 125,200
Dr. Fernando Sisto 9,790 68,615 60,000 125,200
Wayne W. Whalen 9,790 12,658 60,000 125,200
Paul G. Yovovich(1) 0 0 60,000 25,300
</TABLE>
- ---------------
(1) Mr. Paul G. Yovovich became a member of the Board of Trustees effective
October 22, 1998 and thus does not have a full fiscal year of information to
report. Trustees not eligible for compensation or retirement benefits are
not shown in the table.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Trust's fiscal period ended September 30, 1998.
The detail of aggregate compensation before deferral for each series,
including the Fund, is shown in Table A below. The detail of amounts
deferred for each series, including the Fund, is shown in Table B below.
Amounts deferred are retained by the Fund and earn a rate of return
determined by reference to either the return on the common shares of the
Fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the
B-29
<PAGE> 309
extent permitted by the 1940 Act, each Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The detail of cumulative deferred compensation
(including interest) owed to current Trustees by each series, including the
Fund, is shown in Table C below. The deferred compensation plan is described
above the Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for their respective fiscal years ended in 1998. The retirement
plan is described above the Compensation Table.
(4) This is the sum of the estimated maximum annual benefits payable by the
operating investment companies in the Fund Complex for each year of the
10-year period commencing in the year of such trustee's anticipated
retirement. The Retirement Plan is described above the Compensation Table.
Each Non-Affiliated Trustee of the Board of Trustees has served as a member
of the Board of Trustees since he or she was first appointed or elected in
the year set forth in Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1998 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1998. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
trustees were not trustees of such investment companies. Combining the Fund
Complex with other investment companies advised by the Advisers and their
affiliates, Mr. Whalen received Total Compensation of $285,825 during the
calendar year ended December 31, 1998.
As of January 4, 1999, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
B-30
<PAGE> 310
TABLE A
1998 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL --------------------------------------------------------------------------
FUND NAME YEAR-END* BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............. 9/30 $2,352 $2,152 $2,352 $2,352 $2,352 $2,352 $2,352 $0
Tax Free High Income Fund................ 9/30 1,961 1,761 1,961 1,961 1,961 1,961 1,961 0
California Insured Tax Free Fund......... 9/30 1,005 805 1,005 1,005 1,005 1,005 1,005 0
Municipal Income Fund.................... 9/30 1,931 1,731 1,931 1,931 1,931 1,931 1,931 0
Intermediate Term Municipal Income
Fund................................... 9/30 841 641 841 841 841 841 841 0
Florida Insured Tax Free Income Fund..... 9/30 858 658 858 858 858 858 858 0
New York Tax Free Income Fund............ 9/30 842 642 842 842 842 842 842 0
------ ------ ------ ------ ------ ------ ------ --
Trust Total............................ $9,790 $8,390 $9,790 $9,790 $9,790 $9,790 $9,790 $0
====== ====== ====== ====== ====== ====== ====== ==
</TABLE>
*In 1998, the Fund changed its fiscal year-end from December 31 to September
30. Accordingly, the information reported in this column represents information
for the nine-month fiscal period ended September 30, 1998.
TABLE B
1998 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL --------------------------------------------------------------------------
FUND NAME YEAR-END* BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............. 9/30 $2,352 $2,152 $1,176 $2,352 $2,352 $1,176 $2,352 $0
Tax Free High Income Fund................ 9/30 1,961 1,761 981 1,961 1,961 981 1,961 0
California Insured Tax Free Fund......... 9/30 1,005 805 503 1,005 1,005 503 1,005 0
Municipal Income Fund.................... 9/30 1,931 1,731 966 1,931 1,931 966 1,931 0
Intermediate Term Municipal Income
Fund................................... 9/30 841 641 421 841 841 421 841 0
Florida Insured Tax Free Income Fund..... 9/30 858 658 429 858 858 429 858 0
New York Tax Free Income Fund............ 9/30 842 642 421 842 842 421 842 0
------ ------ ------ ------ ------ ------ ------ --
Trust Total............................ $9,790 $8,390 $4,897 $9,790 $9,790 $4,897 $9,790 $0
====== ====== ====== ====== ====== ====== ====== ==
</TABLE>
*In 1998, the Fund changed its fiscal year-end from December 31 to September
30. Accordingly, the information reported in this column represents information
for the nine-month fiscal period ended September 30, 1998.
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEES
FISCAL --------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- -------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund..................... 9/30 $ 6,579 $ 8,672 $12,057 $ 17,744 $ 3,758 $ 4,177 $15,328 $0
Tax Free High Income
Fund..................... 9/30 6,211 8,299 11,879 17,384 3,388 2,473 14,960 0
California Insured Tax Free
Fund..................... 9/30 5,320 7,393 11,446 16,513 2,492 2,035 14,067 0
Municipal Income Fund...... 9/30 7,043 9,700 15,366 22,215 3,622 8,799 19,040 0
Intermediate Term Municipal
Income Fund.............. 9/30 5,166 7,238 11,372 16,363 2,337 1,959 13,913 0
Florida Insured Tax Free
Income Fund.............. 9/30 5,183 7,254 7,093 11,846 2,354 1,967 10,870 0
New York Tax Free Income
Fund..................... 9/30 2,288 1,814 3,430 5,111 1,700 958 4,413 0
------- ------- ------- -------- ------- ------- ------- --
Trust Total............ $37,790 $50,370 $72,643 $107,176 $19,651 $22,368 $92,591 $0
======= ======= ======= ======== ======= ======= ======= ==
<CAPTION>
FORMER TRUSTEES
-----------------------------------------------------------------
FUND NAME CARUSO GAUGHAN LIPSHIE MILLER REES ROBINSON VERNON
--------- ------ ------- ------- ------ ---- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund..................... $2,695 $1,985 $ 212 $ 9,164 $ 0 $13,380 $ 327
Tax Free High Income
Fund..................... 0 1,985 0 9,164 0 13,380 0
California Insured Tax Free
Fund..................... 0 1,985 0 9,164 0 13,380 0
Municipal Income Fund...... 5,804 2,455 961 12,382 7,502 17,483 1,287
Intermediate Term Municipal
Income Fund.............. 0 1,985 0 9,164 0 13,380 0
Florida Insured Tax Free
Income Fund.............. 0 927 0 5,817 0 9,599 0
New York Tax Free Income
Fund..................... 0 295 0 2,344 0 3,740 0
------ ------- ------ ------- ------- ------
Trust Total............ $8,499 $11,617 $1,173 $57,199 $7,502 $84,342 $1,614
====== ======= ====== ======= ====== ======= ======
</TABLE>
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------
FUND NAME BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......................... 1995 1995 1993 1984 1997 1995 1984 1998
Tax Free High Income Fund............................ 1995 1995 1993 1985 1997 1995 1985 1998
California Insured Tax Free Fund..................... 1995 1995 1993 1985 1997 1995 1985 1998
Municipal Income Fund................................ 1995 1995 1993 1990 1997 1995 1990 1998
Intermediate Term Municipal Income Fund.............. 1995 1995 1993 1993 1997 1995 1993 1998
Florida Insured Tax Free Income Fund................. 1995 1995 1994 1994 1997 1995 1994 1998
New York Tax Free Income Fund........................ 1995 1995 1994 1994 1997 1995 1994 1998
</TABLE>
B-31
<PAGE> 311
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate and
implement the Fund's investment objectives. The Adviser also furnishes the
services of the Fund's President and such other executive and clerical personnel
as are necessary to prepare the various reports and statements and conduct the
Fund's day-to-day operations. The Fund, however, bears the cost of its
accounting services, which include maintaining its financial books and records
and calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of the Fund's Treasurer and the
personnel operating under his direction. Charges are allocated among the
investment companies advised or subadvised by the Adviser or its affiliates. A
portion of these amounts is paid to the Adviser or its affiliates in
reimbursement of personnel, office space, facilities and equipment costs
attributable to the provision of accounting services to the Fund. See
"Accounting Services Agreement" below. The Fund also pays distribution fees,
service fees, custodian fees, legal and auditing fees, the costs of reports to
shareholders, and all other ordinary business expenses not specifically assumed
by the Adviser. The Advisory Agreement also provides that the Adviser shall not
be liable to the Fund for any error of judgment or of law, or for any loss
suffered by the Fund in connection with the matters to which the agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence on the part of the Adviser in the performance of its obligations and
duties, or by reason of its reckless disregard of its obligations and duties
under the agreement.
Under the Advisory Agreement, the Fund pays to the Adviser, as compensation
for the services rendered, facilities furnished, and expenses paid by it, a
monthly fee payable computed based upon an annual rate applied to the average
daily net assets of the Fund as follows: 0.525% on the first $500 million of
average daily net assets; 0.500% on the next $500 million of average daily net
assets, 0.475% on the next $500 million of average daily net assets; and 0.450%
on the average daily net assets over $1,500 million.
The Fund's average net assets are determined by taking the average of all
of the determinations of the net assets during a given calendar month. Such fee
is payable for each calendar month as soon as practicable after the end of that
month.
The Advisory Agreement also provides that, in the event the annual expenses
of the Fund for any fiscal year exceed the most stringent limit in any state in
which the Fund's shares are offered for sale, the compensation due the Adviser
will be reduced by the amount of such excess and that, if a reduction in and
refund of the advisory fee is insufficient, the Adviser will pay the Fund
monthly an amount sufficient to make up the deficiency, subject to readjustment
during the year.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on 60 days' written notice.
During the fiscal period ended September 30, 1998 and the fiscal years
ended December 31, 1997 and 1996, the Adviser received approximately $5,135,400,
$6,799,900 and $6,928,000, respectively, in advisory fees from the Fund.
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which Advisory Corp. provides accounting services
to the Fund. The Fund shares together with the other Van Kampen funds in the
cost of providing such services, with 25% of such costs shared proportionately
based on the respective number of classes of securities issued per fund and the
remaining 75% of such cost based proportionally on their respective net assets
per fund.
B-32
<PAGE> 312
During the fiscal period ended September 30, 1998 and the fiscal years
ended December 31, 1997 and 1996, Advisory Corp. received approximately
$278,100, $233,500 and $43,900, respectively, in accounting services fees from
the Fund.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen funds
advised by the Adviser and distributed by the Distributor have entered into
Legal Services Agreements pursuant to which Van Kampen Investments provides
legal services, including without limitation: accurate maintenance of the fund's
minute books and records, preparation and oversight of the fund's regulatory
reports, and other information provided to shareholders, as well as responding
to day-to-day legal issues on behalf of the funds. Payment by the Fund for such
services is made on a cost basis for the salary and salary related benefits,
including but not limited to bonuses, group insurance and other regular wages
for the employment of personnel, as well as overhead and the expenses related to
the office space and the equipment necessary to render the legal services. Other
funds distributed by the Distributor also receive legal services from Van Kampen
Investments. Of the total costs for legal services provided to funds distributed
by the Distributor, one half of such costs are allocated equally to each fund
and the remaining one half of such costs are allocated to specific funds based
on monthly time records.
During the fiscal period ended September 30, 1998 and the fiscal years
ended December 31, 1997 and 1996, Van Kampen Investments received approximately
$18,400, $28,300 and $39,400, respectively, in legal services fees from the
Fund.
DISTRIBUTION AND SERVICE
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Fund through
authorized dealers on a continuous basis. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required to
take and pay for only such shares of the Fund as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and certain other costs including the cost of
supplemental sales literature and advertising. The Distribution and Service
Agreement is renewable from year to year if approved (a)(i) by the Fund's
Trustees or (ii) by the affirmative vote of a majority of the Fund's outstanding
voting securities and (b) by the affirmative vote of a majority of Trustees who
are not parties to the Distribution and Service Agreement or interested persons
of any party, by votes cast in person at a meeting called for such purpose. The
Distribution and Service Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on 90 days'
written notice. Total underwriting commissions on the sale of shares of the Fund
for the last three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
TOTAL UNDER- AMOUNTS
WRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------ --------------
<S> <C> <C>
Fiscal Period Ended September 30, 1998...................... $ 836,106 $ 99,052
Fiscal Year Ended December 31, 1997......................... $1,239,728 $259,984
Fiscal Year Ended December 31, 1996......................... $1,589,072 $405,829
</TABLE>
B-33
<PAGE> 313
With respect to sales of Class A Shares of the Fund, the total sales
charges and concessions reallowed to authorized dealers at the time of purchase
are as follows:
CLASS A SHARES SALES CHARGE TABLE
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-------------------------------------------------
REALLOWED TO
AS % OF NET DEALERS AS
AS % OF AMOUNT A % OF
SIZE OF INVESTMENT OFFERING PRICE INVESTED OFFERING PRICE
------------------ ------------------ ----------- --------------
<S> <C> <C> <C>
Less than $100,000..................................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000........................ 3.75% 3.90% 3.25%
$250,000 but less than $500,000........................ 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000...................... 2.00% 2.04% 1.75%
$1,000,000 or more..................................... * * *
</TABLE>
- ---------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a deferred
sales charge of 1.00% on certain redemptions made within one year of the
purchase. A commission or transaction fee will be paid by the Distributor at
the time of purchase directly out of the Distributor's assets (and not out of
the Fund's assets) to authorized dealers who initiate and are responsible for
purchases of $1 million or more computed based on a percentage of the dollar
value of such shares sold as follows: 1.00% on sales to $2 million, plus 0.80%
on the next $1 million and 0.50% on the excess over $3 million.
With respect to sales of Class B Shares and Class C Shares of the Fund, a
commission or transaction fee generally will be paid by the Distributor at the
time of purchase directly out of the Distributor's assets (and not out of the
Fund's assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 4.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any deferred sales charge and any distribution fees on Class
B Shares and Class C Shares of the Fund are paid to the Distributor and are used
by the Distributor to defray its distribution related expenses in connection
with the sale of the Fund's shares, such as the payment to authorized dealers
for selling such shares. With respect to Class C Shares, the authorized dealers
generally are paid the ongoing commission and transaction fees of up to 0.75% of
the average daily net assets of the Fund's Class C Shares annually commencing in
the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any authorized dealer that sponsors
sales contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the authorized dealer at the public offering price during such programs.
Other programs provide, among other things and subject to certain conditions,
for certain favorable distribution arrangements for shares of the Fund. Also,
the Distributor in its discretion may from time to time, pursuant to objective
criteria established by the Distributor, pay fees to, and sponsor business
seminars for, qualifying authorized dealers for certain services or activities
which are primarily intended to result in sales of shares of the Fund. Fees may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives for meetings or seminars
of a business nature. In some instances additional compensation or promotional
incentives may be offered to brokers, dealers or financial intermediaries that
have sold or may sell significant amounts of shares during specified periods of
time. The Distributor may provide additional compensation to Edward D. Jones &
Co. or an affiliate thereof based on a combination of its sales of shares and
increases in assets under management. All of the foregoing payments are made by
the Distributor out of its own assets. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of the Fund on an annual basis. These
programs will not change the price an investor will pay for shares or the amount
that a Fund will receive from such sale.
B-34
<PAGE> 314
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. State securities
laws regarding registration of banks and other financial institutions may differ
from the interpretations of federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to
certain state laws.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans". The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Distribution Plan and the Service Plan are being implemented
through an agreement (the "Distribution and Service Agreement") with the
Distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance, which may include, but not
be limited to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
For shares sold prior to July 1, 1987, (the "Implementation Date"), the
financial intermediary was not eligible to receive compensation pursuant to such
Distribution and Service Agreement or Selling Agreement. To the extent that
there remain outstanding shares of the Fund that were purchased prior to the
Implementation Date, the percentage of the total average daily net asset value
of a class of shares that may be utilized pursuant to the Distribution and
Service Agreement will be less than the maximum percentage amount permissible
with respect to such class of shares under the Distribution and Service
Agreement.
The Distributor must submit quarterly reports to the Board of Trustees of
the Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Distribution Plan and the purposes for which
such expenditures were made, together with such other information as from time
to time is reasonably requested by the Trustees. The Plans provide that they
will continue in full force and effect from year to year so long as such
continuance is specifically approved by a vote of the Trustees, and also by a
vote of the disinterested Trustees, cast in person at a meeting called for the
purpose of voting on the Plans. Each of the Plans may not be amended to increase
materially the amount to be spent for the services described therein with
respect to any class of shares without approval by a vote of a majority of the
outstanding voting shares of such class, and all material amendments to either
of the Plans must be approved by the Trustees and also by the disinterested
Trustees. Each of the Plans may be terminated with respect to any class of
shares at any time by a vote of a majority of the disinterested Trustees or by a
vote of a majority of the outstanding voting shares of such class.
The Plans generally provide for the Fund to reimburse the lesser of (i) the
distribution and service fees at the rates specified in the prospectus or (ii)
the amount of the Distributor's actual expenses incurred less any deferred sales
charges it received. For Class A Shares, to the extent the Distributor is not
fully reimbursed in a given year, there is no carryover of such unreimbursed
amounts to succeeding years. For each of the Class B Shares and Class C Shares,
to the extent the Distributor is not fully reimbursed in a given year, any
unreimbursed expenses for such class will be carried forward and paid by the
Fund in future years so long as such Plans are in effect. Except as mandated by
applicable law, the Fund does not impose any limit with respect to the number of
years into the future that such unreimbursed expenses may be carried forward (on
a Fund level basis). Because such expenses are accounted on a Fund level basis,
in periods of extreme net asset value fluctuation such amounts with respect to a
particular Class B Share of Class C Share may be
B-35
<PAGE> 315
greater or less than the amount of the initial commission (including carrying
cost) paid by the Distributor with respect to such share. In such circumstances,
a shareholder of a share may be deemed to incur expenses attributable to other
shareholders of such class. As of September 30, 1998, there were $600,476 and
$6,324 of unreimbursed distribution-related expenses with respect to Class B
Shares and Class C Shares, respectively, representing 0.83% and 0.09% of the
Fund's net assets attributable to Class B Shares and Class C Shares,
respectively. If the Plan were terminated or not continued, the Fund would not
be contractually obligated to pay the Distributor for any expenses not
previously reimbursed by the Fund or recovered through deferred sales charge.
Because the Fund is a series of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one series of the Trust may indirectly benefit
the other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution-related expenses
attributable to any other class of shares.
For the fiscal period ended September 30, 1998, the Fund's aggregate
expenses under the Plans for Class A Shares were $2,236,646 or 0.24% of the
Class A Shares' average daily net assets. Such expenses were paid to reimburse
the Distributor for payments made to financial intermediaries for servicing Fund
shareholders and for administering the Plans. For the fiscal period ended
September 30, 1998, the Fund's aggregate expenses under the Class B Plan were
$532,297 or 1.00% of the Class B Shares' average net assets. Such expenses were
paid to reimburse the Distributor for the following payments: $400,590 for
commissions and transaction fees paid to financial intermediaries in respect of
sales of Class B Shares of the Fund and $131,707 for fees paid to financial
intermediaries for servicing Class B shareholders and administering the Plans.
For the fiscal period ended September 30, 1998, the Fund's aggregate expenses
under the Plans for Class C Shares were $43,306 or 1.00% of the Class C Shares'
average net assets. Such expenses were paid to reimburse the Distributor for the
following payments; $16,900 for commissions and transaction fees paid to
financial intermediaries in respect of sales of Class C Shares of the Fund and
$26,406 for fees paid to financial intermediaries for servicing Class C
shareholders and administering the Class C Plan.
TRANSFER AGENT
The Fund's transfer agent is Van Kampen Investor Services Inc., PO Box
418256, Kansas City, MO 64141-9256. During the fiscal period ended September 30,
1998 and the fiscal years ended December 31, 1997 and 1996, Investor Services,
shareholder service agent and dividend disbursing agent for the Fund, received
fees aggregating approximately $625,000, $921,500 and $1,272,800, respectively
for these services. Prior to 1998, these services were provided at cost plus a
profit. Beginning in 1998, the transfer agency prices are determined through
negotiations with the Fund's Board of Trustees and are based on competitive
benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of the Fund's
portfolio business, the policies and practices in this regard will at all times
be subject to review by the trustees of the Fund.
As most transactions made by the Fund are principal transactions at net
prices, the Fund generally incurs little or no brokerage costs. The portfolio
securities in which the Fund invests are normally purchased directly from the
issuer or in the over-the-counter market from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include a spread or markup to the dealer
between the bid and asked price. Sales to dealers are effected at bid prices.
The Fund may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid,
B-36
<PAGE> 316
or may purchase and sell listed bonds on a exchange, which are effected through
brokers who charge a commission for their services.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker/dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size and
breadth of the market for the security, the size of and difficulty in executing
the order, and the best net price. There are many instances when, in the
judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser to the Fund and still must be analyzed
and reviewed by its staff, the receipt of research information is not expected
to reduce its expenses materially. The investment advisory fee is not reduced as
a result of the Adviser's receipt of such research services. Services provided
may include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or pur-chasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Fund.
The Adviser also may place portfolio transactions, to the extent permitted
by law, with brokerage firms affiliated with the Fund, the Adviser or the
Distributor and with brokerage firms participating in the distribution of the
Fund's shares if it reasonably believes that the quality of execution and the
commission are comparable to that available from other qualified firms.
Similarly, to the extent permitted by law and subject to the same considerations
on quality of execution and comparable commission rates, the Adviser may direct
an executing broker to pay a portion or all of any commissions, concessions or
discounts to a firm supplying research or other services or to a firm
participating in the distribution of the Fund's shares.
The Adviser may place portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for the Fund and another advisory account.
In some cases, this procedure could have an adverse effect on the price or the
amount of securities available to the Fund. In making such allocations among the
Fund and other advisory accounts, the main factors considered by the Adviser are
the respective sizes of the Fund and other advisory accounts, the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
Effective October 31, 1996, Morgan Stanley Group Inc. ("Morgan Stanley")
became an affiliate of the Adviser. Effective May 31, 1997, Dean Witter Discover
& Co. ("Dean Witter") became an affiliate of the Adviser. The trustees have
adopted certain policies incorporating the standards of Rule 17e-1 issued by the
SEC under the 1940 Act which requires that the commissions paid to affiliates of
the Fund must be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time. The rule and procedures also contain review requirements and require
the Adviser to furnish reports to the trustees and to maintain records in
connection with such reviews. After consideration of all factors deemed
relevant, the trustees will consider from time to time whether the advisory fee
for the Fund will be reduced by all or a portion of the brokerage commission
given to affiliated brokers.
B-37
<PAGE> 317
The Fund paid the following commissions to all brokers and affiliated
brokers during the periods shown:
<TABLE>
<CAPTION>
AFFILIATED BROKERS
-------------------
MORGAN DEAN
BROKERS STANLEY WITTER
-------- ---------- ------
<S> <C> <C> <C>
Commission paid:
Fiscal period ended September 30, 1998.................... $ 90,152 -- --
Fiscal year ended December 31, 1997....................... $211,776 $0 $0
Fiscal year ended December 31, 1996....................... $ 0 $0 NA
Fiscal period ended September 30, 1998 Percentages:
Commissions with affiliate to total commissions........... -- --
Value of brokerage transactions with affiliate to total
transactions........................................... -- --
</TABLE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's
shares of the Fund are held by Investor Services, the Fund's transfer agent.
Investor Services performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. Except as described
in the Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in any of the
Participating Funds will receive statements quarterly from Investor Services
showing any reinvestments of dividends and capital gains distributions and any
other activity in the account since the preceding statement. Such shareholders
also will receive separate confirmations for each purchase or sale transaction
other than reinvestment of dividends and capital gains distributions and
systematic purchases or redemptions. Additions to an investment account may be
made at any time by purchasing shares through authorized dealers or by mailing a
check directly to Investor Services.
SHARE CERTIFICATES
Generally, the Fund will not issue share certificates. However, upon
written or telephone request to the Fund, a share certificate will be issued
representing shares (with the exception of fractional shares) of the Fund. A
shareholder will be required to surrender such certificates upon redemption
thereof. In addition, if such certificates are lost the shareholder must write
to Van Kampen Funds, c/o Investor Services, PO Box 418256, Kansas City, MO
64141-9256, requesting an "affidavit of loss" and obtain a Surety Bond in a form
acceptable to Investor Services. On the date the letter is received, Investor
Services will calculate a fee for replacing the lost certificate equal to no
more than 2.00% of the net asset value of the issued shares, and bill the party
to whom the replacement certificate was mailed.
RETIREMENT PLANS
Eligible investors may establish individual retirement accounts ("IRAs");
SEP; 401(k) plans; Section 403(b)(7) plans in the case of employees of public
school systems and certain non-profit organizations; or other pension or profit
sharing plans. Documents and forms containing detailed information regarding
these plans are available from the Distributor. Van Kampen Trust Company serves
as custodian under the IRA, 403(b)(7) and Keogh plans. Details regarding fees,
as well as full plan administration for profit sharing, pension and 401(k)
plans, are available from the Distributor.
B-38
<PAGE> 318
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS
Holders of Class A Shares can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemptions transferred to a bank
account via the ACH plan are available to be credited to the account on the
second business day following normal payment. In order to utilize this option,
the shareholder's bank must be a member of ACH. In addition, the shareholder
must fill out the appropriate section of the account application. The
shareholder must also include a voided check or deposit slip from the bank
account into which redemptions are to be deposited together with the completed
application. Once Investor Services has received the application and the voided
check or deposit slip, such shareholder's designated bank account, following any
redemption, will be credited with the proceeds of such redemption. Once enrolled
in the ACH plan, a shareholder may terminate participation at any time by
writing Investor Services.
DIVIDEND DIVERSIFICATION
A shareholder may, upon written request or by completing the appropriate
section of the application form accompanying the Prospectus or by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired), elect to have all dividends
and other distributions paid on a class of shares of the Fund invested into
shares of the same class of any Participating Fund so long as the investor has a
pre-existing account for such class of shares of the other fund. Both accounts
must be of the same type, either non-retirement or retirement. If the accounts
are retirement accounts, they must both be for the same class and of the same
type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for the benefit
of the same individual. If a qualified, pre-existing account does not exist, the
shareholder must establish a new account subject to minimum investment and other
requirements of the fund into which distributions would be invested.
Distributions are invested into the selected fund at its net asset value per
share as of the payable date of the distribution.
SYSTEMATIC WITHDRAWAL PLAN
Any investor whose shares in a single account total $10,000 or more at the
offering price next computed after receipt of instructions may establish a
monthly, quarterly, semi-annual or annual withdrawal plan. Any investor whose
shares in a single account total $5,000 or more at the offering price next
computed after receipt of instructions may establish a quarterly, semiannual or
annual withdrawal plan. This plan provides for the orderly use of the entire
account, not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which any capital gain or loss will be
recognized. The planholder may arrange for monthly, quarterly, semi-annual or
annual checks in any amount, not less than $25. Such a systematic withdrawal
plan may also be maintained by an investor purchasing shares for a retirement
plan established on a form made available by the Fund.
Class B shareholders and Class C shareholders who establish a withdrawal
plan may redeem up to 12% annually of the shareholder's initial account balance
without incurring a CDSC. Initial account balance means the amount of the
shareholder's investment at the time the election to participate in the plan is
made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plans are reinvested in additional shares
at the next determined net asset value per share. If periodic withdrawals
continuously exceed reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Withdrawals made concurrently with the purchase of additional shares
ordinarily will be disadvantageous to the shareholder because of the duplication
of sales charges. Any gain or loss realized by the shareholder upon redemption
of shares is a taxable event. The Fund reserves the right to amend or terminate
the systematic withdrawal program on 30 days' notice to its shareholders.
REINSTATEMENT PRIVILEGE
A Class A shareholder or Class B shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class A Shares of the Fund. A Class C shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption
B-39
<PAGE> 319
in Class C Shares of the Fund with credit given for any CDSC paid upon such
redemption. Such reinstatement is made at the net asset value per share (without
sales charge) next determined after the order is received, which must be within
180 days after the date of the redemption. Reinstatement at net asset value per
share is also offered to participants in those eligible retirement plans held or
administered by Van Kampen Trust Company for repayment of principal (and
interest) on their borrowings on such plans.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed. The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
Additionally, if the Board of Trustees determines that payment wholly or
partly in cash would be detrimental to the best interests of the remaining
shareholders of the Fund, the Fund may pay the redemption proceeds in whole or
in part by a distribution-in-kind of portfolio securities held by the Fund in
lieu of cash in conformity with applicable rules of the SEC. Shareholders may
incur brokerage charges upon the sale of portfolio securities so received in
payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
For purposes of the CDSC-Class A, when shares of one fund are exchanged for
shares of another fund, the purchase date for the shares of the fund exchanged
into will be assumed to be the date on which shares were purchased in the fund
from which the exchange was made. If the exchanged shares themselves are
acquired through an exchange, the purchase date is assumed to carry over from
the date of the original election to purchase shares subject to a CDSC-Class A
rather than a front-end load sales charge. In determining whether a CDSC-Class A
is payable, it is assumed that shares held the longest are the first to be
redeemed.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED
SALES CHARGE ("CDSC-CLASS B AND C")
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a CDSC. The CDSC-Class B
and C is waived on redemptions of Class B Shares and Class C Shares in the
circumstances described below:
REDEMPTION UPON DEATH OR DISABILITY
The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B shareholder and Class C shareholder. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Code, which in pertinent part
defines a person as disabled if such person "is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of
long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of death or disability before it determines to
waive the CDSC-Class B and C.
In cases of death or disability, the CDSC-Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC-Class B and C applies to a total
B-40
<PAGE> 320
or partial redemption, but only to redemptions of shares held at the time of the
death or initial determination of disability.
REDEMPTION IN CONNECTION WITH CERTAIN DISTRIBUTIONS FROM RETIREMENT PLANS
The Fund will waive the CDSC-Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more Participating Funds;
in such event, as described below, the Fund will "tack" the period for which the
original shares were held on to the holding period of the shares acquired in the
transfer or rollover for purposes of determining what, if any, CDSC-Class B and
C is applicable in the event that such acquired shares are redeemed following
the transfer or rollover. The charge also will be waived on any redemption which
results from the return of an excess contribution pursuant to Section 408(d)(4)
or (5) of the Code, the return of excess deferral amounts pursuant to Code
Section 401(k)(8) or 402(g)(2), or from the death or disability of the employee
(see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition, the charge will be
waived on any minimum distribution required to be distributed in accordance with
Code Section 401(a)(9).
The Fund does not intend to waive the CDSC-Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
REDEMPTION PURSUANT TO A FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC-Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from the Fund without the imposition of a CDSC-Class B
and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
The Fund will waive the CDSC-Class B and C in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase of shares.
INVOLUNTARY REDEMPTIONS OF SHARES
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC-Class B and C upon
such involuntary redemption.
REINVESTMENT OF REDEMPTION PROCEEDS
A shareholder who has redeemed Class C Shares of a Fund may reinvest at net
asset value, with credit for any CDSC-Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C Shares of the Fund, provided that the reinvestment is effected
within 180 days after such redemption and the shareholder has not previously
exercised this reinvestment privilege with respect to Class C Shares of the
Fund. Shares acquired in this manner will be deemed to have the original cost
and purchase date of the redeemed shares for purposes of applying the CDSC-Class
C to subsequent redemptions.
B-41
<PAGE> 321
REDEMPTION BY ADVISER
The Fund may waive the CDSC-Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
TAXATION
FEDERAL INCOME TAXATION. The Trust and each of its series, including the
Fund, will be treated as separate corporations for federal income tax purposes.
The Fund has elected and qualified, and intends to continue to qualify each
year, to be treated as a regulated investment company under Subchapter M of the
Code. To qualify as a regulated investment company, the Fund must comply with
certain requirements of the Code relating to, among other things, the source of
its income and diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gain, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses), it
will not be required to pay federal income taxes on any income distributed to
shareholders. The Fund intends to distribute at least the minimum amount of net
investment income necessary to satisfy the 90% distribution requirement. The
Fund will not be subject to federal income tax on any net capital gains
distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute,
by December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income (not including tax-exempt income) for such year and (ii) 98%
of its capital gain net income (the latter of which generally is computed on the
basis of the one-year period ending on October 31st of such year), plus any
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.
If the Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Fund would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions
of the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have
B-42
<PAGE> 322
continued to hold. A portion of the discount relating to certain stripped
tax-exempt obligations may constitute taxable income when distributed to
shareholders.
DISTRIBUTIONS. The Fund intends to invest in sufficient tax-exempt
municipal securities to permit payment of "exempt-interest dividends" (as
defined in the Code). Dividends paid by the Fund from the net tax-exempt
interest earned from municipal securities qualify as exempt-interest dividends
if, at the close of each quarter of its taxable year, at least 50% of the value
of the total assets of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
Exempt-interest dividends are included in determining what portion, if any,
of a person's social security and railroad retirement benefits will be
includable in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund, or by the Trust if it is required to qualify as a regulated
investment company as described below. "Substantial user" is defined under U.S.
Treasury Regulations to include a non-exempt person who regularly uses in his
trade or business a part of any facilities financed with the tax-exempt
obligations and whose gross revenues derived from such facilities exceed 5% of
the total revenues derived from the facilities by all users, or who occupies
more than 5% of the useable area of the facilities or for whom the facilities or
a part thereof were specifically constructed, reconstructed or acquired.
Examples of "related persons" include certain related natural persons,
affiliated corporations, a partnership and its partners and an S corporation and
its shareholders.
While the Fund expects that a major portion of its net investment income
will constitute tax-exempt interest, a significant portion may consist of
investment company taxable income. Distributions of the Fund's net investment
company taxable income are taxable to shareholders as ordinary income to the
extent of the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains ("capital gain
dividends"), if any, are taxable to shareholders as long-term capital gains
regardless of the length of time shares of the Fund have been held by such
shareholders. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming such shares are held as a capital asset). For a summary of the
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates" below. Interest on indebtedness which is incurred to
purchase or carry
B-43
<PAGE> 323
shares of a mutual fund which distributes exempt interest dividends during the
year is not deductible for federal income tax purposes. Tax-exempt shareholders
not subject to federal income tax on their income generally will not be taxed on
distributions from the Fund.
Shareholders receiving distributions in the form of additional shares
issued by the Fund will be treated for federal income tax purposes as receiving
a distribution in an amount equal to the fair market value of the shares
received, determined as of the distribution date. The basis of such shares will
equal the fair market value on the distribution date.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt-interest dividends cannot exceed the
excess of the amount of interest exempt from tax under Section 103 of the Code
received by the Fund during the year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code. Since the percentage of dividends
which are exempt-interest dividends is determined on an average annual method
for the taxable year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax exempt during the period covered by the dividend.
Fund distributions generally will not qualify for the dividends received
deduction for corporations.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
SALE OF SHARES. The sale of shares (including transfers in connection with
a redemption or repurchase of shares) will be a taxable transaction for federal
income tax purposes. Selling shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
shares and the amount received. If such shares are held as a capital asset, the
gain or loss will be a capital gain or loss. For a summary of the tax rates
applicable to capital gains (including capital gain dividends), see "Capital
Gains Rates" below. Any loss recognized upon a taxable disposition of shares
held for six months or less will be treated as a long-term capital loss to the
extent of any capital gain dividends received with respect to such shares. For
purposes of determining whether shares have been held for six months or less,
the holding period is suspended for any periods during which the shareholder's
risk of loss is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES. The maximum tax rate applicable to net capital gains
recognized by individuals and other non-corporate taxpayers is (i) the same as
the maximum ordinary income tax rate for capital assets held for one year or
less or (ii) 20% for capital assets held for more than one year. A special 28%
tax rate may apply to a portion of the capital gain dividends paid by the Fund
with respect to its taxable year ended September 30, 1998. The maximum long-term
capital gains rate for corporations is 35%.
BACKUP WITHHOLDING. The Fund may be required to withhold federal income tax
at a rate of 31% ("backup withholding") from dividends and redemption proceeds
paid to non-corporate shareholders. This tax may be withheld from dividends if
(i) the shareholder fails to furnish the Fund with its correct taxpayer
identification number, (ii) the IRS notifies the Fund that the shareholder has
failed to properly report certain interest and dividend income to the IRS and to
respond to notices to that effect or (iii) when required to do so, the
shareholder fails to certify that he or she is not subject to backup
withholding. Redemption proceeds may be subject to withholding under the
circumstances described in (i) above.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's United States federal income tax liability,
if any, provided that the required information is furnished to the IRS.
B-44
<PAGE> 324
GENERAL. The federal, income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal tax consequences of purchasing, holding and disposing of
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one year, five year and ten year periods. Other total
return quotations, aggregate or average, over other time periods may also be
included.
The total return of the Fund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the Fund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the current maximum public
offering price (which includes a maximum sales charge of 4.75% for Class A
Shares); that all income dividends or capital gains distributions during the
period are reinvested in Fund shares at net asset value; and that any applicable
CDSC has been paid. The Fund's total return will vary depending on market
conditions, the securities comprising the Fund's portfolio, the Fund's operating
expenses and unrealized net capital gains or losses during the period. Total
return is based on historical earnings and asset value fluctuations and is not
intended to indicate future performance. No adjustments are made to reflect any
income taxes payable by shareholders on dividends and distributions paid by the
Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares.
Non-standardized total return calculations do not reflect the imposition of
a contingent deferred sales charge, and if any such contingent deferred sales
charge with respect to the CDSC imposed at the time of redemption were
reflected, it would reduce the performance quoted.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and
B-45
<PAGE> 325
principal value of an investment in the Fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
Yield and total return are calculated separately for Class A Shares, Class
B Shares and Class C Shares. Class A Shares total return figures include the
maximum sales charge of 4.75%; Class B Shares and Class C Shares total return
figures include any applicable CDSC. Because of the differences in sales charges
and distribution fees, the total returns for each of the classes will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield, which is a measure of
the income actually earned by the Fund's investments, and from total return
which is a measure of the income actually earned by the Fund's investments plus
the effect of any realized and unrealized appreciation or depreciation of such
investments during a stated period. Distribution rate is, therefore, not
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
From time to time marketing materials may provide a portfolio manager
update, an adviser update or discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top five sectors, ten largest holdings and other Fund asset
structures, such as duration, maturity, coupon, NAV, rating breakdown, AMT
exposure and number of issues in the portfolio. Materials may also mention how
the Distributor believes the Fund compares relative to other Van Kampen funds.
Materials may also discuss the Dalbar Financial Services study from 1984 to 1994
which studied investor cash flow into and out of all types of mutual funds. The
ten year study found that investors who bought mutual fund shares and held such
shares outperformed investors who bought and sold. The Dalbar study conclusions
were consistent regardless of if shareholders purchased their funds in direct or
sales force distribution channels. The study showed that investors working with
a professional representative have tended over time to earn higher returns than
those who invested directly. The Fund will also be marketed on the internet.
In reports or other communications to shareholders or in advertising
material, the Fund may compare its performance with that of other mutual funds
as listed in the rankings or ratings prepared by Lipper Analytical Services,
Inc., CDA, Morningstar Mutual Funds or similar independent services which
monitor the performance of mutual funds with the Consumer Price Index, other
appropriate indices of investment securities, or with investment or savings
vehicles. The performance information may also include evaluations of the Fund
published by nationally recognized ranking services and by nationally recognized
financial publications. Such comparative performance information will be stated
in the same terms in which the comparative data or indices are stated. Such
advertisements and sales material may also include a yield quotation as of a
current period. In each case, such total return and yield information, if any,
will be calculated pursuant to rules established by the SEC and will be computed
separately for each class of the Fund's shares. For these purposes, the
performance of the Fund, as well as the performance of other mutual funds or
indices, do not reflect sales charges, the inclusion of which would reduce Fund
performance. The Fund will include performance data for each class of shares of
the Fund in any advertisement or information including performance data of the
Fund.
The Fund may also utilize performance information in hypothetical
illustrations. For example, the Fund may, from time to time: (1) illustrate the
benefits of tax-deferral by comparing taxable investments to investments made
through tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
of different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return.
Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
B-46
<PAGE> 326
computed by dividing that portion of the yield of the Fund (as computed above)
which is tax-exempt by a percentage equal to 100% minus a stated percentage
income tax rate and adding the result to that portion of the Fund's yield, if
any, that is not tax-exempt.
The Fund's Annual Report and Semi-Annual Report contain additional
performance information. A copy of the Annual Report or Semi-Annual Report may
be obtained without charge by calling or writing the Fund at the telephone
number and address printed on the back cover of the Prospectus.
CLASS A SHARES
The average total return, including payment of the maximum sales charge,
with respect to the Class A Shares for (i) the one year period ended September
30, 1998 was 3.34%; (ii) the five year period ended September 30, 1998 was 4.59%
and (iii) the ten year period ended September 30, 1998 was 7.37%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.11%. The Fund's current distribution
rate with respect to the Class A Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.58%. The Fund's taxable equivalent distribution rate with
respect to Class A Shares for the month ending September 30, 1998 was 7.16%.
The Fund's cumulative non-standardized total return, including payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to the end of the current period was 224.70%.
The Fund's cumulative non-standardized total return, excluding payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to the end of the current period was 240.85%.
CLASS B SHARES
The average total return, including payment of CDSC, with respect to the
Class B Shares for (i) the one year period ended September 30, 1998 was 3.68%,
(ii) the five year period ended September 30, 1998 was 4.57% and (iii) the
approximately five year, five month period from May 1, 1993 (the commencement of
distribution) through September 30, 1998 was 5.30%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 2.49%. The Fund's current distribution
rate with respect to the Class B Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.07%. The Fund's taxable equivalent distribution rate with
respect to Class B Shares for the month ending September 30, 1998 was 6.36%.
The Fund's cumulative non-standardized total return, including payment of
the CDSC, with respect to the Class B Shares from its inception to the end of
the current period was 32.26%.
The Fund's cumulative non-standardized total return, excluding payment of
the CDSC, with respect to the Class B Shares from its inception to the end of
the current period was 33.26%.
CLASS C SHARES
The average total return, including payment of CDSC, with respect to the
Class C Shares for (i) the one year period ended September 30, 1998 was 6.68%,
(ii) the five year period ended September 30, 1998 was 4.81% and (iii) the
approximately five year, one month period from August 13, 1993 (commencement of
distribution) through September 30, 1998 was 5.11%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 2.51%. The Fund's current distribution
rate with respect to the Class C Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance")
B-47
<PAGE> 327
was 4.07%. The Fund's taxable equivalent distribution rate with respect to Class
C Shares for the month ending September 30, 1998 was 6.36%.
The Fund's cumulative non-standardized total return, including payment of
the CDSC, with respect to the Class C Shares from its inception to the end of
the current period was 29.14%.
The Fund's cumulative non-standardized total return, excluding payment of
the CDSC, with respect to the Class C Shares from its inception to the end of
the current period was 29.14%.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash,
including proceeds from the sale of shares of the Fund and of securities in the
Fund's investment portfolio, are held by State Street Bank and Trust Company,
225 West Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual statements are furnished to
shareholders, and annually such statements are audited by the independent
accountants.
INDEPENDENT ACCOUNTANTS -- KPMG LLP, 303 East Wacker Drive, Chicago,
Illinois 60601, the independent accountants for the Fund, performs an annual
audit of the Fund's financial statements.
LEGAL COUNSEL -- Counsel to the Fund is Skadden, Arps, Slate, Meagher &
Flom (Illinois).
B-48
<PAGE> 328
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen Insured Tax Free Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Insured Tax Free Income Fund (the "Fund"), including the portfolio of
investments, as of September 30, 1998, and the related statement of operations
for the nine-month period ended September 30, 1998 and the year ended December
31, 1997, the statement of changes in net assets for the nine-month period ended
September 30, 1998 and for each of the two years in the period ended December
31, 1997, 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
September 30, 1998, 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 Insured Tax Free Income Fund as of September 30, 1998, the results of its
operations for the nine-month period ended September 30, 1998 and the year ended
December 31, 1997, the changes in its net assets for the nine-month period ended
September 30, 1998 and for each of the two years in the period ended December
31, 1997, and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
November 5, 1998
F-1
<PAGE> 329
PORTFOLIO OF INVESTMENTS
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 97.8%
ALABAMA 2.1%
$ 2,250 Alabama St Brd Edl Rev Shelton St Cmnty College (MBIA
Insd)....................................................... 6.000% 10/01/14 $ 2,511,360
1,955 Alabama Wtr Pollutn Ctl Auth Revolving Fund Ln Ser A (AMBAC
Insd)....................................................... 6.750 08/15/17 2,231,730
1,900 Birmingham-Carraway, AL Methodist Hlth Sys Ser A (Connie Lee
Insd)....................................................... 5.875 08/15/25 2,045,122
2,500 Jefferson Cnty, AL Brd Edl Cap Outlay Sch (AMBAC Insd)...... 5.875 02/15/20 2,692,400
2,000 Lauderdale Cnty & Florence AL Hlthcare Auth Rev Eliza Coffee
Mem Hosp Rfdg (MBIA Insd)................................... 5.750 07/01/19 2,163,440
4,000 Madison Alabama Wts Ser C (MBIA Insd)....................... 5.000 09/01/27 4,012,320
3,130 Montgomery, AL Edl Bldg Auth Faulkner Univ Proj (AMBAC Insd)
(a)......................................................... 5.000 10/01/23 3,134,194
5,500 Morgan Cnty Decatur, AL Hlthcare Auth Hosp Rev Decatur Genl
Hosp Rfdg (Connie Lee Insd)................................. 6.250 03/01/13 6,088,005
2,400 Muscle Shoals, AL Util Brd Wtr & Swr Rev (FSA Insd)......... 6.500 04/01/16 2,720,208
1,400 West Morgan East Lawrence Wtr Auth AL Wtr Rev (FGIC Insd)... 5.625 08/15/21 1,514,520
1,000 West Morgan East Lawrence Wtr Auth AL Wtr Rev (FGIC Insd)... 5.625 08/15/25 1,081,800
--------------
30,195,099
--------------
ALASKA 0.2%
2,355 Ketchikan, AK Muni Util Rev Ser R (FSA Insd)................ 6.600 12/01/07 2,637,624
--------------
ARIZONA 1.3%
11,000 Arizona St Ctfs Partn Ser B Rfdg (AMBAC Insd)............... 6.250 09/01/10 11,988,130
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 2,360,246
1,875 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp Ser A Rfdg
(AMBAC Insd)................................................ 6.000 09/01/12 2,090,925
1,750 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp Ser A Rfdg
(AMBAC Insd)................................................ 6.125 09/01/17 1,946,927
--------------
18,386,228
--------------
CALIFORNIA 16.8%
4,290 Antioch Area, CA Pub Fac Fin Agy Cmnty Fac Dist No 1989
(FGIC Insd)................................................. 5.300 08/01/15 4,565,676
2,835 Bay Area Govt Assn CA Rev Tax Alloc CA Redev Agy Pool Rev
Ser A (FSA Insd)............................................ 6.000 12/15/14 3,195,669
5,000 Beverly Hills, CA Pub Fin Auth Lease Rev Ser A (MBIA
Insd)....................................................... 5.650 06/01/15 5,302,700
10,000 California Hlth Fac Fin Auth Rev Sutter Hosp Ser A Rfdg
(AMBAC Insd)................................................ 6.700 01/01/13 10,176,900
3,415 California Pub Cap Impt Fin Auth Rev Pooled Proj Ser B (BIGI
Insd)....................................................... 8.100 03/01/18 3,496,243
10,000 California St Pub Wks Brd Lease Rev Dept of Corrections CA
St Prison D Susanville (MBIA Insd).......................... 5.375 06/01/18 10,396,500
10,000 California Statewide Cmntys Dev Auth Rev Sherman Oaks
Project Ser A Rfdg (AMBAC Insd)............................. 5.000 08/01/22 10,274,300
16,770 Capistrano, CA Uni Pub Fin Auth Spl Tax Rev First Lien Ser A
Rfdg (AMBAC Insd)........................................... 5.700 09/01/16 18,469,304
6,420 Central Vly Sch Dist Fin Auth CA Cap Apprec Sch Dist Ser A
Rfdg (MBIA Insd)............................................ * 08/01/09 4,037,987
3,000 Chino, CA Ctfs Partn Redev Agy (MBIA Insd).................. 6.200 09/01/18 3,349,200
220 Concord, CA Redev Agy Tax Alloc Cent Concord Redev Proj Ser
3 (BIGI Insd)............................................... 8.000 07/01/18 226,818
805 Corona Norco, CA Uni Sch Dist Lease Rev Partn Insd Land
Acquis Ser A (FSA Insd)..................................... 6.000 04/15/19 893,703
1,250 Cucamonga, CA Cnty Wtr Dist Ctfs Partn Fac Refin (FGIC
Insd)....................................................... 6.300 09/01/12 1,355,938
425 Earlimart, CA Elem Sch Dist Ser 1 (AMBAC Insd).............. 6.700 08/01/21 542,861
5,675 Escondido, CA Jt Pwrs Fin Auth Lease Rev CA Cent for the
Arts Rfdg (AMBAC Insd)...................................... * 09/01/17 1,875,361
6,500 Grossmont, CA Union High Sch Dist Ctfs Partn (MBIA Insd).... * 11/15/21 1,503,385
7,000 La Habra, CA Ctfs Partn Pk La Habra & Viewpark Proj (FSA
Insd)....................................................... 6.625 11/01/22 7,952,560
1,000 La Habra, CA Ctfs Partn Pk La Habra & Viewpark Proj
(Prerefunded @ 11/01/02) (FSA Insd)......................... 6.500 11/01/12 1,131,360
3,500 Los Angeles Cnty, CA Cap Asset Lease Corp Leasehold Rev Rfdg
(AMBAC Insd)................................................ 6.000 12/01/16 3,846,080
5,350 Los Angeles Cnty, CA Metro Tran Auth Sales Tax Rev First
Tier Prop A Ser A Rfdg (FSA Insd) (a)....................... 5.000 07/01/04 5,581,441
13,480 Los Angeles Cnty, CA Metro Tran Auth Sales Tax Rev Prop A
Second Tier Rfdg (MBIA Insd)................................ 6.000 07/01/21 14,946,085
3,000 Los Angeles, CA Cmnty Redev Agy Tax Alloc Bunker Hill Ser H
Rfdg (FSA Insd)............................................. 6.500 12/01/14 3,410,160
1,830 Los Angeles, CA Ser A (FGIC Insd)........................... 6.125 09/01/13 2,054,724
7,500 Manteca, CA Redev Agy Tax Alloc Redev Proj No 1 Ser A Rfdg
(MBIA Insd)................................................. 6.700 10/01/21 8,401,350
1,290 Martinez, CA Uni Sch Dist Ctfs Elig Rfdg (FSA Insd)......... 6.000 08/01/09 1,370,483
2,000 MSR Pub Pwr Agy CA San Juan Proj Rev Ser F Rfdg (AMBAC
Insd)....................................................... 6.000 07/01/20 2,195,880
13,610 Norco, CA Redev Agy Tax Alloc Norco Redev Proj Area No 1
Rfdg (MBIA Insd)............................................ 6.250 03/01/19 14,864,978
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 330
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA (CONTINUED)
$ 1,500 North City West, CA Sch Fac Fin Auth Spl Tax Ser B Rfdg (FSA
Insd)....................................................... 6.000% 09/01/19 $ 1,669,005
2,860 Orange Cnty, CA Ctfs Partn Juvenile Justice Cent Fac Rfdg
(AMBAC Insd)................................................ 6.000 06/01/17 3,107,304
2,760 Palmdale, CA Civic Auth Rev Merged Redev Proj Areas Ser A
(MBIA Insd)................................................. 6.000 09/01/15 3,100,832
2,160 Paramount, CA Redev Agy Tax Alloc (MBIA Insd)............... 6.250 08/01/11 2,411,878
2,295 Paramount, CA Redev Agy Tax Alloc (MBIA Insd)............... 6.250 08/01/12 2,562,620
2,435 Paramount, CA Redev Agy Tax Alloc (MBIA Insd)............... 6.250 08/01/13 2,718,945
2,585 Paramount, CA Redev Agy Tax Alloc (MBIA Insd)............... 6.250 08/01/14 2,886,437
2,750 Paramount, CA Redev Agy Tax Alloc (MBIA Insd)............... 6.250 08/01/15 3,070,678
2,000 Perris, CA Pub Fin Auth Local Agy Rev Parity Ser F (FSA
Insd)....................................................... 5.850 09/01/24 2,211,480
1,400 Reedley, CA Pub Fin Auth Lease Rev Wastewtr Treatment Plant
Proj (AMBAC Insd)........................................... 6.050 05/01/15 1,504,356
2,945 Rubidoux, CA Cmnty Svcs Dist Ctfs Partn Wtr Sys Impt Rfdg
(AMBAC Insd)................................................ 5.050 12/01/17 3,091,278
4,170 Rubidoux, CA Cmnty Svcs Dist Ctfs Partn Wtr Sys Impt Rfdg
(AMBAC Insd)................................................ 5.100 12/01/24 4,403,186
5,000 Sacramento, CA Cogeneration Auth Cogeneration Proj Rev (MBIA
Insd)....................................................... 5.000 07/01/17 5,113,500
3,900 Sacramento, CA Muni Util Dist Elec Rev Ser A Rfdg (MBIA
Insd)....................................................... 5.750 08/15/13 4,170,699
13,800 San Bernardino Cnty, CA Ctfs Partn Ser B (Embedded Swap)
(MBIA Insd)................................................. 7.000 07/01/16 15,169,374
1,000 San Jose, CA Fin Auth Rev Convention Cent Proj Ser C Rfdg
(FSA Insd).................................................. 6.300 09/01/09 1,092,180
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 2,981,925
1,000 Santa Rosa, CA Wastewtr Svc Fac Dist Rfdg & Impt (AMBAC
Insd)....................................................... 6.200 07/02/09 1,100,650
2,000 Santa Rosa, CA Wtr Rev Ser B Rfdg (FGIC Insd)............... 6.200 09/01/09 2,192,700
2,510 Solano Cnty, CA Ctfs Partn Solano Park Hosp Proj (FSA
Insd)....................................................... 5.750 08/01/14 2,754,323
12,600 Southern CA Pub Pwr Auth Transmission Proj Rev (FSA Insd)... 6.000 07/01/12 13,688,136
3,370 Stockton, CA Pub Fin Auth Rev Ser A Rfdg (FSA Insd)......... 5.875 09/02/16 3,764,526
2,500 Temecula Vly, CA Uni Sch Dist Ctfs Partn Rfdg (FSA Insd).... 6.000 09/01/25 2,778,125
1,000 Temecula Vly, CA Uni Sch Dist Ser B Rfdg (FGIC Insd)........ 6.000 09/01/12 1,091,840
2,460 Torrance, CA Hosp Rev Torrance Mem Hosp Rfdg (MBIA Insd).... 6.750 01/01/12 2,479,778
3,845 Vista, CA Uni Sch Dist Ctfs Partn Ser A Rfdg (FSA Insd)..... * 11/01/17 1,302,955
2,000 William S Hart CA Jt Sch Fin Auth Spl Tax Rev Cmnty Fac Rfdg
(FSA Insd).................................................. 6.500 09/01/14 2,325,320
--------------
240,161,676
--------------
COLORADO 2.2%
2,090 Colorado Hlth Fac Auth Rev Sisters of Charity Hlthcare Ser A
(Prerefunded @ 05/15/01) (MBIA Insd)........................ 6.000 05/15/13 2,213,122
17,750 Denver, CO City & Cnty Arpt Rev Ser A (MBIA Insd)........... 5.700 11/15/25 19,312,888
5,500 Denver, CO City & Cnty Arpt Rev Ser D Rfdg (MBIA Insd)...... 5.500 11/15/25 5,845,125
10 Jefferson Cnty, CO Single Family Mtg Rev Ser A Rfdg (MBIA
Insd)....................................................... 8.875 10/01/13 10,698
2,050 Thornton, CO Rfdg (FGIC Insd)............................... * 12/01/11 1,148,226
1,100 Thornton, CO Rfdg (FGIC Insd)............................... * 12/01/15 497,101
2,000 Westminster, CO Wtr & Wastewtr Util Enterprise Rev (AMBAC
Insd)....................................................... 6.250 12/01/14 2,232,740
--------------
31,259,900
--------------
DISTRICT OF COLUMBIA 0.0%
250 District of Columbia Ser B Rfdg (MBIA Insd)................. * 06/01/04 199,278
--------------
FLORIDA 5.3%
1,350 Dade Cnty, FL Sch Brd Ctfs Partn Ser A (AMBAC Insd)......... 5.500 05/01/25 1,429,002
1,010 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd)............ 8.000 10/01/03 1,201,365
690 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd)............ 8.000 10/01/04 841,138
1,180 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd)............ 8.000 10/01/05 1,470,292
1,275 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd)............ 8.000 10/01/06 1,620,831
1,375 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd)............ 8.000 10/01/07 1,779,525
2,095 Dade Cnty, FL Util Pub Impt Rfdg (FGIC Insd)................ 12.000 10/01/04 2,986,401
175 Duval Cnty, FL Hsg Fin Auth Single Family Mtg Rev Ser C
(FGIC Insd)................................................. 7.650 09/01/10 185,560
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 331
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FLORIDA (CONTINUED)
$ 755 Duval Cnty, FL Hsg Fin Auth Single Family Mtg Rev Ser C
(FGIC Insd)................................................. 7.700% 09/01/24 $ 799,681
1,410 Florida St Dept Corrections Ctfs Partn Okeechobee
Correctional (AMBAC Insd)................................... 6.250 03/01/15 1,588,873
2,000 Indian River Cnty, FL Hosp Rev Rfdg (FSA Insd).............. 6.100 10/01/18 2,244,680
1,000 Key West, FL Util Brd Elec Rev Ser D (AMBAC Insd)........... * 10/01/13 503,970
4,000 Lee Cnty, FL Hosp Brd Dir Hosp Rev (Inverse Fltg) (MBIA
Insd)....................................................... 9.468 04/01/20 4,695,000
15,825 Miami Dade Cnty, FL Solid Waste Sys Rev (AMBAC Insd)........ 4.750 10/01/18 15,754,104
14,275 Miami Dade Cnty, FL Spl Oblig Ser B (MBIA Insd)............. 5.000 10/01/37 14,343,234
6,000 Orange Cnty, FL Hlth Fac Auth Rev (Inverse Fltg) (MBIA
Insd)....................................................... 8.796 10/29/21 7,162,500
2,000 Palm Beach Cnty, FL Sch Brd Ctfs Partn Ser A (Prerefunded @
08/01/04) (AMBAC Insd)...................................... 6.375 08/01/15 2,281,540
1,090 Sarasota Cnty, FL Util Sys Rev (Prerefunded @ 10/01/04)
(FGIC Insd)................................................. 6.500 10/01/14 1,263,070
10,000 Tallahassee, FL Hlth Fac Rev Tallahassee Mem Regl Med Ser A
Rfdg (MBIA Insd)............................................ 6.625 12/01/13 11,433,500
1,750 Tampa, FL Rev Hlth Sys Catholic Hlth Ser A1 (MBIA Insd)..... 4.875 11/15/23 1,727,425
--------------
75,311,691
--------------
GEORGIA 2.9%
1,250 Atlanta, GA Ctfs Partn Atlanta Pretrial Detention Cent (MBIA
Insd)....................................................... 6.250 12/01/08 1,381,288
1,750 Atlanta, GA Ctfs Partn Atlanta Pretrial Detention Cent (MBIA
Insd)....................................................... 6.250 12/01/17 1,922,638
15,550 Georgia Muni Elec Auth Pwr Rev Ser Y (AMBAC Insd)........... 6.400 01/01/13 18,568,566
10,000 Georgia Muni Elec Auth Pwr Rev Ser Y (MBIA Insd)............ 6.500 01/01/17 12,251,300
6,500 Georgia Muni Elec Auth Pwr Rev Genl Ser B (BIGI Insd)....... * 01/01/07 4,649,970
4,750 Georgia Muni Elec Auth Pwr Rev Genl Ser B (BIGI Insd)....... * 01/01/08 3,233,468
--------------
42,007,230
--------------
HAWAII 1.0%
12,785 Hawaii St Arpt Sys Rev Ser 1993 Rfdg (MBIA Insd)............ 6.400 07/01/08 14,306,031
--------------
ILLINOIS 19.8%
1,000 Berwyn, IL (MBIA Insd)...................................... 7.000 11/15/10 1,081,490
5,000 Chicago, IL (FGIC Insd)..................................... 5.500 01/01/21 5,316,850
5,000 Chicago, IL Lakefront Millennium Parking Fac (MBIA Insd).... 5.000 01/01/18 5,045,250
1,400 Chicago, IL Brd of Ed Chicago Sch Reform (AMBAC Insd)....... 5.750 12/01/20 1,540,686
25,725 Chicago, IL Brd of Ed Chicago Sch Reform (MBIA Insd)........ 6.000 12/01/26 28,461,111
16,000 Chicago, IL Brd of Ed Chicago Sch Reform (AMBAC Insd)....... 5.750 12/01/27 17,582,560
22,000 Chicago, IL Brd of Ed Chicago Sch Reform Ser A (AMBAC
Insd)....................................................... 5.250 12/01/30 22,474,320
6,950 Chicago, IL Midway Arpt Rev Ser B (MBIA Insd)............... 5.000 01/01/28 6,901,906
24,925 Chicago, IL Midway Arpt Rev Ser B (MBIA Insd)............... 5.000 01/01/35 24,778,441
2,720 Chicago, IL Pub Bldg Comm Bldg Rev Chicago Transit Auth
(AMBAC Insd)................................................ 6.600 01/01/15 3,081,080
3,480 Chicago, IL Pub Bldg Comm Bldg Rev Ser A (MBIA Insd)........ * 01/01/06 2,583,448
3,105 Chicago, IL Pub Bldg Comm Bldg Rev Ser A (MBIA Insd)........ * 01/01/07 2,203,370
4,150 Chicago, IL Skyway Toll Brdg Rev (MBIA Insd)................ 5.500 01/01/23 4,408,670
2,000 Chicago, IL Wastewtr Transmission Rev (FGIC Insd)........... 5.125 01/01/25 2,017,440
1,000 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd)................................................. 8.400 01/01/01 1,098,030
5,550 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd)................................................. 8.750 01/01/03 6,582,245
8,460 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd)................................................. 8.750 01/01/04 10,340,150
2,460 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd)................................................. 8.750 01/01/05 3,086,291
3,500 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd)................................................. 8.750 01/01/07 4,588,325
1,280 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood & Flossmor
(AMBAC Insd)................................................ * 12/01/05 956,838
8,280 Cook Cnty, IL Cnty Juvenile Detention Ser A (AMBAC Insd).... * 11/01/08 5,417,687
1,505 Cook Cnty, IL Sch Dist No 100 Berwyn South (FSA Insd)....... 8.200 12/01/14 2,113,607
1,775 Cook Cnty, IL Sch Dist No 100 Berwyn South (FSA Insd)....... 8.100 12/01/16 2,499,147
5,500 Cook County, IL Ser A Rfdg (AMBAC Insd)..................... 5.000 11/15/22 5,495,875
1,115 Evanston, IL Residential Mtg Rev (AMBAC Insd)............... 6.375 01/01/09 1,186,472
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 332
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ILLINOIS (CONTINUED)
$10,000 Illinois Dev Fin Auth Pollutn Ctl Rev Comwlth Edison Co Proj
Ser D Rfdg (AMBAC Insd)..................................... 6.750% 03/01/15 $ 11,455,700
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 41,266,050
5,000 Illinois Dev Fin Auth Pollutn Ctl Rev IL Pwr Co Proj Ser A
Rfdg (MBIA Insd)............................................ 5.400 03/01/28 5,114,250
2,000 Illinois Dev Fin Auth Rev Sch Dist Pgm Rockford Sch 205 (FSA
Insd)....................................................... 6.650 02/01/11 2,427,920
5,025 Illinois Dev Fin Auth Rev Sch Dist Pgm Rockford Sch 205 Rfdg
(FSA Insd).................................................. 6.650 02/01/12 5,846,487
6,015 Illinois Edl Fac Auth Rev Lake Forest College (MBIA Insd)... 5.000 10/01/28 5,973,376
971 Illinois Hlth Fac Auth Rev Cmnty Prov Pooled Pgm Ser B (MBIA
Insd)....................................................... 7.900 08/15/03 984,196
220 Illinois Hlth Fac Auth Rev Cmnty Prov Pooled Pgm Ser B Rfdg
(MBIA Insd)................................................. 7.900 08/15/03 253,726
5,000 Illinois Hlth Fac Auth Rev Hosp Sisters Svcs (Inverse Fltg)
(MBIA Insd)................................................. 9.467 06/19/15 6,037,500
5,000 Illinois Hlth Fac Auth Rev Methodist Hlth Proj (Inverse
Fltg) (AMBAC Insd).......................................... 9.872 05/18/21 5,937,500
3,400 Illinois Hlth Fac Auth Rev Rush Presbyterian Saint Luke Hosp
(Inverse Fltg) (MBIA Insd).................................. 9.818 10/01/24 4,046,000
3,000 Illinois Hlth Fac Auth Rev Sarah Bush Lincoln Hlth Rfdg
(AMBAC Insd)................................................ 6.000 01/01/27 3,284,790
1,320 Kane Cnty, IL Sch Dist No 129 Aurora West Side (FSA Insd)... 5.000 02/01/14 1,344,064
5,350 Melrose Park, IL Wtr Rev Ser A (MBIA Insd).................. 5.200 07/01/18 5,490,812
2,625 Melrose Park, IL Wtr Rev Ser A (MBIA Insd).................. 5.000 07/01/20 2,627,809
6,110 Rosemont, IL Tax Increment 3 (FGIC Insd).................... * 12/01/06 4,364,739
3,000 Rosemont, IL Tax Increment 3 (FGIC Insd).................... * 12/01/07 2,047,440
1,185 Saint Clair Cnty, IL Ctfs Partn (MBIA Insd)................. 8.000 12/01/04 1,443,591
1,285 Saint Clair Cnty, IL Ctfs Partn (MBIA Insd)................. 8.000 12/01/05 1,600,262
1,500 Will Cnty, IL Cmnty Unit Sch Dist No 201 Ser C (FSA Insd)... * 10/01/13 743,865
1,000 Will Cnty, IL Cmnty Unit Sch Dist No 201 Ser C (FSA Insd)... * 10/01/14 472,520
--------------
283,603,886
--------------
INDIANA 0.6%
2,000 Indiana Bond Bank Spl Pgm Ser A (AMBAC Insd)................ 9.750 08/01/09 2,644,560
5,000 Indiana Hlth Fac Fin Auth Hosp Rev Cmnty Hosps Proj Rfdg &
Impt (MBIA Insd)............................................ 6.400 05/01/12 5,441,250
1,000 Marion Cnty, IN Convention & Rectl Fac Auth Excise Tax Rev
Lease Rental Ser A (AMBAC Insd)............................. 7.000 06/01/21 1,091,960
--------------
9,177,770
--------------
KANSAS 3.0%
38,750 Burlington, KS Pollutn Ctl Rev KS Gas & Elec Co Proj Rfdg
(MBIA Insd) (b)............................................. 7.000 06/01/31 42,296,013
--------------
KENTUCKY 0.2%
20 Kentucky Cntys Single Family Mtg Presbyterian Homes Ser A
Rfdg (MBIA Insd)............................................ 8.625 09/01/15 20,252
2,000 Kentucky Econ Dev Fin Auth Hosp Fac Rev Rfdg (Connie Lee
Insd)....................................................... 5.700 02/01/28 2,144,340
--------------
2,164,592
--------------
LOUISIANA 1.6%
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 4,849,748
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 6,756,056
310 Louisiana Pub Fac Auth Rev Med Cent LA at New Orleans Proj
(Connie Lee Insd)........................................... 6.250 10/15/10 332,488
4,150 Louisiana Pub Fac Auth Rev Pgm Hlth & Edl Cap Fac Our Lady
Med Cent Ser C (BIGI Insd).................................. 8.200 12/01/15 4,264,872
5,000 Louisiana Pub Fac Auth Rev Tulane Univ of LA (AMBAC Insd)... 6.050 10/01/25 5,559,200
10,000 New Orleans, LA Home Mtg Auth Single Family Mtg Rev 1985 Ser
A (MBIA Insd)............................................... * 09/15/16 1,598,500
--------------
23,360,864
--------------
MAINE 0.3%
2,750 Easton, ME Indl Dev McCain Food Inc Proj Ser 1985 (AMBAC
Insd)....................................................... 9.200 08/01/99 2,790,920
35 Maine Hlth & Higher Edl Fac Auth Rev Ser B (FSA Insd)....... 7.100 07/01/14 40,894
1,715 Maine Hlth & Higher Edl Fac Auth Rev Ser B (Prerefunded @
07/01/04) (FSA Insd)........................................ 7.100 07/01/14 2,023,768
--------------
4,855,582
--------------
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 333
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MASSACHUSETTS 0.9%
$ 1,700 Massachusetts St Hlth & Edl Fac Auth Rev Mt Auburn Hosp Ser
B1 (MBIA Insd).............................................. 6.250% 08/15/14 $ 1,902,062
1,555 Massachusetts St Indl Fin Agy Rev Western New England
College (AMBAC Insd)........................................ 5.000 07/01/18 1,570,737
3,750 Massachusetts St Wtr Res Auth Houston Ind Inc Proj Ser A
(FSA Insd).................................................. 4.750 08/01/37 3,627,225
3,250 Massachusetts St Wtr Res Auth Genl Ser A (FGIC Insd)........ 5.500 11/01/21 3,437,525
1,920 Worcester, MA (MBIA Insd)................................... 5.000 08/01/17 1,960,992
--------------
12,498,541
--------------
MICHIGAN 2.7%
2,325 Bay City, MI (AMBAC Insd)................................... * 06/01/15 1,066,547
1,000 Bay City, MI (AMBAC Insd)................................... * 06/01/16 433,270
3,250 Central MI Univ Rev (FGIC Insd)............................. 5.625 10/01/22 3,646,955
1,100 Central MI Univ Rev (FGIC Insd)............................. 5.500 10/01/26 1,224,531
2,175 Clintondale, MI Cmnty Sch Rfdg (FSA Insd)................... 5.125 05/01/28 2,197,881
2,000 Durand, MI Area Schs (FGIC Insd)............................ 5.375 05/01/23 2,080,780
5,000 Ecorse, MI Pub Sch Dist (FGIC Insd)......................... 5.500 05/01/27 5,336,850
3,000 Lake Shore, MI Pub Schs Macomb Cnty (FSA Insd).............. 5.500 05/01/20 3,171,090
21,000 Livonia, MI Pub Sch Dist Ser II (FGIC Insd)................. * 05/01/21 5,624,010
5,000 Michigan St Hosp Fin Auth Rev Hosp Sparrow Oblig Group (MBIA
Insd)....................................................... 6.000 11/15/36 5,529,900
2,000 Michigan St Hsg Dev Auth Rental Hsg Rev Ser B (AMBAC
Insd)....................................................... 4.850 04/01/04 2,052,400
5,000 Mount Clemens, MI Cmnty Sch Dist Cap Apprec (Prerefunded @
05/01/07) (MBIA Insd)....................................... * 05/01/17 1,753,350
5,115 Wayne Charter Cnty, MI Arpt Rev Detroit Metropolitan Wayne
County Airport B (MBIA Insd)................................ 5.000 12/01/28 5,075,239
--------------
39,192,803
--------------
MINNESOTA 0.5%
1,000 Brainerd, MN Rev Evangelical Lutheran Ser B Rfdg (FSA
Insd)....................................................... 6.650 03/01/17 1,098,120
5,600 Minneapolis-St Paul, MN Hsg & Redev Auth Hlthcare Sys Rev
Hlth One Ser A (MBIA Insd).................................. 7.400 08/15/11 6,061,832
--------------
7,159,952
--------------
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 1,412,540
--------------
MISSOURI 0.6%
1,985 Green Cnty, MO Single Family Mtg Rev (AMBAC Insd)........... * 12/01/16 336,815
4,585 Missouri St Hlth & Edl Fac Auth (MBIA Insd)................. 6.250 06/01/16 4,988,984
1,065 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Rfdg
(Prerefunded @ 06/01/02) (MBIA Insd)........................ 6.250 06/01/16 1,174,972
175 Saint Louis Cnty, MO Single Family Mtg Rev (AMBAC Insd)..... 9.250 10/01/16 190,708
2,000 St Charles Cnty, MO Cmnty College (FGIC Insd)............... 5.000 02/15/16 2,042,680
--------------
8,734,159
--------------
NEVADA 0.7%
1,000 Carson City, NV Hosp Rev Ser B (AMBAC Insd)................. 5.400 03/01/17 1,047,700
2,000 Clark Cnty, NV Indl Dev Rev NV Pwr Co Proj Ser C Rfdg (AMBAC
Insd)....................................................... 7.200 10/01/22 2,253,220
4,355 Reno, NV Hosp Rev Dates Saint Mary's Hosp Inc Ser C
(Prerefunded @ 01/01/00) (BIGI Insd)........................ 7.750 07/01/15 4,657,107
3,720 Washoe Cnty, NV Rfdg & Impt (MBIA Insd)..................... * 07/01/07 2,596,597
--------------
10,554,624
--------------
NEW HAMPSHIRE 0.6%
5,000 New Hampshire Higher Edl & Hlth Fac Auth Rev (AMBAC Insd)... 6.000 10/01/26 5,535,500
2,500 New Hampshire St Tpk Sys Rev Rfdg (Inverse Fltg) (FGIC
Insd)....................................................... 9.860 11/01/17 3,396,875
--------------
8,932,375
--------------
NEW JERSEY 0.7%
5,500 Howell Twp, NJ Rfdg (FGIC Insd)............................. 6.800 01/01/14 6,062,485
3,625 Morristown, NJ Rfdg (FSA Insd).............................. 6.400 08/01/14 4,161,826
--------------
10,224,311
--------------
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 334
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK 7.9%
$ 8,000 Metropolitan Tran Auth NY Commuter Fac Rev Ser A (MBIA
Insd)....................................................... 5.625% 07/01/27 $ 8,656,320
3,250 Metropolitan Tran Auth NY Dedicated Tax Fund Ser A (FGIC
Insd)....................................................... 5.000 04/01/23 3,262,707
2,090 New York City Ser G (MBIA Insd)............................. 5.750 02/01/14 2,274,861
4,350 New York City Indl Dev Agy Civic Fac Rev USTA Natl Tennis
Cent Proj (FSA Insd)........................................ 6.375 11/15/14 4,912,150
50 New York City Ser C Subser C1 (FSA Insd).................... 6.250 08/01/09 54,883
18,000 New York City Ser G (FGIC Insd)............................. 5.750 02/01/14 19,592,100
3,000 New York St Dorm Auth Lease Rev Muni Hlth Fac Impt Pgm Ser A
(FSA Insd).................................................. 5.500 05/15/25 3,171,720
2,775 New York St Dorm Auth Rev City Univ Ser C (FGIC Insd)....... 7.000 07/01/14 2,972,247
1,175 New York St Dorm Auth Rev City Univ Ser C (Prerefunded @
07/01/00) (AMBAC Insd)...................................... 7.000 07/01/14 1,265,616
4,700 New York St Dorm Auth Rev Insd Pace Univ Rfdg (MBIA Insd)... 5.750 07/01/26 5,194,205
170 New York St Med Care Fac Fin Agy Rev IBC Mental Hlth Svcs
Ser A (MBIA Insd)........................................... 7.750 08/15/10 181,810
1,000 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Ser E
(FSA Insd).................................................. 6.500 08/15/15 1,140,160
23,535 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg Ser A
(Prerefunded @ 02/15/05) (AMBAC Insd)....................... 6.750 08/15/14 27,691,987
3,400 New York St Muni Bond Bank Agy Spl Pgm Rev Rochester Ser A
(Prerefunded @ 09/15/01) (MBIA Insd)........................ 6.625 03/15/06 3,726,128
1,500 New York St Urban Dev Corp Rev Correctional Fac Rfdg (AMBAC
Insd)....................................................... 5.250 01/01/18 1,538,820
13,500 New York, NY Ser I (MBIA Insd).............................. 5.000 05/15/23 13,528,755
14,000 New York, NY Ser I (MBIA Insd).............................. 5.000 05/15/28 14,029,820
--------------
113,194,289
--------------
NORTH CAROLINA 0.2%
1,250 Franklin Cnty, NC Ctfs Partn Jail & Sch Projs (FGIC Insd)... 6.625 06/01/14 1,414,738
2,000 North Carolina Med Care Comm Hosp Rev Alamance Regl Med Cent
Inc (FSA Insd).............................................. 5.000 08/15/16 2,047,620
--------------
3,462,358
--------------
NORTH DAKOTA 0.8%
4,595 Grand Forks, ND Sales Tax Rev Aurora Proj Ser A (MBIA
Insd)....................................................... 5.625 12/15/29 4,939,625
5,000 Mercer Cnty, ND Pollutn Ctl Rev Antelope Vly Station Rfdg
(AMBAC Insd)................................................ 7.200 06/30/13 6,324,850
--------------
11,264,475
--------------
OHIO 4.4%
5,000 Clermont Cnty, OH Hosp Fac Rev Muni (Inverse Fltg) (AMBAC
Insd)....................................................... 9.596 10/05/21 6,000,000
2,010 Cleveland, OH (Prerefunded @ 11/15/04) (MBIA Insd).......... 6.500 11/15/09 2,330,495
2,285 Cleveland, OH (Prerefunded @ 11/15/04) (MBIA Insd).......... 6.500 11/15/10 2,649,343
9,600 Franklin Cnty, OH Convention Fac Auth Tax Lease Rev Antic
(MBIA Insd)................................................. 5.000 12/01/27 9,668,832
7,500 Hamilton Cnty, OH Hosp Fac Rev Childrens Hosp Med Cent Ser G
(MBIA Insd)................................................. 4.750 05/15/28 7,233,900
10,000 Hamilton Cnty, OH Hosp Fac Rev Childrens Hosp Med Cent Ser G
(MBIA Insd)................................................. 5.000 05/15/23 10,022,000
20,700 Hamilton Cnty, OH Sales Tax Hamilton Cnty Football Proj B
(MBIA Insd)................................................. 5.000 12/01/18 21,015,261
1,500 Ohio St Air Quality Dev Auth Rev Pollutn Ctl Cleveland Co
Proj Rfdg (FGIC Insd)....................................... 8.000 12/01/13 1,733,550
2,500 Ohio St Air Quality Dev Auth Rev Pollutn Ctl OH Edison Ser A
Rfdg (FGIC Insd)............................................ 7.450 03/01/16 2,668,700
--------------
63,322,081
--------------
OKLAHOMA 0.5%
2,100 Edmond, OK Pub Wks Auth Util Rev Rfdg (MBIA Insd)........... 5.000 07/01/18 2,110,311
1,760 McAlester, OK Pub Wks Auth Rev Rfdg & Impt (FSA Insd)....... 5.250 12/01/20 1,825,208
2,440 Oklahoma Hsg Fin Agy Single Family Rev Mtg Ser A (MBIA
Insd)....................................................... 7.200 03/01/11 2,579,983
--------------
6,515,502
--------------
OREGON 0.1%
1,000 Wasco Cnty, OR Vets Home (FSA Insd)......................... 6.200 06/01/13 1,111,840
--------------
PENNSYLVANIA 5.0%
4,875 Allegheny Cnty, PA Hosp Dev Auth Rev Pittsburgh Mercy Hlth
Sys Inc (AMBAC Insd)........................................ 5.625 08/15/26 5,368,935
2,985 Butler, PA Area Sch Dist Cap Apprec (Prerefunded @ 11/15/07)
(FGIC Insd)................................................. * 11/15/23 812,010
5,650 Butler, PA Area Sch Dist Cap Apprec (Prerefunded @ 11/15/07)
(FGIC Insd)................................................. * 11/15/26 1,280,912
31,250 Dauphin Cnty, PA Genl Auth Hlth Sys Rev Pinnacle Hlth Sys
Proj Rfdg (MBIA Insd)....................................... 5.500 05/15/27 32,951,875
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 335
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 2,000 Dauphin Cnty, PA Genl Auth Hosp Rev Hapsco Phoenixville Hosp
Proj Ser B (FGIC Insd)...................................... 6.125% 07/01/10 $ 2,261,580
1,295 Deer Lakes Sch Dist PA Ser A (FSA Insd)..................... 5.250 01/15/17 1,351,501
750 Lehigh Cnty, PA Genl Purp Auth Rev Good Shepherd Rehab Hosp
Rfdg (AMBAC Insd)........................................... 5.250 11/15/27 767,415
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 1,106,820
3,750 Montgomery Cnty, PA Indl Dev Auth Rev Pollutn Ctl Ser E Rfdg
(MBIA Insd)................................................. 6.700 12/01/21 4,087,200
1,000 New Kensington Arnold, PA Sch Dist (FGIC Insd).............. 5.500 05/15/26 1,057,220
8,365 Northeastern PA Hosp & Edl Auth Wyoming Vly Hlthcare Ser A
(AMBAC Insd)................................................ 5.250 01/01/26 8,540,581
1,000 Pennsylvania St Higher Edl Fac Auth College & Univ Rev Bryn
Mawr College (MBIA Insd).................................... 5.625 12/01/27 1,084,280
2,250 Philadelphia, PA Gas Wks Rev 14th Ser A Rfdg (FSA Insd)..... 6.375 07/01/14 2,511,653
1,000 Saint Mary's Hosp Auth Bucks Cnty, PA Rev Franciscan Hlth
Saint Mary Ser A (Prerefunded @ 07/01/02) (MBIA Insd)....... 6.500 07/01/22 1,113,690
1,000 Saint Mary's Hosp Auth Bucks Cnty, PA Rev Franciscan Hlth
Sys Ser B (Prerefunded @ 07/01/02) (MBIA Insd).............. 6.500 07/01/12 1,113,690
1,000 Sayre, PA Hlthcare Fac Auth Rev VHA Cap Asset Fin Pgm Ser H2
(AMBAC Insd)................................................ 7.625 12/01/15 1,071,260
3,750 Southmoreland Sch Dist PA (AMBAC Insd)...................... 5.250 10/01/17 3,909,787
1,000 State Pub Sch Bldg Auth PA Sch Rev Burgettstown Sch Dist Ser
D (Prerefunded @ 02/01/05) (MBIA Insd)...................... 6.500 02/01/14 1,144,960
--------------
71,535,369
--------------
RHODE ISLAND 1.7%
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 2,396,400
18,000 Rhode Island St Hlth & Edl Bldg Corp Rev RI Hosp (Inverse
Fltg) (FGIC Insd)........................................... 9.968 08/15/21 21,622,500
--------------
24,018,900
--------------
SOUTH CAROLINA 0.1%
70 Charleston Cnty, SC Ctfs Partn Ser B (MBIA Insd)............ 6.875 06/01/14 80,098
1,430 Charleston Cnty, SC Ctfs Partn Ser B (Prerefunded @
06/01/04) (MBIA Insd)....................................... 6.875 06/01/14 1,672,986
--------------
1,753,084
--------------
SOUTH DAKOTA 0.8%
5,205 South Dakota St Lease Rev Trust Ctfs Ser A (FSA Insd)....... 6.625 09/01/12 6,373,158
4,000 South Dakota St Lease Rev Trust Ctfs Ser A (FSA Insd)....... 6.700 09/01/17 4,986,480
--------------
11,359,638
--------------
TENNESSEE 0.4%
2,000 Chattanooga-Hamilton Cnty, TN Hosp Auth Hosp Rev Erlanger
Med Cent Ser B (Inverse Fltg) (Prerefunded @ 05/01/01) (FSA
Insd)....................................................... 9.956 05/25/21 2,370,000
3,320 Johnson City, TN Sch Sales Tax (Prerefunded @ 05/01/06)
(AMBAC Insd)................................................ 6.700 05/01/18 3,916,870
--------------
6,286,870
--------------
TEXAS 5.1%
3,000 Amarillo, TX Hlth Fac Corp Hosp Rev High Plains Baptist Hosp
(Inverse Fltg) (FSA Insd)................................... 9.088 01/01/22 3,506,250
1,000 Austin, TX Util Sys Rev (Prerefunded @ 05/15/02) (BIGI
Insd)....................................................... 8.625 11/15/12 1,163,910
12,500 Austin, TX Util Sys Rev Ser A Rfdg (MBIA Insd).............. * 11/15/10 7,330,750
2,470 Corpus Christi, TX Hsg Fin Corp Single Family Mtg Rev Ser A
Rfdg (MBIA Insd)............................................ 7.700 07/01/11 2,722,829
6,525 Dallas Cnty, TX Util & Reclamation Dist (MBIA Insd)......... * 02/15/07 3,838,201
6,780 Dallas Cnty, TX Util & Reclamation Dist (MBIA Insd)......... * 02/15/08 3,696,524
7,705 Dallas Cnty, TX Util & Reclamation Dist (MBIA Insd)......... * 02/15/09 3,882,087
5,000 Dallas, TX Civic Cent Convention Rfdg & Impt (MBIA Insd).... 5.000 08/15/28 5,010,800
5,000 Dallas, TX Rev Spl Tax Ser A (AMBAC Insd) (a)............... 5.000 08/15/20 5,046,550
6,490 El Paso, TX Hsg Fin Corp Mtg Rev Single Family (FGIC
Insd)....................................................... * 11/01/16 987,713
1,250 Harris Cnty, TX Hlth Fac Dev Corp Thermal Util Rev Teco Proj
Ser A (AMBAC Insd).......................................... 7.250 02/15/15 1,329,250
7,000 Harris Cnty, TX Toll Rd Sr Lien Rfdg (MBIA Insd)............ 5.000 08/15/24 7,012,040
4,615 Harris Cnty, TX Toll Rd Tax & Sub Lien Ser A Rfdg (FGIC
Insd)....................................................... * 08/15/07 3,205,164
13,625 Harris Cnty-Houston, TX Sports Auth Spl Rev Ser A (MBIA
Insd)....................................................... 5.000 11/15/28 13,629,632
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 336
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TEXAS (CONTINUED)
$ 245 Henderson, TX (AMBAC Insd).................................. 9.125% 05/15/04 $ 309,362
2,505 Montgomery Cnty, TX Cap Apprec Rfdg (MBIA Insd)............. * 03/01/15 1,118,032
1,000 Montgomery Cnty, TX Cap Apprec Rfdg (MBIA Insd)............. * 03/01/16 416,790
1,305 Montgomery Cnty, TX Cap Apprec Rfdg (MBIA Insd)............. * 03/01/17 515,579
5,000 North Cent, TX Hlth Fac Dev TX Hlth Res Sys Ser B (MBIA
Insd)....................................................... 5.375 02/15/26 5,193,850
1,000 San Antonio, TX Indpt Sch Dist Pub Fac Corp Lease Rev (AMBAC
Insd)....................................................... 5.850 10/15/10 1,117,610
1,750 Tarrant Cnty, TX Hlth Fac Dev Corp Hlth Sys Rev Ser B (FGIC
Insd)....................................................... 5.000 09/01/15 1,766,275
--------------
72,799,198
--------------
UTAH 3.0%
21,000 Intermountain Pwr Agy UT Pwr Supply Rev Ser B Rfdg (MBIA
Insd)....................................................... 5.750 07/01/19 23,108,400
2,085 Payson City, UT Cnty UT Elec Pwr Rev (BIGI Insd)............ 8.000 08/15/03 2,150,615
750 Provo, UT Elec Rev 1984 Ser A Rfdg (AMBAC Insd)............. 10.375 09/15/15 1,128,772
3,500 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg (Inverse Fltg)
(AMBAC Insd)................................................ 9.768 05/15/20 4,147,500
7,385 Utah St Muni Fin Co-op Local Govt Rev Pool Cap Salt Lake
(FSA Insd).................................................. * 03/01/09 4,716,504
3,115 West Jordan, UT Multi-Family Rev Broadmoor Vlg Apts Proj Ser
A Rfdg (FSA Insd)........................................... 6.800 01/01/15 3,377,813
4,540 West Valley City, UT Muni Bldg Lease Ser A Rfdg (AMBAC Insd)
(a)......................................................... 4.750 04/15/19 4,593,708
--------------
43,223,312
--------------
VIRGINIA 0.6%
2,500 Chesapeake Bay Bridge & Tunnel VA Genl Resolution Rfdg
(AMBAC Insd) (a)............................................ 5.500 07/01/25 2,792,300
4,000 Loudoun Cnty, VA Ctfs Partn (FSA Insd)...................... 6.800 03/01/14 4,543,240
750 University of VA Hosp Rev Ser C Rfdg (Prerefunded @
06/01/00) (AMBAC Insd)...................................... 9.375 06/01/07 826,568
--------------
8,162,108
--------------
WASHINGTON 1.6%
1,250 Franklin Cnty, WA Pub Util Dist No 1 Elec Rev (Prerefunded @
09/01/01) (AMBAC Insd)...................................... 7.100 09/01/08 1,368,138
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 3,321,245
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 2,587,647
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 1,458,243
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 1,135,905
350 Pierce Cnty, WA Swr Rev Ser A (MBIA Insd)................... 9.000 02/01/05 425,901
1,000 Snohomish Cnty, WA Solid Waste Rev (Prerefunded @ 12/01/01)
(MBIA Insd)................................................. 7.000 12/01/10 1,116,790
5,000 Spokane, WA Regl Solid Waste Mgmt Sys Rev (AMBAC Insd)...... 6.250 12/01/11 5,489,200
160 University of WA Univ Rev (MBIA Insd)....................... 7.000 12/01/21 176,739
3,090 Washington St Pub Pwr Supply Sys Nuclear Proj No 1 Rev Ser A
Rfdg (AMBAC Insd)........................................... 5.700 07/01/09 3,402,832
3,015 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev Ser C
Rfdg (MBIA Insd)............................................ * 07/01/04 2,383,177
--------------
22,865,817
--------------
WISCONSIN 1.1%
12,490 Wisconsin St Hlth & Edl Fac Auth Rev Aurora Med Group Inc
Proj (FSA Insd)............................................. 5.750 11/15/25 13,450,114
1,000 Wisconsin St Hlth & Edl Fac Auth Rev Med College of WI Inc
Proj (MBIA Insd)............................................ 5.500 03/01/17 1,054,730
1,000 Wisconsin St Hlth & Edl Fac Auth Rev Med College of WI Inc
Proj (MBIA Insd)............................................ 5.750 03/01/27 1,101,770
--------------
15,606,614
--------------
WYOMING 0.2%
2,000 Laramie Cnty, WY Hosp Rev Mem Hosp Proj (AMBAC Insd)........ 6.700 05/01/12 2,218,400
--------------
</TABLE>
See Notes to Financial Statements
F-9
<PAGE> 337
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PUERTO RICO 0.2%
$ 3,000 Puerto Rico Indl Tourist Edl Med & Environmental Ctl Fac
Hosp Aux (MBIA Insd)........................................ 6.250% 07/01/16 $ 3,390,900
--------------
TOTAL LONG-TERM INVESTMENTS 97.8%
(Cost $1,257,575,348).................................................................. 1,400,723,524
SHORT-TERM INVESTMENTS 2.1%
(Cost $29,900,000)..................................................................... 29,900,000
--------------
TOTAL INVESTMENTS 99.9%
(Cost $1,287,475,348).................................................................. 1,430,623,524
OTHER ASSETS IN EXCESS OF LIABILITIES 0.1%.............................................. 1,960,061
--------------
NET ASSETS 100.0%....................................................................... $1,432,583,585
==============
</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
F-10
<PAGE> 338
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $1,287,475,348)..................... $1,430,623,524
Cash........................................................ 15,577
Receivables:
Fund Shares Sold.......................................... 20,472,576
Interest.................................................. 18,122,691
Investments Sold.......................................... 7,470,295
Other....................................................... 26,238
--------------
Total Assets.......................................... 1,476,730,901
--------------
LIABILITIES:
Payables:
Investments Purchased..................................... 40,154,755
Income Distributions...................................... 1,820,094
Distributor and Affiliates................................ 619,887
Investment Advisory Fee................................... 574,690
Fund Shares Repurchased................................... 420,946
Accrued Expenses............................................ 391,563
Trustees' Deferred Compensation and Retirement Plans........ 165,381
--------------
Total Liabilities..................................... 44,147,316
--------------
NET ASSETS.................................................. $1,432,583,585
==============
NET ASSETS CONSIST OF:
Capital..................................................... $1,274,724,790
Net Unrealized Appreciation................................. 143,148,176
Accumulated Net Realized Gain............................... 15,232,609
Accumulated Distributions in Excess of Net Investment
Income.................................................... (521,990)
--------------
NET ASSETS.................................................. $1,432,583,585
==============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $1,353,881,347 and 67,843,044 shares of
beneficial interest issued and outstanding)............. $ 19.96
Maximum sales charge (4.75%* of offering price)......... 1.00
--------------
Maximum offering price to public........................ $ 20.96
==============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $71,867,314 and 3,601,092 shares of
beneficial interest issued and outstanding)............. $ 19.96
==============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $6,834,924 and 342,562 shares of
beneficial interest issued and outstanding)............. $ 19.95
==============
*On sales of $100,000 or more, the sales charge will be
reduced.
</TABLE>
See Notes to Financial Statements
F-11
<PAGE> 339
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998 and
the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest.................................................... $ 58,756,607 $ 81,024,876
------------ ------------
EXPENSES:
Investment Advisory Fee..................................... 5,135,396 6,799,897
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B, and C of $2,311,926, $533,506 and $44,183,
respectively, for the nine months ended 9/30/98 and
$2,889,918, $693,713 and $49,687, respectively, for the
year ended 12/31/97)...................................... 2,889,615 3,633,318
Shareholder Services........................................ 920,617 1,437,336
Insurance................................................... 55,985 44,844
Legal....................................................... 54,600 110,242
Trustees' Fees and Expenses................................. 46,939 36,865
Custody..................................................... 40,950 119,050
Other....................................................... 493,029 805,717
------------ ------------
Total Operating Expenses................................ 9,637,131 12,987,269
------------ ------------
Interest Expense........................................ 8,938 -0-
------------ ------------
NET INVESTMENT INCOME....................................... $ 49,110,538 $ 68,037,607
============ ============
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 17,320,858 $ 12,503,696
Options................................................... -0- (847,958)
Futures................................................... (2,243,546) (3,130,732)
------------ ------------
Net Realized Gain........................................... 15,077,312 8,525,006
------------ ------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 131,036,118 99,934,215
End of the Period:
Investments............................................. 143,148,176 131,207,289
Futures................................................. -0- (171,171)
------------ ------------
143,148,176 131,036,118
------------ ------------
Net Unrealized Appreciation During the Period............... 12,112,058 31,101,903
------------ ------------
NET REALIZED AND UNREALIZED GAIN............................ $ 27,189,370 $ 39,626,909
============ ============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 76,299,908 $107,664,516
============ ============
</TABLE>
See Notes to Financial Statements
F-12
<PAGE> 340
STATEMENT OF CHANGES IN NET ASSETS
For the Nine Months Ended September 30, 1998
and the Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Year Ended
September 30, 1998 December 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income....................................... $ 49,110,538 $ 68,037,607 $ 70,583,949
Net Realized Gain........................................... 15,077,312 8,525,006 10,645,588
Net Unrealized Appreciation/Depreciation During the
Period.................................................... 12,112,058 31,101,903 (32,868,974)
------------- ------------- -------------
Change in Net Assets from Operations........................ 76,299,908 107,664,516 48,360,563
------------- ------------- -------------
Distributions from Net Investment Income.................... (49,274,568) (67,785,067) (70,583,949)
Distributions in Excess of Net Investment Income............ (521,990) -0- (467,897)
------------- ------------- -------------
Distributions from and in Excess of Net Investment
Income*................................................... (49,796,558) (67,785,067) (71,051,846)
Distributions from Net Realized Gain*....................... (2,401,285) (11,111,608) -0-
------------- ------------- -------------
Total Distributions....................................... (52,197,843) (78,896,675) (71,051,846)
------------- ------------- -------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES......... 24,102,065 28,767,841 (22,691,283)
------------- ------------- -------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold................................... 505,859,955 631,717,458 579,040,170
Net Asset Value of Shares Issued Through Dividend
Reinvestment.............................................. 35,644,233 54,493,315 48,357,526
Cost of Shares Repurchased.................................. (492,241,941) (716,001,683) (690,249,529)
------------- ------------- -------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.......... 49,262,247 (29,790,910) (62,851,833)
------------- ------------- -------------
TOTAL INCREASE/DECREASE IN NET ASSETS....................... 73,364,312 (1,023,069) (85,543,116)
NET ASSETS:
Beginning of the Period..................................... 1,359,219,273 1,360,242,342 1,445,785,458
------------- ------------- -------------
End of the Period (Including accumulated undistributed
net investment income of $(521,990), $164,030 and
($88,510), respectively).................................. $1,432,583,585 $1,359,219,273 $1,360,242,342
============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Year Ended
*Distributions by Class September 30, 1998 December 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Distributions from and in Excess of Net Investment Income:
Class A Shares............................................ $(47,397,474) $(64,607,170) $(67,667,425)
Class B Shares............................................ (2,215,435) (2,965,479) (3,178,918)
Class C Shares............................................ (183,649) (212,418) (205,503)
------------ ------------ ------------
$(49,796,558) $(67,785,067) $(71,051,846)
============ ============ ============
Distributions from Net Realized Gain:
Class A Shares............................................ $ (2,262,642) $(10,489,973) $ -0-
Class B Shares............................................ (128,797) (580,452) -0-
Class C Shares............................................ (9,846) (41,183) -0-
------------ ------------ ------------
$ (2,401,285) $(11,111,608) $ -0-
============ ============ ============
</TABLE>
See Notes to Financial Statements
F-13
<PAGE> 341
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,
Nine Months Ended ----------------------------------------------------
Class A Shares September 30, 1998 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period............ $19.631 $ 19.238 $ 19.549 $ 17.572 $ 19.857 $ 18.721
------- -------- -------- -------- -------- --------
Net Investment Income............................. .710 .974 .980 1.021 1.051 1.107
Net Realized and Unrealized Gain/Loss............. .371 .551 (.304) 1.982 (2.280) 1.145
------- -------- -------- -------- -------- --------
Total from Investment Operations.................... 1.081 1.525 .676 3.003 (1.229) 2.252
------- -------- -------- -------- -------- --------
Less:
Distributions from and in Excess of Net Investment
Income.......................................... .720 .971 .987 1.026 1.056 1.116
Distributions from Net Realized Gain.............. .036 .161 -0- -0- -0- -0-
------- -------- -------- -------- -------- --------
Total Distributions................................. .756 1.132 .987 1.026 1.056 1.116
------- -------- -------- -------- -------- --------
Net Asset Value, End of the Period.................. $19.956 $ 19.631 $ 19.238 $ 19.549 $ 17.572 $ 19.857
======= ======== ======== ======== ======== ========
Total Return (a).................................... 5.61%* 8.19% 3.65% 17.49% (6.31%) 12.32%
Net Assets at End of the Period (In millions)....... $1,353.9 $1,283.5 $1,283.7 $1,365.4 $1,110.2 $1,230.0
Ratio of Expenses to Average Net Assets (b)......... .90% .92% .95% .88% .88% .84%
Ratio of Net Investment Income to Average
Net Assets (b).................................... 4.85% 5.07% 5.11% 5.44% 5.70% 5.69%
Portfolio Turnover.................................. 62%* 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 Van Kampen's
reimbursement of certain expenses was less than 0.01%.
* Non-Annualized
See Notes to Financial Statements
F-14
<PAGE> 342
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
Nine Months Ended ------------------------------------- Distribution) to
Class B Shares September 30, 1998 1997 1996 1995 1994 December 31, 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period....... $ 19.634 $19.240 $19.549 $17.563 $19.824 $ 19.320
-------- ------- ------- ------- ------- --------
Net Investment Income........................ .598 .826 .832 .890 .899 .619
Net Realized and Unrealized Gain/Loss........ .370 .551 (.304) 1.978 (2.276) .513
-------- ------- ------- ------- ------- --------
Total from Investment Operations............... .968 1.377 .528 2.868 (1.377) 1.132
-------- ------- ------- ------- ------- --------
Less:
Distributions from and in Excess of Net
Investment Income.......................... .609 .822 .837 .882 .884 .628
Distributions from Net Realized Gain......... .036 .161 -0- -0- -0- -0-
-------- ------- ------- ------- ------- --------
Total Distributions............................ .645 .983 .837 .882 .884 .628
-------- ------- ------- ------- ------- --------
Net Asset Value, End of the Period............. $ 19.957 $19.634 $19.240 $19.549 $17.563 $ 19.824
======== ======= ======= ======= ======= ========
Total Return (a)............................... 5.07%* 7.36% 2.83% 16.67% (7.03%) 5.92%*
Net Assets at End of the Period (In
millions).................................... $71.9 $70.1 $71.6 $75.3 $30.0 $20.8
Ratio of Expenses to Average Net Assets (b).... 1.66% 1.69% 1.74% 1.67% 1.71% 1.68%
Ratio of Net Investment Income to Average
Net Assets (b)............................... 4.08% 4.29% 4.38% 4.69% 4.88% 4.25%
Portfolio Turnover............................. 62%* 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 Van Kampen's
reimbursement of certain expenses was less than 0.01%.
* Non-Annualized
See Notes to Financial Statements
F-15
<PAGE> 343
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
Nine Months Ended ------------------------------------- Distribution) to
Class C Shares September 30, 1998 1997 1996 1995 1994 December 31, 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period....... $19.630 $19.239 $19.548 $17.568 $19.823 $19.650
------- ------- ------- ------- ------- -------
Net Investment Income........................ .594 .822 .830 .883 .908 .350
Net Realized and Unrealized Gain/Loss........ .373 .552 (.302) 1.979 (2.279) .181
------- ------- ------- ------- ------- -------
Total from Investment Operations............... .967 1.374 .528 2.862 (1.371) .531
------- ------- ------- ------- ------- -------
Less:
Distributions from and in Excess of Net
Investment Income.......................... .609 .822 .837 .882 .884 .358
Distributions from Net Realized Gain......... .036 .161 -0- -0- -0- -0-
------- ------- ------- ------- ------- -------
Total Distributions............................ .645 .983 .837 .882 .884 .358
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period............. $19.952 $19.630 $19.239 $19.548 $17.568 $19.823
======= ======= ======= ======= ======= =======
Total Return (a)............................... 5.02%* 7.36% 2.83% 16.60% (6.98%) 2.70%*
Net Assets at End of the Period (In
millions).................................... $6.8 $5.6 $4.9 $5.1 $3.5 $5.0
Ratio of Expenses to Average Net Assets (b).... 1.66% 1.69% 1.74% 1.67% 1.70% 1.68%
Ratio of Net Investment Income to Average Net
Assets (b)................................... 4.06% 4.29% 4.37% 4.68% 4.89% 4.21%
Portfolio Turnover............................. 62%* 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 Van Kampen's
reimbursement of certain expenses was less than 0.01%.
* Non-Annualized
See Notes to Financial Statements
F-16
<PAGE> 344
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Insured Tax Free Income Fund (the "Fund") is organized as a series of
Van Kampen 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. In July, 1998, the Fund's Board of Trustees
approved a change in the Fund's fiscal year end from December 31 to September
30. As a result, this financial report reflects the nine-month period commencing
on January 1, 1998, and ending on September 30, 1998.
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 or losses may differ for financial reporting and tax
purposes primarily as a result of the deferral for tax purposes of losses
resulting from wash sales at September 30, 1998.
At September 30, 1998, for federal income tax purposes, cost of long- and
short-term investments is $1,287,479,675; the aggregate gross unrealized
appreciation is $143,202,817 and the aggregate gross unrealized depreciation is
$58,968, resulting in net unrealized appreciation of $143,143,849.
F-17
<PAGE> 345
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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 the nine months ended September 30, 1998, 99.9% of the income
distributions made by the Fund were exempt from federal income taxes.
Additionally, during the period the Fund designated and paid $1,034,912 as a 20%
rate gain distribution. In January, 1999, the Fund will provide tax information
to shareholders for the 1998 calendar year.
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
Investment Advisory Corp. (the "Adviser") will provide investment advice and
facilities to the Fund for an annual fee payable monthly as follows:
<TABLE>
<CAPTION>
% PER
AVERAGE NET ASSETS 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 nine months ended September 30, 1998 and the year ended December
31, 1997, the Fund recognized expenses of approximately $29,000 and $52,500,
respectively, 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 nine months ended September 30, 1998 and the year ended December
31, 1997, the Fund recognized expenses of approximately $296,500 and $259,600,
respectively, representing Van Kampen Funds Inc.'s or its affiliates'
(collectively "Van Kampen") cost of providing accounting and legal services to
the Fund.
Van Kampen Investor Services Inc. ("VKIS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the nine months ended
September 30, 1998 and the year ended December 31, 1997, the Fund recognized
expenses of approximately $625,000 and $921,500, respectively. Beginning in
1998, the transfer agency fees are determined through negotiations with the
Fund's Board of Trustees and are based on competitive market benchmarks.
Certain officers and trustees of the Fund are also officers and directors
of Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
F-18
<PAGE> 346
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. 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 $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 September 30, 1998, capital aggregated $1,199,841,126, $68,091,721 and
$6,791,943 for Classes A, B and C, respectively. For the nine months ended
September 30, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................................. 24,717,457 $ 483,526,778
Class B.................................................. 517,918 10,164,399
Class C.................................................. 621,935 12,168,778
----------- -------------
Total Sales................................................ 25,857,310 $ 505,859,955
=========== =============
Dividend Reinvestment:
Class A.................................................. 1,747,169 $ 34,263,263
Class B.................................................. 63,858 1,252,254
Class C.................................................. 6,563 128,716
----------- -------------
Total Dividend Reinvestment................................ 1,817,590 $ 35,644,233
=========== =============
Repurchases:
Class A.................................................. (24,001,702) $(470,222,851)
Class B.................................................. (552,971) (10,848,637)
Class C.................................................. (570,061) (11,170,453)
----------- -------------
Total Repurchases.......................................... (25,124,734) $(492,241,941)
=========== =============
</TABLE>
F-19
<PAGE> 347
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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>
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>
F-20
<PAGE> 348
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
Class B and C shares are offered without a front end sales charge, but
are subject to a contingent deferred sales charge (CDSC). Class B shares will
automatically convert to Class A shares after the eighth year following
purchase. 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 nine months ended September 30, 1998 and the year ended December
31, 1997, Van Kampen as Distributor for the Fund, received commissions on sales
of the Fund's Class A shares of approximately $98,900 and $260,200, respectively
and CDSC on redeemed shares of approximately $86,900 and $161,700, respectively.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
For the nine months ended September 30, 1998, the cost of purchases and proceeds
from sales of investments, excluding short-term investments were $837,637,183
and $842,866,230, respectively. For the year ended December 31, 1997, 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.
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.
F-21
<PAGE> 349
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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-
Option 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>
There were no transactions in options for the nine months ended September
30, 1998.
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
and the nine months ended September 30, 1998, 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
Futures Opened.............................................. 7,227
Futures Closed.............................................. (7,527)
---
Outstanding at September 30, 1998........................... -0-
=====
</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.
F-22
<PAGE> 350
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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 nine months ended September 30, 1998 and the year ended December 31,
1997, are payments retained by Van Kampen of approximately $615,800 and
$736,900, respectively.
7. BORROWINGS
In accordance with its investment policies, the Fund may borrow money from banks
in an amount up to 5% of its net assets. The Fund, in combination with two other
funds in the fund complex, has entered into a $100 million revolving credit
agreement which expires September 27, 1999. The maximum amount available to any
single fund is $75 million. Interest is charged under the agreement at a rate of
.45% above the federal funds rate. An annual facility fee of .06% is charged on
the unused portion of the credit facility.
The average daily balance of bank borrowings for the nine months ended
September 30, 1998 was approximate $199,100 with an average interest rate of
5.99%. At September 30, 1998, the Fund did not have any outstanding borrowings
under the agreement.
8. YEAR 2000 COMPLIANCE (UNAUDITED)
Van Kampen utilizes a number of computer programs across its entire operation
relying on both internal software systems as well as external software systems
provided by third parties. In 1996 Van Kampen initiated a CountDown 2000 Project
to review both the internal systems and external vendor connections. The goal of
this project is to position its business to continue unaffected as a result of
the century change. At this time, there can be no assurance that the steps taken
will be sufficient to avoid any adverse impact to the Fund, but Van Kampen does
not anticipate that the move to Year 2000 will have a material impact on its
ability to continue to provide the Fund with service at current levels. In
addition, it is possible that the securities markets in which the Fund invests
may be detrimentally affected by computer failures throughout the financial
services industry beginning January 1, 2000. Improperly functioning trading
systems may result in settlement problems and liquidity issues.
F-23
<PAGE> 351
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN CALIFORNIA INSURED TAX FREE FUND
Van Kampen California Insured Tax Free Fund (the "Fund") is a mutual fund
with an investment objective to provide only California investors with a high
level of current income exempt from federal and California income taxes, with
liquidity and safety of principal, primarily through investment in a diversified
portfolio of insured California municipal securities. The Fund is designed for
investors who are residents of California for tax purposes.
The Fund is organized as a diversified series of Van Kampen Tax Free Trust,
an open-end, management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the
Fund's Prospectus (the "Prospectus") dated as of the same date as this Statement
of Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-2833
for the hearing impaired).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... B-2
Investment Objective and Policies........................... B-4
Investment Restrictions..................................... B-24
Description of Securities Ratings........................... B-25
Description of Insurance Company Claims Paying Ability
Ratings................................................... B-30
Trustees and Officers....................................... B-31
Investment Advisory and Other Services...................... B-40
Distribution and Service.................................... B-41
Transfer Agent.............................................. B-44
Portfolio Transactions and Brokerage Allocation............. B-44
Shareholder Services........................................ B-46
Redemption of Shares........................................ B-48
Contingent Deferred Sales Charge-Class A.................... B-48
Waiver of Class B and Class C Contingent Deferred Sales
Charge ("CDSC-Class B and C")............................. B-48
Taxation.................................................... B-50
Fund Performance............................................ B-53
Other Information........................................... B-56
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-13
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY 28, 1999.
B-1
<PAGE> 352
GENERAL INFORMATION
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated May 10, 1995. The Declaration of Trust permits the Trustees to
create one or more separate investment portfolios and issue a series of shares
for each portfolio. The Trustees can further sub-divide each series of shares
into one or more classes of shares for each portfolio.
The Trust was originally organized in 1985 under the name Van Kampen
Merritt Tax Free Trust as a Massachusetts business trust (the "Massachusetts
Trust"). The Massachusetts Trust was reorganized into the Trust under the name
Van Kampen American Capital Tax Free Trust on July 31, 1995. The Trust was
created for the purpose of facilitating the Massachusetts Trust reorganization
into a Delaware business trust. On July 14, 1998, the Trust adopted its current
name.
The Fund was originally organized under the name Van Kampen Merritt
California Insured Tax Free Fund as a sub-trust of the Massachusetts Trust. The
Fund was reorganized as a series of the Trust under the name Van Kampen American
Capital California Insured Tax Free Fund on July 31, 1995. On July 14, 1998, the
Fund adopted its current name.
Van Kampen Investment Advisory Corp. (the "Adviser" or "Advisory Corp."),
Van Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley Dean Witter & Co. The principal office of the Trust, the Fund,
the Adviser, the Distributor and Van Kampen Investments is located at 1 Parkview
Plaza, PO Box 5555, Oakbrook Terrace, Illinois 60181-5555.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and securities lending.
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest, par value $0.01 per share, which can be
divided into series, such as the Fund, and further subdivided into classes of
each series. Each share represents an equal proportionate interest in the assets
of the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.
The Fund currently offers three classes of shares, designated Class A
Shares, Class B Shares and Class C Shares. Other classes may be established from
time to time in accordance with provisions of the Declaration of Trust. Each
class of shares of the Fund generally are identical in all respects except that
each class bears certain distribution expenses and has exclusive voting rights
with respect to its distribution fee.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution fee for a class of a series
would be voted upon by shareholders of only the class of such series involved.
Except as otherwise described in the Prospectus or herein, shares do not have
cumulative voting rights, preemptive rights or any conversion, subscription or
exchange rights.
B-2
<PAGE> 353
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
In the event of liquidation, each of the shares of the Fund is entitled to
its portion of all of the Fund's net assets after all debts and expenses of the
Fund have been paid. Since Class B Shares and Class C Shares have higher
distribution fees and transfer agency costs, the liquidation proceeds to holders
of Class B Shares and Class C Shares are likely to be lower than to holders of
Class A Shares.
The Trustees may amend the Declaration of Trust (including with respect to
any series) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any series without approval by a majority of the shares of each affected series
present at a meeting of shareholders (or such higher vote as may be required by
the 1940 Act or other applicable law) and except that the Trustees cannot amend
the Declaration of Trust to impose any liability on shareholders, make any
assessment on shares or impose liabilities on the Trustees without approval from
each affected shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
As of January 4, 1999, no person was known by the Fund to own beneficially
or to hold of record 5% or more of the outstanding Class A Shares, Class B
Shares or Class C Shares of the Fund, except as follows:
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT
NAME AND ADDRESS JANUARY 4, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OF OWNERSHIP
- ------------------------------------------------------------ ------------ --------- ------------
<S> <C> <C> <C>
Merrill Lynch Pierce Fenner & Smith Inc. ................... 35,029.01 C 10.75%
For the sole benefit of its customers
Attn: Fund Administration
4800 Deer Lake Drive East
2nd Floor
Jacksonville, FL 32246-6484
Sharon Woody & Esther Coleman TR............................ 29,577.47 C 9.07%
Bella Hess Trust DTD 8/25/97
c/o Esther Coleman
1000 Groton DR
Burbank, CA 91504-1935
NFSC FEBO................................................... 28,809.41 C 8.84%
Geraldine R Frey TTEE
The Geraldine Frey Trust
U/A 11/4/86
22881 Via Orvieto
Monarch Beach, CA 82629-3457
Salomon Smith Barney Inc. .................................. 27,181.99 C 8.34%
333 West 34th St-3rd Floor
New York, NY 10001-2483
Robert W Baird & Co. Inc. .................................. 26,278.95 C 8.06%
777 E Wisconsin Ave
Milwaukee, WI 53202-5300
</TABLE>
B-3
<PAGE> 354
INVESTMENT OBJECTIVE AND POLICIES
The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to this
caption in the Prospectus for a complete presentation of the matters disclosed
below.
MUNICIPAL SECURITIES
Municipal securities include long-term obligations, which often are called
municipal bonds, as well as shorter term municipal notes, municipal leases, and
tax exempt commercial paper. Under normal market conditions, longer term
municipal securities generally provide a higher yield than shorter term
municipal securities, and therefore the Fund generally expects to be invested
primarily in longer term municipal securities. The Fund will, however, invest in
shorter term municipal securities when yields are greater than yields available
on longer term municipal securities, for temporary defensive purposes and when
redemption requests are expected. The two principal classifications of municipal
securities are "general obligation" and "revenue" or "special obligation"
securities, which include "industrial revenue bonds." General obligation
securities are secured by the issuer's pledge of its faith, credit, and taxing
power for the payment of principal and interest. Revenue or special obligation
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source, such as from the user of the facility
being financed. The Fund may also invest in "moral obligation" bonds which are
normally issued by special purpose public authorities. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of such bonds
becomes a moral commitment but not a legal obligation of the state or
municipality in question.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of state and local
governments or authorities used to finance the acquisition of equipment and
facilities. Lease obligations generally do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged. A lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. In addition to the "non-appropriation" risk, these securities represent
a relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. Additionally,
use of the leased property may be limited by state or local law to a specified
use thereby further limiting ability to rent. There is no limitation on the
percentage of the Fund's assets that may be invested in "non-appropriation"
lease obligations. In evaluating such lease obligations, the Adviser will
consider such factors as it deems appropriate, which factors may include (a)
whether the lease can be cancelled, (b) the ability of the lease obligee to
direct the sale of the underlying assets, (c) the general creditworthiness of
the lease obligor, (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality, (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding and (f) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services than those covered by the lease obligation.
Also included in the term municipal securities are participation
certificates issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participations in a
lease, an installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given
B-4
<PAGE> 355
period, to prepay at its discretion upon notice to the noteholders the
outstanding principal amount of the notes plus accrued interest. The interest
rate on a floating rate demand note is based on a known lending rate, such as a
bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 15% of its total assets in derivative
variable rate municipal securities such as inverse floaters whose rates vary
inversely with changes in market rates of interest or range floaters or capped
floaters whose rates are subject to periodic or lifetime caps. Derivative
variable rate securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative variable rate securities in response to changes in market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity.
The Fund also may acquire custodial receipts or certificates underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain municipal securities. The
underwriter of these certificates or receipts typically purchases municipal
securities and deposits the securities in an irrevocable trust or custodial
account with a custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and the final
principal payment on the obligations. Although under the terms of a custodial
receipt, the Fund typically would be authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund could be required to
assert through the custodian bank those rights as may exist against the
underlying issuer. Thus, in the event the underlying issuer fails to pay
principal or interest when due, the Fund may be subject to delays, expenses and
risks that are greater than those that would have been involved if the Fund had
purchased a direct obligation of the issuer. In addition, in the event that the
trust or custodial account in which the underlying security has been deposited
is determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantee
of such payment obligations, of the municipal securities.
Although the municipal securities in which the Fund may invest will be
insured as to timely payment of principal and interest, municipal securities,
like other debt obligations, are subject to the risk of non-payment. The ability
of issuers of municipal securities to make timely payments of interest and
principal may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal,
state and local governmental units. Such non-payment would result in a reduction
of income to the Fund, and could result in a reduction in the value of the
municipal security experiencing non-payment and a potential decrease in the net
asset value of the Fund. Issuers of municipal securities might seek protection
under the bankruptcy laws. In the event of bankruptcy of such an issuer, the
Fund could experience delays and limitations with respect to the collection of
principal and interest on such municipal securities and the Fund may not, in all
circumstances, be able to collect all principal and interest to which it is
entitled. To enforce its rights in the event of a default in the payment of
interest or repayment of principal, or both, the Fund may take possession of and
manage the assets securing the issuer's obligations on such securities, which
may increase the Fund's operating expenses and adversely affect the net asset
value of the Fund. Any income derived from the Fund's ownership or operation of
such assets may not be tax-exempt. In addition, the Fund's intention to qualify
as a "regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), may limit the extent to which the Fund may exercise its
rights by taking possession of such assets, because as a regulated investment
company the Fund is subject to certain limitations on its investments and on the
nature of its income. Further, in connection with the working out or
restructuring of a defaulted security, the Fund may acquire additional
securities of the issuer, the acquisition of which may be deemed to be a loan of
money or property. Such additional securities should be considered speculative
with respect to the capacity to pay interest or repay principal in accordance
with their terms.
B-5
<PAGE> 356
INSURANCE
As described in the Prospectus, the Fund invests primarily in municipal
securities which are either pre-insured under a policy obtained for such
securities prior to the purchase of such securities or will be insured under
policies obtained by the Fund to cover otherwise uninsured securities.
ORIGINAL ISSUE INSURANCE. Original Issue Insurance is purchased with
respect to a particular issue of municipal securities by the issuer thereof or a
third party in conjunction with the original issuance of such municipal
securities. Under such insurance, the insurer unconditionally guarantees to the
holder of the insured municipal security the timely payment of principal and
interest on such obligation when and as such payments shall become due but shall
not be paid by the issuer; except that in the event of any acceleration of the
due date of the principal by reason of mandatory or optional redemption (other
than acceleration by reason of a mandatory sinking fund payment), default or
otherwise, the insured payments may be made in such amounts and at such times as
payments of principal would have been due had there not been such acceleration.
The insurer is responsible for such payments less any amounts received by the
holder from any trustee for the municipal security issuers or from any other
source. Original Issue Insurance generally does not insure payment on an
accelerated basis, the payment of any redemption premium (except with respect to
certain premium payments in the case of certain small issue industrial
development and pollution control municipal securities), the value of the shares
of the Fund or the market value of municipal securities, or payments of any
tender purchase price upon the tender of the municipal securities. Original
Issue Insurance also does not insure against nonpayment of principal of or
interest on municipal securities resulting from the insolvency, negligence or
any other act or omission of the trustee or other paying agent for such
obligations.
In the event that interest on or principal of a municipal security covered
by insurance is due for payment but is unpaid by reason of nonpayment by the
issuer thereof, the applicable insurer will make payments to its fiscal agent
(the "Fiscal Agent") equal to such unpaid amounts of principal and interest not
later than one business day after the insurer has been notified that such
nonpayment has occurred (but not earlier than the date of such payment is due).
The Fiscal Agent will disburse to the Fund the amount of principal and interest
which is then due for payment but is unpaid upon receipt by the Fiscal Agent of
(i) evidence of the Fund's right to receive payment of such principal and
interest and (ii) evidence, including any appropriate instrument of assignment,
that all of the rights of payment of such principal or interest then due for
payment shall thereupon vest in the insurer. Upon payment by the insurer of any
principal or interest payments with respect to any municipal securities, the
insurer shall succeed to the rights of the Fund with respect to such payment.
Original Issue Insurance remains in effect as long as the municipal
securities covered thereby remain outstanding and the insurer remains in
business, regardless of whether the Fund ultimately disposes of such municipal
securities. Consequently, Original Issue Insurance may be considered to
represent an element of market value with respect to the municipal securities so
insured, but the exact effect, if any, of this insurance on such market value
cannot be estimated.
SECONDARY MARKET INSURANCE. Subsequent to the time of original issuance of
a municipal security, the Fund or a third party may, upon the payment of a
single premium, purchase insurance on such municipal security. Secondary Market
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance and, as is the case with Original Issue Insurance,
Secondary Market Insurance remains in effect as long as the municipal security
covered thereby remains outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal security.
All premiums respecting municipal securities covered by Original Issue Insurance
or Secondary Market Insurance are paid in advance by the issuer or other party
obtaining the insurance.
One of the purposes of acquiring Secondary Market Insurance with respect to
a particular municipal security would be to enhance the value of such municipal
security. The Fund, for example, might seek to purchase a particular municipal
security and obtain Secondary Market Insurance with respect thereto if, in the
opinion of the Adviser, the market value of such municipal security, as insured,
would exceed the current value of the municipal security without insurance plus
the cost of the Secondary Market Insurance. Similarly, if the Fund owns but
wishes to sell a municipal security that is then covered by Portfolio Insurance,
the Fund might seek to obtain Secondary Market Insurance with respect thereto
if, in the opinion of the Adviser, the net
B-6
<PAGE> 357
proceeds of a sale by the Fund of such obligation, as insured, would exceed the
current value of such obligation plus the cost of the Secondary Market
Insurance.
PORTFOLIO INSURANCE. The Portfolio Insurance policies obtained by the Fund
would insure the payment of principal and interest on specified eligible
municipal securities purchased by the Fund. Except as described below, Portfolio
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance or Secondary Market Insurance. Municipal securities
insured under one Portfolio Insurance policy generally would not be insured
under any other policy purchased by the Fund. A municipal security is eligible
for coverage under a policy if it meets certain requirements of the insurer.
Portfolio Insurance is intended to reduce financial risk, but the cost thereof
and compliance with investment restrictions imposed under the policy will reduce
the yield to shareholders of the Fund. If a municipal security already is
covered by Original Issue Insurance of Secondary Market Insurance, the Fund is
not required to additionally insure any such municipal security under any policy
of Portfolio Insurance that the Fund may purchase.
Portfolio Insurance policies are effective only as to municipal securities
owned and held by the Fund, and do not cover municipal securities for which the
contract for purchase fails. A "when-issued" municipal security will be covered
under a Portfolio Insurance policy upon the settlement date of the issue of such
"when-issued" municipal security.
In determining whether to insure municipal securities held by the Fund, an
insurer will apply its own standards, which correspond generally to the
standards it has established for determining the insurability of new issues of
municipal securities. See "Original Issue Insurance" above.
Each Portfolio Insurance policy will be non-cancellable and will remain in
effect so long as the Fund is in existence, the municipal securities covered by
the policy continue to be held by the Fund, and the Fund pays the premiums for
the policy. Each insurer generally will reserve the right at any time upon 90
days written notice to the Fund to refuse to insure any additional securities
purchased by the Fund after the effective date of such notice. The Board of
Trustees of the Fund generally will reserve the right to terminate each policy
upon seven days written notice to an insurer if it determines that the cost of
such policy is not reasonable in relation to the value of the insurance to the
Fund.
Each Portfolio Insurance policy shall terminate as to any municipal
security that has been redeemed from or sold by the Fund on the date of such
redemption or the settlement date of such sale, and an insurer shall not have
any liability thereafter under a policy as to any such municipal security,
except that if the date of such redemption or the settlement date of such sale
occurs after a record date and before the related payment date with respect to
any such municipal security, the policy will terminate as to such municipal
security on the business day immediately following such payment date. Each
policy will terminate as to all municipal securities covered thereby on the date
on which the last of the covered municipal securities mature, are redeemed or
are sold by the Fund.
One or more policies of Portfolio Insurance may provide the Fund, pursuant
to an irrevocable commitment of the insurer, with the option to exercise the
right to obtain permanent insurance ("Permanent Insurance") with respect to a
municipal security that is to be sold by the Fund. The Fund would exercise the
right to obtain Permanent Insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such municipal
security. It is expected that the Fund will exercise the right to obtain
Permanent Insurance for a municipal security only if, in the opinion of the
Adviser, upon such exercise the net proceeds from the sale by the Fund of such
obligation, as insured, would exceed the proceeds from the sale of such
obligation without insurance. The Permanent Insurance premium with respect to
each such obligation is determined based upon the insurability of each such
obligation as of the date of purchase by the Fund and will not be increased or
decreased for any change in the creditworthiness of such obligation unless such
obligation is in default as to payment of principal or interest, or both. In
such event, the Permanent Insurance premium shall be subject to an increase
predetermined at the date of purchase by the Fund.
Because each Portfolio Insurance policy will terminate as to municipal
securities sold by the Fund on the date of sale, in which event the insurer will
be liable only for those payments of principal and interest that are then due
and owing (unless Permanent Insurance is obtained by the Fund), the provision
for this insurance
B-7
<PAGE> 358
will not enhance the marketability of securities held by the Fund, whether or
not the securities are in default or in significant risk of default. On the
other hand, since Original Issue Insurance and Secondary Market Insurance will
remain in effect as long as municipal securities covered thereby are
outstanding, such insurance may enhance the marketability of such securities
even when such securities are in default or in significant risk of default, but
the exact effect, if any, on the marketability cannot be estimated. Accordingly,
the Fund may determine to retain or, alternatively, to sell municipal securities
covered by Original Issue Insurance or Secondary Market Insurance that are in
default or in significant risk of default.
GENERAL. It is anticipated that certain of the municipal securities to be
purchased by the Fund will be insured under policies obtained by persons other
than the Fund. In instances in which the Fund purchases municipal securities
insured under policies obtained by persons other than the Fund, the Fund does
not pay the premiums for such policies; rather the cost of such policies may be
reflected in a higher purchase price for such municipal securities. Accordingly,
the yield on such municipal securities may be lower than that on similar
uninsured municipal securities. Premiums for a Portfolio Insurance Policy
generally are paid by the Fund monthly, and are adjusted for purchases and sales
of municipal securities covered by the policy during the month. The yield on the
Fund's portfolio is reduced to the extent of the insurance premiums paid by the
Fund which, in turn, will depend upon the characteristics of the covered
municipal securities held by the Fund. In the event the Fund were to purchase
Secondary Market Insurance with respect to any municipal securities then covered
by a Portfolio Insurance policy, the coverage and the obligation of the Fund to
pay monthly premiums under such policy would cease with such purchase.
There can be no assurance that insurance of the kind described above will
continue to be available to the Fund. In the event that such insurance is no
longer available or that the cost of such insurance outweighs the benefits to
the Fund in the view of the Board of Trustees, the Board will consider whether
to modify the investment policies of the Fund, which may require the approval of
shareholders. In the event the claims-paying ability rating of an insurer of
municipal securities in the Fund's portfolio were to be lowered from AAA by
Standard and Poor's ("S&P"), Aaa by Moody's Investor Services, Inc. ("Moody's")
or an equivalent rating by another nationally recognized statistical ratings
organization ("NRSRO"), or if the Adviser anticipates such a lowering or
otherwise does not believe an insurer's claims-paying ability merits its
existing triple-A rating, the Fund could seek to obtain additional insurance
from an insurer whose claims-paying ability is rated AAA by S&P, Aaa by Moody's
or an equivalent rating by another NRSRO, or if the Adviser determines that the
cost of obtaining such additional insurance outweigh the benefits, the Fund may
elect not to obtain additional insurance. In making such determination, the
Adviser will consider the cost of the additional insurance, the new
claims-paying ability rating and financial condition of the existing insurer and
the creditworthiness of the issuer or guarantor of the underlying municipal
securities. The Adviser also may determine not to purchase additional insurance
in such circumstances if it believes that the insurer is taking steps which will
cause its triple-A claims paying ability rating to be restored promptly.
Although the Adviser periodically reviews the financial condition of each
insurer, there can be no assurance that the insurers will be able to honour
their obligations under all circumstances. The Fund cannot predict the
consequences of a state takeover of an insurer's obligations and, in particular,
whether such an insurer (or its state regulatory agency) could or would honour
all of the insurer's contractual obligations including any outstanding insurance
contracts insuring the timely payment of principal and interest on municipal
securities. The Fund cannot predict the impact which such events might have on
the market values of such municipal security. In the event of a default by an
insurer on its obligations with respect to any municipal securities in the
Fund's portfolio, the Fund would look to the issuer or guarantor of the relevant
municipal securities for payments of principal and interest and such issuer or
guarantor may not be rated AAA by S&P, Aaa by Moody's or an equivalent rating by
another NRSRO. Accordingly, the Fund could be exposed to greater risk of
non-payment in such circumstances which could adversely affect the Fund's net
asset value. Alternatively, the Fund could elect to dispose of such municipal
securities; however, the market prices for such municipal securities may be
lower than the Fund's purchase price for them and the Fund could sustain a
capital loss as a result.
B-8
<PAGE> 359
Although the insurance on municipal securities reduces financial or credit
risk in respect of the insured obligations (i.e., the possibility that owners of
the insured municipal securities will not receive timely scheduled payments of
principal or interest), insured municipal securities remain subject to market
risk
(i.e., fluctuations in market value as a result of changes in prevailing
interest rates). Accordingly, insurance on municipal securities does not insure
the market value of the Fund's assets or the net asset value.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES. As
described in the Prospectus, except during temporary periods, the Fund will
invest substantially all of its assets in California municipal securities. The
portfolio of the Fund may include securities issued by the State of California
(the "State"), by its various public bodies (the "Agencies") and/or by other
municipal entities located within the State (securities of all such entities are
referred to herein as "California municipal securities").
In addition, the specific California municipal securities in which the Fund
will invest will change from time to time. The Fund is therefore susceptible to
political, economic, regulatory or other factors affecting issuers of California
municipal securities. The following information constitutes only a brief summary
of a number of the complex factors which may impact issuers of California
municipal securities and does not purport to be a complete or exhaustive
description of all adverse conditions to which issuers of California municipal
securities may be subject. Such information is derived from official statements
utilized in connection with the issuance of California municipal securities, as
well as from other publicly available documents. Such information has not been
independently verified by the Fund and the Fund assumes no responsibility for
the completeness or accuracy of such information. Additionally, many factors,
including national, economic, social and environmental policies and conditions,
which are not within the control of such issuers, could have an adverse impact
on the financial condition of such issuers. The Fund cannot predict whether or
to what extent such factors or other factors may affect the issuers of
California municipal securities, the market value or marketability of such
securities or the ability of the respective issuers of such securities acquired
by the Fund to pay interest on or principal of such securities. The
creditworthiness of obligations issued by local California issuers may be
unrelated to the creditworthiness of obligations issued by the State of
California, and there is no assurance on the part of the State of California to
make payments on such local obligations. There may be specific factors that are
applicable in connection with investment in the obligations of particular
issuers located within California, and it is possible the Fund will invest in
obligations of particular issuers as to which such specific factors are
applicable. However, the information set forth below is intended only as a
general summary and not as a discussion of any specific factors that may affect
any particular issuer of California municipal securities.
Constitutional Limits on Spending and Taxes. Certain California municipal
securities may be obligations of issuers which rely in whole or in part,
directly or indirectly, on ad valorem real property taxes as a source of
revenue. In 1978, California voters approved an amendment to the California
Constitution known as Proposition 13, the Jarvis/Gann Initiative, which added
Article XIIIA to the California Constitution. The effect of Article XIIIA is to
limit ad valorem taxes on real property and to restrict the ability of taxing
entities to increase real property tax revenues. On June 18, 1992, the United
States Supreme Court upheld the constitutionality of Article XIIIA.
In 1979, the voters of California passed an amendment adding Article XIIIB
to the California Constitution, the effect of which is to significantly limit
spending by State government and by "local government" (defined as "any city,
county, city and county, school district, special district, authority, or other
political subdivision of or within the state"). Excluded from these limitations
on government entities is "debt service" (defined as "appropriations required to
pay the cost of interest and redemption charges, including the funding of any
reserve or sinking fund required in connection therewith, on indebtedness
existing or legally authorized as of January 1, 1979 or on bonded indebtedness
thereafter approved" by the voters of the issuing entity).
In November 1986, California voters approved an amendment to the California
Government Code known as Proposition 62 which added Article 3.7 to Title 5,
Division 2, Chapter 4 of the California Government Code. The effect of Article
3.7 is to limit the abilities of local governments to impose new taxes or
increase existing taxes by requiring certain legislative and voter approvals
prior to the imposition of certain taxes by any
B-9
<PAGE> 360
local government (defined as any county, city, city and county, including a
chartered city or county, or any public or municipal corporation) or district
(defined as any agency of the state, formed pursuant to general law or special
act, for the local performance of governmental or proprietary functions within
limited boundaries). Article 3.7 can be amended only by a vote of the electorate
of the State of California. In particular, Article 3.7, among other things,
requires (i) two-thirds approval of all members of the applicable legislative
body followed by majority approval of the voters voting in an election in order
for a local government or district to impose any general tax (defined as any tax
imposed for general governmental purposes), and (ii) two-thirds approval of the
voters voting in an election in order for a local government or district to
impose any special tax (defined as any tax imposed for a specific purpose).
Those voting requirements do not apply to ad valorem taxes to pay interest and
redemption charges on any indebtedness approved by the voters prior to the
effective date of Article XIIIA of the California Constitution. Article 3.7
requires (1) that the revenues from a special tax be used only for the purpose
or service for which the tax was imposed, and (2) any tax subject to the measure
imposed by any local government or district on or after August 1, 1985 be
ratified by majority vote of the voters voting in an election held within two
years after the effective date of the measure in order for the tax to continue
to be imposed on and after November 15, 1988. Article 3.7 contains a provision
which diminishes the property tax revenues allocated to a local government or
district to the extent that the local government or district imposed any tax not
in compliance with Article 3.7. Article 3.7 also provides that no local
government or district may impose any ad valorem tax on real property other than
as permitted by Section 1 of Article XIIIA of the California Constitution, and
that no local government or district may impose any transaction tax or sales tax
on the sale of real property within the city, county or district. A 1988
decision of the Fourth Appellate District of the California Court of Appeals
declared that the requirement of local voter ratification provided for in
Article 3.7 violated the California Constitution. An initiative proposed to
re-enact the ratification provisions of Article 3.7 as a constitutional
amendment was defeated by the voters in November 1990, but such a proposal may
be renewed in the future.
On December 19, 1991, the California Supreme Court declared a 1988 San
Diego County Ballot measure that raised sales taxes for the purpose of financing
construction of criminal detention and courthouse facilities unconstitutional
because it was not passed with two-thirds voter approval. The court concluded
that the agency established to finance the facilities is a special district
created to circumvent Article XIIIA. However, in May 1992, the California
Supreme Court let stand two lower court decisions involving sales tax increases
passed by a majority vote. The lower courts had held that the Los Angeles County
Transportation Commission and the Orange County Transportation Authority, the
agencies entitled to collect the taxes, were not formed to circumvent Article
XIIIA, and that, therefore, the taxes were validly passed. On November 10, 1993,
in a closely watched case involving a Santa Clara County transportation
authority created with the parameters of the California Supreme Court's 1991
decision in mind, a California Court of Appeal overturned a sales tax approved
by less than two-thirds of the voters. In a September 1995 decision, the State
Supreme Court affirmed the Court of Appeal, declaring Proposition 62
constitutional under the California Constitution. The decision limited itself to
cities organized by the State and left unresolved whether Proposition 62 is
constitutional as applied to cities organized under a charter. Approximately
half the population of the State resides in charter cities. In March 1996, a
Superior Court held that charter cities do not have to submit taxes to voter
approval despite the State Supreme Court's Proposition 62 ruling. These
decisions may continue to cast doubt on other projects around the State that
have been financed with sales tax increases imposed without two-thirds voter
approval. Soon after the State Supreme Court decision, Moody's Investors
Services, Inc. indicated that the ruling has broad negative implications on the
ability of the State's cities and counties to raise revenue and issue debt
supported by general fund revenues.
On November 5, 1996, voters approved Proposition 218, entitled the "Right
to Vote on Taxes Act," which incorporates new Articles XIIIC and XIIID into the
California Constitution. These new provisions enact limitations on the ability
of local government agencies to impose or raise various taxes, fees, charges and
assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995 must be approved by voters in order to remain in effect. In
addition, Article XIIIC clarifies the right of local voters to reduce taxes,
fees, assessments or charges through local initiatives.
B-10
<PAGE> 361
Proposition 218 does not affect the State or its ability to levy or collect
taxes. There are a number of ambiguities concerning the Proposition and its
impact on local governments and their bonded debt which will require
interpretation by the courts or the Legislature. The Legislative Analyst
estimated that enactment of Proposition 218 would reduce local government
revenues statewide by over $100 million a year, and that over time revenues to
local government would be reduced by several hundred million dollars a year
under this Proposition.
Because of the complex nature of Articles XIIIA-D, the ambiguities and
possible inconsistencies in their respective terms, and the applicability of
their respective exemptions and exceptions and the impossibility of predicting
future appropriations, it is not presently possible to determine the impact of
Article XIIIA-D or any implementing or related legislation on the California
municipal securities in which the Fund may invest, or the abilities of State or
local governments to pay the interest on, or repay the principal of such
California municipal securities.
Proposition 98. On November 8, 1988, voters approved Proposition 98, a
combined initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act" (the "Act"). The Act changes
State funding of public education below the university level and the operation
of the State's Appropriations Limit. The Act, as amended, guarantees State
funding for K-12 school districts and community college districts at a level
equal to the greater of (a) in general, a fixed percentage of General Fund
revenues, (b) the amount actually appropriated to such districts from the
General Fund in the previous fiscal year, adjusted for either changes in the
cost of living, or (c) a third test which would replace the test in (b) if the
percentage growth in per capita of General Fund revenues in the prior year plus
one half of one percent is less than the percentage growth in California per
capita personal income. Under the test in (c), the schools would receive the
amount appropriated in the prior year adjusted for changes in enrollment and
General Fund revenues. The Act permits the legislature, by two-thirds vote of
both houses, with the Governor's concurrence, to suspend this formula for a
one-year period. The Act could cause increasing pressure on the State's budget
over future years, potentially reducing resources available for other State
programs, especially to the extent the Article XIIIB spending limit would
restrain the State's ability to fund such other programs by raising taxes. The
Act also changes how tax revenues in excess of the State's Appropriations Limit
are distributed. Any excess State tax revenues up to a specified amount would,
instead of being returned to taxpayers, be transferred to K-12 school and
community college districts. Such transfer would be excluded from the
Appropriations Limit for K-14 school districts, and the K-14 school
Appropriations Limits for the next year would be automatically increased by the
amount of such transfer. These additional moneys would enter the base funding
calculation for K-14 schools for subsequent years, creating further pressure on
other portions of the state budget, particularly if revenues decline in a year
following such a transfer.
During the recent recession, General Fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July, 1996, provides, among other things, that both
the State and K-14 schools share in the repayment of prior years' emergency
loans to schools. Of the total $1.76 billion in loans, the State will repay $935
million by forgiveness of the amount owed, while schools will repay $825
million. The State share of the repayment will be reflected as an appropriation
above the current Proposition 98 base calculation. The schools' share of the
repayment will count as appropriations that count toward satisfying the
Proposition 98 guarantee, or from "below" the current base. Repayments are
spread over the eight-year period of 1994-95 through 2001-02 to mitigate any
adverse fiscal impact. Substantially increased General Fund revenues, above
initial budget projections, in the fiscal years 1994-95 and thereafter have
resulted or will result in retroactive increases in Proposition 98
appropriations from subsequent fiscal years' budgets.
B-11
<PAGE> 362
Local Governments. The fiscal condition of local governments has been
constrained since the enactment of "Proposition 13" in 1978, which reduced and
limited the future growth of property taxes, and limited the ability of local
government to impose "special taxes" (those devoted to a specific purpose)
without two-thirds voter approval.
Counties, in particular, have had fewer options to raise revenues than many
other local government entities, and have been required to maintain many
services. The entire statewide welfare system was changed in response to the
change in federal welfare law enacted in 1996. California's response to the
federal welfare reforms is embodied in Chapter 270, Statutes of 1997. This new
basic State welfare program is called California Work Opportunity and
Responsibility to Kids Act ("CalWORKs"), which replaced the former Aid to
Families with Dependent Children (AFDC) and Greater Avenues to Independence
(GAIN) programs effective January 1, 1998. Consistent with the federal law,
CalWORKs contains new time limits on receipt of welfare aid, both lifetime as
well as for any current period on aid. The centerpiece of CalWORKs is the
linkage of eligibility to work participation requirements. Administration of the
new CalWORKS program is largely at the county level and counties are given
financial incentives for success in this program.
Although the longer-term impact of the new federal Law and CalWORKs cannot
be determined until there has been more experience, the State does not presently
anticipate that these new programs will have an adverse financial impact on the
General Fund. Overall Temporary Assistance for Needy Families (TANF) grants from
the federal government are expected to equal or exceed the amounts the State
would have received under the old AFDC program.
Under current law, counties are required to provide "general assistance"
aid to certain persons who cannot obtain welfare from other programs, but this
mandate may be eliminated as part of the overhaul.
In the aftermath of Proposition 13, the State provided aid from the General
Fund to make up some of the loss of property tax moneys, including taking over
the principal responsibility for funding local K-12 schools and community
colleges. Under the pressure of the recent recession, the Legislature has
eliminated the remnants of this post-Proposition 13 aid to entities other than
K-14 education districts, although it has also provided additional funding
sources (such as sales taxes) and reduced mandates for local services. Many
counties continue to be under severe fiscal stress. While such stress has in
recent years most often been experienced by smaller, rural counties, larger
urban counties, such as Los Angeles, have also been affected.
In November of 1994, Standard & Poor's Rating Group downgraded the credit
rating of several California counties, including San Francisco, San Diego,
Marin, Los Angeles and San Bernadino. In December of 1994 and January of 1995,
Standard & Poor's and Moody's Investors Services, Inc., respectively, downgraded
Orange County to below investment grade as a result of its bankruptcy filing
(see discussion below). In August of 1995, Standard & Poor's Rating Group again
downgraded the credit rating of Los Angeles County and placed it on CreditWatch.
Moody's Investors Services, Inc. also downgraded Los Angeles County. In October
of 1995, Standard & Poor's Rating Group placed San Diego County's $449.3 million
in general fund-supported debt issues on CreditWatch. During the two-month
period following the passage of Proposition 218 in November 1996, five of the
seven California cities reviewed by the major rating agencies during such
two-month period had been downgraded (Los Angeles, Sacramento, San Diego, Fresno
and Anaheim). In June 1998, Standard & Poor's downgraded Fresno's municipal
bonds, citing the County's reduced financial flexibility due to several years of
budget deficit. In April 1998, each of the three major rating agencies upgraded
San Diego County's credit rating, citing the County's successful sale of its
troubled trash plant as a key factor in improving the County's fiscal outlook.
However, in August 1998, Standard & Poor's announced that San Diego County's
rising debt, absent new sources of revenue, was becoming a concern, signaling a
greater likelihood in the next three years of a downgrade in the County's strong
credit rating.
On December 6, 1994, Orange County, California (the "County"), together
with its pooled investment funds (the "Funds") filed for protection under
Chapter 9 of the federal Bankruptcy Code, after reports that the Funds had
suffered significant market losses in their investments, causing a liquidity
crisis for the Funds and the County. More than 200 other public entities, most
of which, but not all, are located in the County, were also depositors in the
Funds. As of mid-January, 1995, following a restructuring of most of the Funds'
B-12
<PAGE> 363
assets to increase their liquidity and reduce their exposure to interest rate
increases, the County estimated the Funds' loss at about $1.69 billion, or 23%
of their initial deposits of approximately $7.5 billion. Many of the entities
which deposited moneys in the Funds, including the County, are facing cash flow
difficulties because of the bankruptcy filing and may be required to reduce
programs or capital projects. This may also affect their ability to meet their
outstanding obligations. In June, 1996, Orange County emerged from bankruptcy
protection as part of a fiscal recovery plan that included the issuance of new
recovery bonds and sharp reductions in services and personnel. Moody's gave the
insured recovery bonds an underlying rating of Baa and the county's general
obligation bonds a Ba rating. Standard & Poor's gave the recovery bonds a B
underlying rating and, in February 1998, Fitch Investors Service assigned the
bonds as underlying rating of BBB.
State Finances. From 1990 until 1994 the State experienced the worst
economic fiscal, and budget conditions since the 1930's. Construction,
manufacturing (especially aerospace), and financial services, among others, have
all been severely affected. Job losses were the worst of any post-war recession.
The recession seriously affected State tax revenues, which basically mirror
economic conditions. It also caused increased expenditures for health and
welfare programs. The State has also been facing a structural imbalance in its
budget with the largest programs supported by the General Fund -- K-14
education, health, welfare and corrections -- growing at rates significantly
higher than the growth rates for the principal revenue sources of the General
Fund. As a result, the State entered a period of chronic budget imbalance. By
the 1993-94 Fiscal Year, the accumulated deficit was so large that it was
impractical to budget to retire it in one year, so a two-year program was
implemented, using the issuance of revenue anticipation warrants to carry a
portion of the deficit over the end of the fiscal year. When the economy failed
to recover sufficiently in 1993-94, a second two-year plan was implemented in
1994-95, again using cross-fiscal year revenue anticipation warrants to partly
finance the deficit into the 1995-96 fiscal year.
Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish its cash reserves,
the State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
For several fiscal years during the recession, the State was forced to rely
on external debt markets to meet its cash needs, as a succession of notes and
revenue anticipation warrants were issued in the period from June 1992 to July
1994, often needed to pay previously maturing notes or warrants. These
borrowings were used also in part to spread out the repayment of the accumulated
budget deficit over the end of a fiscal year, as noted earlier. The last and
largest of these borrowings was $4.0 billion of revenue anticipation warrants
which were issued in July, 1994 and matured on April 25, 1996.
The State's financial condition improved markedly during the 1995-96,
1996-97 and 1997-98 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint based on the actions taken in earlier years. The State's cash position
also improved, and no external deficit borrowing has occurred over the end of
these three fiscal years.
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (around $2.2 billion in
1995-96, $1.6 billion in 1996-97 and $2.2 billion in 1997-98) than were
initially planned when the budgets were enacted. These additional funds were
largely directed to school spending as mandated by Proposition 98, and to make
up shortfalls from reduced federal health and welfare aid. The accumulated
budget deficit from the recession years was finally eliminated. The Department
of Finance estimates that the State's budget reserve (the SFEU) totaled $639.8
million as of June 30, 1997 and $1.782 billion at June 30, 1998.
B-13
<PAGE> 364
As a result of the deterioration in the State's budget and cash situation
during the early 1990, rating agencies reduced the State's credit rating.
Between October 1991 and October 1992, the rating on the general obligation
bonds was reduced by Standard & Poor's from "AAA" to "A+", by Moody's Investors
Services, Inc. from "Aaa" to "Aa" and by Fitch Investors Services, Inc. from
"AAA" to "AA". On July 15, 1994, all three of the rating agencies rating the
State's long-term debt again lowered their ratings of the State's general
obligation bonds. Moody's Investors Services, Inc. lowered its rating from "Aa"
to "A1", Standard & Poor's lowered its rating from "A+" to "A", and Fitch
Investors Service lowered its rating from "AA" to "A". In July 1996, Standard &
Poor's raised its rating to A+ from A. In 1997, Fitch Investors Service raised
its rating to "AA-" from "A+". In October 1998, Moody's Investors Service raised
its rating to Aa3 from A1. There can be no assurance that such ratings will
continue for any given period of time or that they will not in the future be
further revised or withdrawn. It should be noted that the creditworthiness of
obligations issued by local California issuers may be unrelated to the
creditworthiness of obligations issued by the State of California, and there is
no obligation on the part of the State to make payment on such obligations in
the event of default.
When the Governor released his proposed 1998-99 Fiscal Year Budget on
January 9, 1998, he projected General Fund revenues for the 1998-99 Fiscal Year
of $55.4 billion, and proposed expenditures in the same amount. By the time the
Governor released the May Revision of the 1998-99 Budget ("May Revisions") on
May 14, 1998, the Administration projected that revenues for the 1997-98 and
1998-99 Fiscal Years combined would be more than $4.2 billion higher than was
projected in January. The Governor proposed that most of this increased revenue
be dedicated to fund a 75% cut in the Vehicle License Fee ("VLF").
The Legislature passed the 1998-99 Budget Bill on August 11, 1998, and the
Governor signed it on August 21, 1998. Some 33 companion bills necessary to
implement the budget were also signed. In signing the 1998-99 Budget Bill, the
Governor used his line-item veto power to reduce expenditures by $1.360 billion
from the General Fund, and $160 million from Special Funds. Of this total, the
Governor indicated that about $250 million of vetoed funds were "set aside" to
fund programs for education. Vetoed items included education funds, salary
increases and many individual resources and capital projects.
The 1998-99 Budget Act is based on projected General Fund revenues and
transfers of $57.0 billion (after giving effect to various tax reductions
enacted in 1997 and 1998), a 4.2% increase from the revised 1997-98 figures.
Special Fund revenues were estimated at $14.3 billion. The revenue projections
were based on the May Revision. International economic problems, such as the
soaring trade deficit, continuing weakness in Asia, initial signs of economic
weakness in Canada and Latin America (which have been California's largest
trading partners), and the fall in stock prices worldwide, since that time may
affect the May Revision projections.
After giving effect to the Governor's vetoes, the 1998-99 Budget Act
provides authority for expenditures of $57.3 billion from the General Fund (a
7.3% increase from 1997-98), $14.7 billion from Special Funds, and $3.4 billion
from bond funds. The 1998-99 Budget Act projects a balance in the SFEU at June
30, 1999 (but without including the "set aside" veto amount) of $1.255 billion,
a little more than 2% of General Fund revenues. The 1998-99 Budget Act assumes
the State will carry out its normal intra-year cash flow borrowing in the amount
of $1.7 billion of revenue anticipation notes, which were issued on October 1,
1998.
Based solely on the legislation enacted, on a net basis, for reserve for
June 30, 1999, was reduced by $256 million. On the other hand, 1997-98 revenues
have been increased by $160 million. The revised June 30, 1999, reserve is
projected to be $1,159 million or $96 million below the level projected at the
1998-99 Budget Act. The reserve projected in the 1998-99 Budget Act was $1,255
million. It is important to emphasize that the new reserve level is based on
1998-99 revenue and expenditure assumptions as of the 1998-99 Budget Act except
to augment for legislation signed after the budget enactment. These assumptions
will not be updated until the 1999-00 Governor's Budget is released on January
10, 1999. In November, 1998, the Legislative Analyst's Office released a report
predicting that General Fund revenues for 1998-99 would be somewhat lower, and
expenditures somewhat higher, than the 1998-99 Budget Act forecasts, but the net
variance would be within the projected $1.2 billion year-end reserve amount.
B-14
<PAGE> 365
It is not presently possible (1) to know whether, and to what extent, the
State General Fund or any Special Funds will have surplus or deficit balances in
the 1998-1999 fiscal year or in any subsequent fiscal year, or (2) to determine
the overall impact of any deficits on future allocations of the State revenues
to local governments or on the abilities of State or local governments to pay
the interest on, or repay the principal of, any California municipal securities
in which the Fund may invest.
In November 1998, California voters approved Proposition 1A, the largest
bond measure ever to be passed in U.S. history and which authorized the State to
issue up to $9.2 billion in school expansion bonds. Although Moody's Investors
Service recently upgraded the State's credit rating, the State's willingness to
take on such debt could threaten its ability to do so in the future.
Litigation. At any given time, including the present, there are numerous
civil actions pending against the State (including, but not limited to, those
discussed in the preceding paragraphs and below), which could, if determined
adversely to the State, affect the State's expenditures and, in some cases, its
revenues. The following are certain of the more significant lawsuits pending
against the State.
Northern California 1997 Flood Litigation: In January of 1997, California
experienced major flooding in six different areas with current estimates of
property damage to be approximately $1.6 to $2 billion. To date, one lawsuit has
been filed by 500 homeowners, but more lawsuits are expected. Exposure from all
of the anticipated cases arising from these floods could total approximately $2
billion.
The State is a defendant in several related cases, mainly California
Ambulance Association v. Shalala et al., in which the plaintiffs are seeking
action to compel the Department of Health Services to pay Part B ambulance and
physician services co-payments under the Medicare and Medicaid Acts. In 1998, a
judgment was entered for the plaintiff. The Ninth Circuit Court of Appeals,
however, reversed the trial court's decision. Plaintiffs filed petition for
certiorari at the United States Supreme Court, which the State opposed. The
petition is currently pending at the Supreme Court. Should the plaintiffs
prevail, the liability for retroactive payments is estimated to be $490 million,
and the liability for future payments can be in excess of $130 million annually.
The General Fund and the federal government will share the liability equally.
The State is a defendant in Ceridian Corporation v. Franchise Tax Board, a
suit which challenges the validity of two sections of the California Tax laws.
The first relates to deduction from corporate taxes for dividends received from
insurance companies to the extent the insurance companies have California
activities. The second relates to corporate deduction of dividends to the extent
the earnings of the dividend paying corporation have already been included in
the measure of their California tax. In August 1998, a judgment was entered for
the plaintiffs. The State will appeal. If both sections of the California Tax
law are invalidated, and all dividends become deductible, then the General Fund
can become liable for approximately $200-$250 million annually.
The State is involved in a lawsuit. Thomas Hayes v. Commission on State
Mandates, related to state-mandated costs. The action involves an appeal by the
Director of Finance from a 1984 decision by the State Board of Control (now
succeeded by the Commission on State Mandates (Commission)). The Board of
Control decided in favor of local school districts' claims for reimbursement for
special education programs for handicapped students. The case was then brought
to the trial court by the State and later remanded to the Commission for
redetermination. The Commission has since expanded the claim to include
supplemental claims filed by seven other educational institutions; the issuance
of a final consolidated decision is anticipated sometime in late 1998. To date,
the Legislature has not appropriated funds. The liability to the State, if all
potentially eligible school districts pursue timely claims, has been estimated
by the Department of Finance at more than $1 billion.
The State is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In United States, People of the State of
California v. J. B. Stringfellow, Jr., et al., the State is seeking recovery for
past costs of cleanup of the site, a declaration that the defendants are jointly
and severally liable for future costs, and an injunction ordering completion of
the cleanup. However, the defendants have filed a counterclaim against the State
for alleged negligent acts. Because the State is the present owner of the site,
the State may be found liable. Present estimates of the cleanup range from $300
million to $800 million.
B-15
<PAGE> 366
The State is a defendant in a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The trial court has found liability in inverse condemnation and awarded damages
of $500,000 to a sample of plaintiffs. The State's potential liability to the
remaining plaintiffs ranges from $800 million to $1.5 billion. An appeal has
been filed.
The State is a defendant in California State Employees Association v.
Wilson, where the petitioners are challenging several budget appropriations in
the 1994 and 1995 Budget Acts. The appropriations mandate the transfer of funds
from the State Highway Account to the General Fund to reimburse the General Fund
for debt service costs on two rail bond measures. The petitioners contend that
the transfers violate the bond acts themselves and are requesting the monies be
returned. In February 1998, the Court of Appeal modified, then affirmed, a
judgment in favor of the plaintiffs invalidating the transfer of $12,290,000
from the State Highway Account to the General Fund.
In a similar case, Professional Engineers in California Government v.
Wilson, the petitioners are challenging several appropriations in the 1993,
1994, and 1995 Budget Acts. The appropriations mandate the transfer of
approximately $262 million from the State Highway Account and $113 million from
the Motor Vehicle Account to the General Fund and appropriate approximately $6
million from the State Highway Account to fund a highway-grade crossing program
administered by the Public Utilities Commission. Petitioners contend that the
transfers violate several constitutional provisions and request that the moneys
be returned to the State Highway Account and Motor Vehicle Account.
The State is a defendant in Just Say No To Tobacco Dough Campaign v. State
of California, where the petitioners challenge the appropriation of
approximately $166 million of Proposition 99 funds in the Cigarette and Tobacco
Products Surtax Fund for years ended June 30, 1990, through June 30, 1995 for
programs which were allegedly not health education or tobacco-related disease
research. If the State loses, the General Fund and funds from other sources
would be used to reimburse the Cigarette and Tobacco Products Surtax Fund for
approximately $166 million.
The State is a defendant in the case of Howard Jarvis Taxpayers Association
et al. v Kathleen Connell. On June 24, 1998, plaintiffs filed a complaint for
certain declaratory and injunctive relief challenging the authority of the State
Controller to make payments from the State Treasury in the absence of a state
budget. On July 21, 1998, the trial court issued a preliminary injunction
prohibiting the State Controller from paying moneys from the State Treasury for
fiscal year 1998-99, with certain limited exceptions, in the absence of a state
budget. The preliminary injunction, among other things, prohibited the State
Controller from making any payments pursuant to any continuing appropriation.
On July 22 and 27, 1998, various employee unions which had intervened in
the case appealed the trial court's preliminary injunction and asked the Court
of Appeal to stay the preliminary injunction. On July 28, 1998, the Court of
Appeal granted the unions' requests and stayed the preliminary injunction
pending the Court of Appeal's decision on the merits of the appeal. On August 5,
1998, the Court of Appeal denied the plaintiffs' request to reconsider the stay.
Also on July 22, 1998, the State Controller asked the California Supreme Court
to immediately stay the trial court's preliminary injunction and to overrule the
order granting the preliminary injunction on the merits. On July 29, 1998, the
Supreme Court transferred the State Controller's request to the Court of Appeal.
The matters are now pending before the Court of Appeal.
The State is a defendant in the case of Jordan v Department of Motor
Vehicles, where the plaintiff challenged the validity and constitutionality of
the State's smog impact fee and requested a refund of the fee. In October 1997,
the trial court ruled in favor of plaintiff and, in addition, ordered the State
to provide refunds to all persons who paid the smog impact fee from three years
before the filing of the lawsuit in 1995 to the present. Plaintiff assets that
the total amount required to be refunded will exceed $350 million. The State has
appealed.
Year 2000 Issue. The year 2000 issue is the result of computer programs
being written using two digits rather than four digits to define the applicable
year. Computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations. At this time, the Fund
B-16
<PAGE> 367
cannot determine what impact the year 2000-related issue may have on the State
or any of its municipalities or other issuers of securities owned by the Fund if
not completely addressed prior to the year 2000, but such impact could be
significant.
Legislation has been or may be introduced which would create new regional
agencies with the ability to tax and issue debt, alter the definition of
ownership changes that trigger reassessment of business property under Article
XIIIA, modify existing taxes or other revenue-raising measures or which either
would further limit or, alternatively would increase the abilities of State and
local governments to impose new taxes, increase existing taxes (including sales
tax increases to fund earthquake relief), issue bonds or other debt instruments,
or adopt State budgets with only a majority vote of the legislature. It is not
currently possible to predict the extent to which any such legislation will be
enacted. Furthermore, other measures affecting the taxing or spending authority
of California or its political subdivisions may be approved or enacted in the
future. Nor is it currently possible to determine the impact of any recently
enacted or proposed legislation on California municipal securities in which the
Fund may invest or future allocations of State revenues to local governments.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell derivative instruments such as exchange-listed and
over-the-counter put and call options on securities, financial futures, interest
rate indices and other financial instruments, purchase and sell financial
futures contracts and options thereon, or enter into various interest rate
transactions such as swaps, caps, floors or collars (collectively, all the above
are called "Strategic Transactions"). Strategic Transactions may be used to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities.
Any or all of these investment techniques may be used at any time and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out
B-17
<PAGE> 368
a transaction without incurring substantial losses, if at all. Although the
contemplated use of futures and options transactions should tend to minimize the
risk of loss due to a decline in the value of the hedged position, at the same
time they tend to limit any potential gain which might result from an increase
in value of such position. Finally, the daily variation margin requirements for
futures contracts would create a greater ongoing potential financial risk than
would purchases of options, where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Strategic Transactions would
reduce net asset value, and possibly income, and such losses can be greater than
if the Strategic Transactions had not been utilized. Income earned or deemed to
be earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
B-18
<PAGE> 369
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only enter into OTC options that have a buy-back provision permitting
the Fund to require the Counterparty to close the option at a formula price
within seven days. The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other NRSRO. The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on illiquid securities
described herein.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities that are traded on securities exchanges
and in the over-the-counter markets and related futures on such contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold. In the event of exercise of a call option
sold by the Fund with respect to securities not owned by the Fund, the Fund may
be required to acquire the underlying security at a disadvantageous price in
order to satisfy its obligation with respect to the call option.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and corporate debt securities (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate or fixed-income market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold
B-19
<PAGE> 370
on the commodities exchanges where they are listed with payment of initial and
variation margin as described below. The purchase of a futures contract creates
a firm obligation by the Fund, as purchaser, to take delivery from the seller
the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission and will be
entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except
for closing transactions) for other than bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the
B-20
<PAGE> 371
desired portfolio management goal, it is possible that the combination will
instead increase such risks or hinder achievement of the portfolio management
objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which the Fund may enter are interest rate and index swaps and the purchase or
sale of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions,
in addition to other requirements, require that the Fund segregate cash and
liquid securities with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid securities at least
equal to the current amount of the obligation must be segregated with the
custodian. The segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. For example, a call option written by the Fund will require the Fund to
hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate cash and
liquid securities sufficient to purchase and deliver the securities if the call
is exercised. A call option sold by the Fund on an index will require the Fund
to own portfolio securities which correlate with the index or to segregate cash
and liquid securities equal to the excess of the index value over the exercise
price on a current basis. A put option written by the Fund requires the Fund to
segregate cash and liquid securities equal to the exercise price.
OTC options entered into by the Fund, including those on securities,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of cash and liquid
securities equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net
B-21
<PAGE> 372
amount. These amounts will equal 100% of the exercise price in the case of a non
cash-settled put, the same as an OCC guaranteed listed option sold by the Fund,
or the in-the-money amount plus any sell-back formula amount in the case of a
cash-settled put or call. In addition, when the Fund sells a call option on an
index at a time when the in-the-money amount exceeds the exercise price, the
Fund will segregate, until the option expires or is closed out cash and liquid
securities equal in value to such excess. OCC issued and exchange listed options
sold by the Fund other than those above generally settle with physical delivery,
and the Fund will segregate an amount of cash and liquid securities equal to the
full value of the option. OTC options settling with physical delivery, or with
an election of either physical delivery or cash settlement, will be treated the
same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash and liquid securities sufficient to meet its obligation to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract.
With respect to swaps, the Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of cash and liquid securities with a value equal to the Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash and
liquid securities, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating cash and liquid
securities if the Fund held a futures or forward contract, it could purchase a
put option on the same futures or forward contract with a strike price as high
or higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction no segregation is required, but if it
terminates prior to such time, cash and liquid securities equal to any remaining
obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by
the requirements of the Code for qualification as a regulated investment
company.
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may also purchase and sell municipal securities on a "when-issued"
and "delayed delivery" basis. No income accrues to the Fund on municipal
securities in connection with such transactions prior to the date the Fund
actually takes delivery of such securities. These transactions are subject to
market fluctuation; the value of the municipal securities at delivery may be
more or less than their purchase price, and yields generally available on
municipal securities when delivery occurs may be higher or lower than yields on
the municipal securities obtained pursuant to such transactions. Because the
Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. When the Fund is the buyer in such a transaction, however, it
will maintain, in a segregated account with its custodian, cash or liquid
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. The Fund will make commitments to purchase
municipal securities on such basis only with the intention of actually acquiring
these securities, but the Fund may sell such securities prior to the settlement
date if such sale is considered to be advisable. To the extent the Fund engages
in "when-issued" and "delayed delivery" transactions, it will do so for the
purpose of acquiring securities for the Fund's portfolio consistent with the
Fund's investment objectives and policies and not for the purposes of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when-issued" or "delayed
delivery" basis.
B-22
<PAGE> 373
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The Fund's portfolio turnover rate (the lesser of
the value of the securities purchased or securities sold divided by the average
value of the securities held in the Fund's portfolio excluding all securities
whose maturities at acquisition were one year or less) is shown in the table of
"Financial Highlights" in the Prospectus. A high portfolio turnover rate (100%
or more) increases the Fund's transaction costs, including brokerage
commissions, and may result in the realization of more short-term capital gains
than if the Fund had a lower portfolio turnover. The turnover rate will not be a
limiting factor, however, if the Adviser deems portfolio changes appropriate.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities,
which includes repurchase agreements which have a maturity of longer than seven
days and generally includes securities that are restricted from sale to the
public without registration under the Securities Act of 1933, as amended (the
"1933 Act"). The sale of such securities often requires more time and results in
higher brokerage charges or dealer discounts and other selling expenses than
does the sale of liquid securities trading on national securities exchanges or
in the over-the-counter markets. Restricted securities are often purchased at a
discount from the market price of unrestricted securities of the same issuer
reflecting the fact that such securities may not be readily marketable without
some time delay. Investments in securities which have no ready market are valued
at fair value as determined in good faith by the Adviser in accordance with
procedures approved by the Fund's Trustees. Ordinarily, the Fund would invest in
restricted securities only when it receives the issuer's commitment to register
the securities without expense to the Fund. However, registration and
underwriting expenses (which may range from 7% to 15% of the gross proceeds of
the securities sold) may be paid by the Fund. Restricted securities which can be
offered and sold to qualified institutional buyers under Rule 144A under the
1933 Act ("144A Securities") and are determined to be liquid under guidelines
adopted by and subject to the supervision of the Fund's Board of Trustees are
not subject to the limitation on illiquid securities. Such 144A Securities are
subject to monitoring and may become illiquid to the extent qualified
institutional buyers become, for a time, uninterested in purchasing such
securities. Factors used to determine whether 144A Securities are liquid
include, among other things, a security's trading history, the availability of
reliable pricing information, the number of dealers making quotes or making a
market in such security and the number of potential purchasers in the market for
such security. For purposes hereof, investments by the Fund in securities of
other investment companies will not be considered investments in restricted
securities to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
B-23
<PAGE> 374
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without approval by the vote of a majority of its
outstanding voting shares, which is defined by the 1940 Act as the lesser of (i)
67% or more of the voting securities present in person or by proxy at the
meeting, if the holders of more than 50% of the outstanding voting securities
are present in person or by proxy; or (ii) more than 50% of the outstanding
voting securities. The Fund may not:
1. Purchase any securities (other than tax exempt obligations guaranteed by
the United States Government or by its agencies or instrumentalities),
if as a result more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer or if as
a result the Fund would hold more than 10% of the outstanding voting
securities or any single issuer, except that up to 25% of the Fund's
total assets may be invested without regard to such limitation, except
that the Fund may purchase securities of other investment companies to
the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940
Act, as amended from time to time, or (iii) an exemption or other relief
from the provisions of the 1940 Act.
2. Invest more than 25% of its assets in a single industry; however, as
described in the Prospectus, the Fund may from time to time invest more
than 25% of its assets in a particular segment of the municipal bond
market; however, the Fund will not invest more than 25% of its assets in
industrial development bonds in a single industry, and except that the
Fund may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
3. Borrow money, except from banks for temporary purposes and then in
amounts not in excess of 5% of the total asset value of the Fund, or
mortgage, pledge or hypothecate any assets except in connection with a
borrowing and in amounts not in excess of 10% of the total asset value
of the Fund. Borrowings may not be made for investment leverage, but
only to enable the Fund to satisfy redemption requests where liquidation
of portfolio securities is considered disadvantageous or inconvenient.
In this connection, the Fund will not purchase portfolio securities
during any period that such borrowings exceed 5% of the total asset
value of the Fund. Notwithstanding this investment restriction, the Fund
may enter into "when issued" and "delayed delivery" transactions as
described in the Prospectus.
4. Make loans, except to the extent the tax exempt obligations the Fund may
invest in are considered to be loans.
5. Buy any securities "on margin." The deposit of initial or maintained
margin in connection with interest rate or other financial futures or
index contracts or related options is not considered the purchase of a
security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other
financial futures or index contracts or related options, except as
hedging transactions in accordance with the requirements of the
Securities and Exchange Commission and the Commodity Futures Trading
Commission.
7. Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of securities
held in its portfolio.
8. Make investments for the purpose of exercising control or participation
in management, except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
9. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and extent permitted by
(i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions
of the 1940 Act.
B-24
<PAGE> 375
10. Invest in equity interests in oil, gas or other mineral exploration or
development programs.
11. Purchase or sell real estate commodities or commodity contracts, except
as set forth in item 6 above and except to the extent the municipal
securities in which the Fund may invest are considered to be interests
in real estate.
As long as the percentage restrictions described above are satisfied at the
time of the investment or borrowing, the Fund will be considered to have abided
by those restrictions even if, at a later time, a change in values or net assets
causes an increase or decrease in percentage beyond that allowed.
DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S--A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P follows):
A S&P corporate or municipal debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment--capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the
terms of the obligation:
2. Nature of and provisions of the obligation:
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditor's rights.
LONG-TERM DEBT--INVESTMENT GRADE
<TABLE>
<S> <C>
AAA: Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to meet its financial commitment on the obligation
is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only
in small degree. Capacity to meet its financial commitment
on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions
than obligations in higher rated categories. Capacity to
meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
to meet its financial commitment on the obligation.
</TABLE>
B-25
<PAGE> 376
SPECULATIVE GRADE
BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and "C" are regarded
as having significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
<TABLE>
<S> <C>
BB: Debt rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the
obligation.
B: Debt rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the
capacity to meet its financial commitment on the obligation.
Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and
economic conditions for the obligor to meet its financial
commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is
not likely to have the capacity to meet its financial
commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to
nonpayment.
C: The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being
continued.
D: Debt rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made
on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period. The "D" rating also will be used
upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
R: This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to
principal or volatility of expected returns which are not
addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment
risk--such as interest-only or principal-only mortgage
securities; and obligations with unusually risky interest
terms, such as inverse floaters.
</TABLE>
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating.
The following criteria will be used in making that assessment.
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note).
B-26
<PAGE> 377
Note rating symbols are as follows:
<TABLE>
<S> <C>
SP-1: Strong or strong capacity to pay principal and interest.
Issues determined to possess very strong characteristics are
a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse Financial and economic changes
over the term of the notes.
SP-3: Speculative capacity to pay principal and interest.
</TABLE>
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from
'A-1' for the highest quality obligations to 'D' for the lowest. These
categories are as follows:
<TABLE>
<S> <C>
A-1: A short-term obligation rated A-1 is rated in the highest
category by S&P. The obligor's capacity to meet its
financial commitment on the obligation is strong. Within
this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is
extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is
satisfactory.
A-3: A short-term obligation rated A-3 exhibits adequate
protection parameters. However, adverse economic conditions
or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated B is regarded as having
significant speculative characteristics. The obligor
currently has the capacity to meet its financial commitment
on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C: A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent on favorable business,
financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D: A short-term obligation rated D is in payment default. The D
rating is used when payments on an obligation are not made
on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
</TABLE>
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by
the issuer or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in
or unavailability of, such information.
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option
or demand feature as part of their structure.
The first rating addresses the likelihood of repayment of principal
and interest as due, and the second rating addresses only the demand
feature. The long-term debt rating symbols are used for bonds to denote the
long-term maturity and the commercial paper rating symbols for the put
option (for example, 'AAA/
B-27
<PAGE> 378
A-1+'). With short-term demand debt, S&P's note rating symbols are used
with the commercial paper rating symbols (for example, 'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE INC.--A brief description of the applicable
Moody's Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
<TABLE>
<S> <C>
AAA: Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edged." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some
time in the future.
BAA: Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor
poorly secured). Interest payment and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may
be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
CA: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers, 1, 2, and 3 in each
generic rating classification from Aa to B. The modifier 1
indicates that the issue ranks in the higher end of its
generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
</TABLE>
Absence of Rating: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the
quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
B-28
<PAGE> 379
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date date to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term ratings, while other factors of major importance
in bond risk, long-term secular trends for example, may be less important
over the short run. A short-term rating may also be assigned on an issue
having a demand feature-variable rate demand obligation. Such ratings will
be designated as VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
SG. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity
in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933,
nor does it represent that any specific note is a valid obligation of a
rated issuer or issued in conformity with any applicable law.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Issuers rated Prime-1 (on supporting institutions) have a superior
ability for repayment of short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
B-29
<PAGE> 380
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well established access to a ranges of financial markets and
assured sources of alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or supported institutions) have an acceptable
ability for repayment of short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the prime rating
categories.
DESCRIPTION OF INSURANCE COMPANY CLAIMS PAYING ABILITY RATINGS
RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
The claims-paying ability of insurance companies is rated by S&P and
Moody's. Descriptions of these ratings are set forth below:
DESCRIPTION OF S&P'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
AAA. Superior financial security on an absolute and relative basis.
Capacity to meet policyholder obligations is overwhelming under a variety of
economic and underwriting conditions.
AA. Excellent financial security. Capacity to meet policyholder obligations
is strong under a variety of economic and underwriting conditions.
A. Good financial security, but capacity to meet policyholder obligations
is somewhat susceptible to adverse economic and underwriting conditions.
BBB. Adequate financial security, but capacity to meet policyholder
obligations is susceptible to adverse economic and underwriting conditions.
Note: Plus (+) and minus (-) signs indicate relative standing within a category,
and are not indications of likely upgrades or downgrades.
DESCRIPTION OF MOODY'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
AAA. Insurance companies rated Aaa offer exceptional financial security.
While the financial strength of these companies is likely to change, such
changes as can be visualized are most unlikely to impair their fundamentally
strong position.
AA. Insurance companies rated Aa offer excellent financial security.
Together with the Aaa group they constitute what are generally known as high
grade companies. They are rated lower than Aaa companies because long-term risks
appear somewhat larger.
B-30
<PAGE> 381
A. Insurance companies rated A offer good financial security. However,
elements may be present which suggest a susceptibility to impairment sometime in
the future.
BAA. Insurance companies rated Baa offer adequate financial security.
However, certain protective elements may be lacking or may be characteristically
unreliable over any great length of time.
Note: Numeric modifiers are used to refer to the ranking within the group -- one
being the highest and three being the lowest. However, the financial strength of
companies within a generic rating symbol (Aa, for example) is broadly the same.
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and officers of the Fund and
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with Van
Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment
Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Management
Inc., Van Kampen Advisors Inc., Van Kampen Insurance Agency of Illinois Inc.,
Van Kampen Insurance Agency of Texas Inc., Van Kampen System Inc., Van Kampen
Recordkeeping Services Inc., American Capital Contractual Services, Inc., Van
Kampen Trust Company, Van Kampen Exchange Corp. and Van Kampen Investor Services
Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are
referred to herein collectively as the "Advisers". For purposes hereof, the term
"Fund Complex" includes each of the open-end investment companies advised by the
Advisers (excluding Van Kampen Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee/Director of each of the
funds in the Fund Complex.
</TABLE>
B-31
<PAGE> 382
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Richard M. DeMartini*..................... Chairman and Chief Executive Officer of International
Two World Trade Center Private Client Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Chairman of Dean Witter Futures & Currency
New York, NY 10048 Management Inc. and Demeter Management Corporation.
Date of Birth: 10/12/52 Director of Dean Witter Reynolds Inc. Chairman and
Director of Dean Witter Capital Corporation. Chairman,
Chief Executive Officer, President and a Director of Dean
Witter Alliance Capital Corporation, Director of the
National Healthcare Resources, Inc., Morgan Stanley Dean
Witter Distributors, Inc., Dean Witter Realty Inc., Dean
Witter Reynolds Venture Equities Inc., DW Window Covering
Holding, Inc., and is a member of the Morgan Stanley Dean
Witter Management Committee. Prior to December of 1998,
Mr. DeMartini was President and Chief Operating Officer
of Morgan Stanley Dean Witter Individual Asset Management
and a Director of Morgan Stanley Dean Witter Trust FSB.
Formerly Vice Chairman of the Board of the National
Association of Securities Dealers, Inc. and Chairman of
the Board of the Nasdaq Stock Market, Inc. Trustee of the
TCW/DW Funds, Director of the Morgan Stanley Dean Witter
Funds and Trustee/Director of each of the funds in the
Fund Complex.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board,
Vice Chair of the Board of The YMCA of Metropolitan
Chicago and a member of the Women's Board of the
University of Chicago. Prior to 1996, Trustee of The
International House Board. Trustee/Director of each of
the funds in the Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and Member of the Investment Committee
of the Joyce Foundation, a private foundation.
Trustee/Director of each of the funds in the Fund
Complex.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee/Director of each of
the funds in the Fund Complex.
</TABLE>
B-32
<PAGE> 383
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Don G. Powell*............................ Currently a member of the board of governors and
3 Wexford Court executive committee for the Investment Company Institute,
Houston, TX 77024 and a member of the Board of Trustees of the Houston
Date of Birth: 10/19/39 Museum of Natural Science. Immediate past Chairman of the
Investment Company Institute. Prior to January 1999,
Chairman and a Director of Van Kampen Investments, the
Advisers, the Distributor and Investor Services and
Director or officer of certain other subsidiaries of Van
Kampen Investments. Prior to July of 1998, Director and
Chairman of VK/AC Holding, Inc. Prior to November 1996,
President, Chief Executive Officer and a Director of
VK/AC Holding, Inc. Trustee/Director of each of the funds
in the Fund Complex and Trustee of other funds advised by
the Advisers or Van Kampen Management Inc.
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer services company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company and
Date of Birth: 07/08/44 the Urban Shopping Centers Inc., a retail mall management
company. Trustee, University of Notre Dame. Prior to
1998, Director of Stone Smurfit Container Corp., a paper
manufacturing company. Formerly, President, Chief
Executive Officer and Chief Operating Officer of Waste
Management, Inc., an environmental services company.
Trustee/Director of each of the funds in the Fund
Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen Management Inc.
Trustee/Director of each of the funds in the Fund
Complex, and Trustee/Managing General Partner of other
open-end and closed-end funds advised by the Advisers or
Van Kampen Management Inc.
Paul G. Yovovich.......................... Private investor. Prior to April 1996, President of
Sears Tower Advance Ross Corporation. Director of 3Com Corporation,
233 South Wacker Drive APAC Teleservices, Inc., and COMARCO, Inc.
Suite 9700 Trustee/Director of each of the Funds in the Fund
Chicago, IL 60606 Complex.
Date of Birth: 10/29/53
</TABLE>
- ------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
current or former positions with Morgan Stanley Dean Witter & Co. or its
affiliates.
B-33
<PAGE> 384
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Sullivan, Wood, Dalmaso, Martin,
Wetherell and Hill are located at 1 Parkview Plaza, PO Box 5555, Oakbrook
Terrace, IL 60181-5555. The Fund's other officers are located at 2800 Post Oak
Blvd., Houston, TX 77056.
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Dennis J. McDonnell.................. Executive Vice President and a Director of Van Kampen
Date of Birth: 05/20/42 Investments. President, Chief Operating Officer and a
President Director of the Advisers, Van Kampen Advisors Inc., and Van
Kampen Management Inc. Prior to July of 1998, Director and
Executive Vice President of VK/AC Holding, Inc. Prior to
April of 1998, President and a Director of Van Kampen
Merritt Equity Advisors Corp. Prior to April of 1997, Mr.
McDonnell was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996, Mr. McDonnell was
Chief Executive Officer and Director of MCM Group, Inc.,
McCarthy, Crisanti & Maffei, Inc. and Chairman and Director
of MCM Asia Pacific Company, Limited and MCM (Europe)
Limited. Prior to July of 1996, Mr. McDonnell was President,
Chief Operating Officer and Trustee of VSM Inc. and VCJ Inc.
President of each of the funds in the Fund Complex.
President, Chairman of the Board and Trustee/Managing
General Partner of other investment companies advised by the
Advisers or their affiliates.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Prior to July
Vice President of 1996, Mr. Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of McCarthy, Crisanti &
Maffei, Inc. Vice President of each of the funds in the Fund
Complex and certain other investment companies advised by
the Advisers or their affiliates.
John L. Sullivan..................... First Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Treasurer, Vice President and Chief Financial
Treasurer, Vice President and Chief Officer of each of the funds in the Fund Complex and certain
Financial Officer other investment companies advised by the Advisers or their
affiliates.
Curtis W. Morell..................... Senior Vice President of the Advisers, Vice President and
Date of Birth: 08/04/46 Chief Accounting Officer of each of the funds in the Fund
Vice President and Chief Accounting Complex and certain other investment companies advised by
Officer the Advisers or their affiliates.
</TABLE>
B-34
<PAGE> 385
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Ronald A. Nyberg..................... Executive Vice President, General Counsel, Secretary and
Date of Birth: 07/29/53 Director of Van Kampen Investments. Mr. Nyberg is Executive
Vice President and Secretary Vice President, General Counsel, Assistant Secretary and a
Director of the Advisers and the Distributor, Van Kampen
Advisors Inc., Van Kampen Management Inc., Van Kampen
Exchange Corp., American Capital Contractual Services, Inc.
and Van Kampen Trust Company. Executive Vice President,
General Counsel and Assistant Secretary of Investor Services
and River View International Inc. Director or officer of
certain other subsidiaries of Van Kampen Investments.
Director of ICI Mutual Insurance Co., a provider of
insurance to members of the Investment Company Institute.
Prior to July of 1998, Director and Executive Vice
President, General Counsel and Secretary of VK/AC Holding,
Inc. Prior to April of 1998, Executive Vice President,
General Counsel and Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he was Executive Vice
President, General Counsel and a Director of Van Kampen
Merritt Equity Holdings Corp. Prior to September of 1996, he
was General Counsel of McCarthy, Crisanti & Maffei, Inc.
Prior to July of 1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc. and Executive Vice
President and General Counsel of VCJ Inc. Vice President and
Secretary of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Paul R. Wolkenberg................... Executive Vice President and Director of Van Kampen
Date of Birth: 11/10/44 Investments. Executive Vice President of Asset Management
Vice President and the Distributor. President and a Director of Investor
Services. President and Chief Operating Officer of Van
Kampen Recordkeeping Services Inc. Prior to July of 1998,
Director and Executive Vice President of VK/AC Holding, Inc.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Edward C. Wood III................... Senior Vice President of the Advisers, Van Kampen
Date of Birth: 01/11/56 Investments and Van Kampen Management Inc. Senior Vice
Vice President President and Chief Operating Officer of the Distributor.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Tanya M. Loden....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 11/19/59 Controller of each of the funds in the Fund Complex and
Controller other investment companies advised by the Advisers or their
affiliates.
Nicholas Dalmaso..................... Associate General Counsel and Assistant Secretary of Van
Date of Birth: 03/01/65 Kampen Investments. Vice President, Associate General
Assistant Secretary Counsel and Assistant Secretary of the Advisers, the
Distributor, Van Kampen Advisors Inc. and Van Kampen
Management Inc. Assistant Secretary of each of the funds in
the Fund Complex and other investment companies advised by
the Advisers or their affiliates.
</TABLE>
B-35
<PAGE> 386
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Scott E. Martin...................... Senior Vice President, Deputy General Counsel and Assistant
Date of Birth: 08/20/56 Secretary of Van Kampen Investments. Senior Vice President,
Assistant Secretary Deputy General Counsel and Secretary of the Advisers, the
Distributor, Investor Services, American Capital Contractual
Services, Inc., Van Kampen Management Inc., Van Kampen
Exchange Corp., Van Kampen Advisors Inc., Van Kampen
Insurance Agency of Illinois Inc., Van Kampen System Inc.
and Van Kampen Recordkeeping Services Inc. Prior to July of
1998, Senior Vice President, Deputy General Counsel and
Assistant Secretary of VK/AC Holding, Inc. Prior to April of
1998, Van Kampen Merritt Equity Advisors Corp. Prior to
April of 1997, Senior Vice President, Deputy General Counsel
and Secretary of Van Kampen American Capital Services, Inc.
and Van Kampen Merritt Holdings Corp. Prior to September of
1996, Mr. Martin was Deputy General Counsel and Secretary of
McCarthy, Crisanti & Maffei, Inc., and prior to July of
1996, he was Senior Vice President, Deputy General Counsel
and Secretary of VSM Inc. and VCJ Inc. Assistant Secretary
of each of the funds in the Fund Complex and other
investment companies advised by the Advisers or their
affiliates.
Weston B. Wetherell.................. Vice President, Associate General Counsel and Assistant
Date of Birth: 06/15/56 Secretary of Van Kampen Investments, the Advisers, the
Assistant Secretary Distributor, Van Kampen Management Inc. and Van Kampen
Advisors Inc. Prior to September of 1996, Mr. Wetherell was
Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.
Assistant Secretary of each of the funds in the Fund Complex
and other investment companies advised by the Advisers or
their affiliates.
Steven M. Hill....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 10/16/64 Assistant Treasurer of each of the funds in the Fund Complex
Assistant Treasurer and other investment companies advised by the Advisers or
their affiliates.
Michael Robert Sullivan.............. Assistant Vice President of the Advisers. Assistant
Date of Birth: 03/30/33 Controller of each of the funds in the Fund Complex and
Assistant Controller other investment companies advised by the Advisers or their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 65 operating funds in the Fund Complex. Each trustee/director who is not an
affiliated person of Van Kampen Investments, the Advisers or the Distributor
(each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex (except the money market series of the Van Kampen Series Fund,
Inc.) provides a deferred compensation plan to its Non-Affiliated Trustees that
allows trustees/directors to defer receipt of their compensation and earn a
return on such deferred amounts. Deferring compensation has the economic effect
as if the Non-Affiliated Trustee reinvested his or her compensation into the
funds. Each fund in the Fund Complex (except the money market series of the Van
Kampen Series Fund, Inc.) provides a retirement plan to its Non-Affiliated
Trustees that provides Non-Affiliated Trustees with compensation after
retirement, provided that certain eligibility requirements are met as more fully
described below.
Effective January 1, 1998, the trustees adopted a standardized compensation
and benefits program for each fund in the Fund Complex. The compensation of each
Non-Affiliated Trustee includes an annual retainer in an amount equal to $50,000
per calendar year, due in four quarterly installments on the first business day
of each quarter. Payment of the annual retainer is allocated among the funds in
the Fund Complex (except the money market series of the Van Kampen Series Funds,
Inc.) on the basis of the relative
B-36
<PAGE> 387
net assets of each fund as of the last business day of the preceding calendar
quarter. The compensation of each Non-Affiliated Trustee includes a per meeting
fee from each fund in the Fund Complex (except the money market series of the
Van Kampen Series Fund, Inc.) in the amount of $200 per quarterly or special
meeting attended by the Non-Affiliated Trustee, due on the date of the meeting,
plus reasonable expenses incurred by the Non-Affiliated Trustee in connection
with his or her services as a trustee, provided that no compensation will be
paid in connection with certain telephonic special meetings.
Under the deferred compensation plan, each Non-Affiliated Trustee generally
can elect to defer receipt of all or a portion of the compensation earned by
such Non-Affiliated Trustee until retirement. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to the return on the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
----------------------------------------------------------
AGGREGATE AGGREGATE TOTAL
PENSION OR ESTIMATED MAXIMUM COMPENSATION
AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan $9,790 $35,691 $60,000 $125,200
Linda Hutton Heagy 8,390 3,861 60,000 112,800
R. Craig Kennedy 2,652 2,652 60,000 125,200
Jack E. Nelson 18,385 18,385 60,000 125,200
Phillip B. Rooney 6,002 6,002 60,000 125,200
Dr. Fernando Sisto 68,615 68,615 60,000 125,200
Wayne W. Whalen 12,658 12,658 60,000 125,200
Paul G. Yovovich(1) 0 0 60,000 25,300
</TABLE>
- ---------------
(1) Mr. Paul G. Yovovich became a member of the Board of Trustees effective
October 22, 1998 and thus does not have a full fiscal year of information to
report. Trustees not eligible for compensation or retirement benefits are
not shown in the table.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Trust's fiscal period ended September 30, 1998.
The detail of aggregate compensation before deferral for each series,
including the Fund, is shown in Table A below. The detail of amounts
deferred for each series, including the Fund, is shown in Table B below.
Amounts deferred are retained by the Fund and earn a rate of return
determined by reference to either the return on the common shares of the
Fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic
B-37
<PAGE> 388
effect as if such Non-Affiliated Trustee had invested in one or more funds
in the Fund Complex. To the extent permitted by the 1940 Act, each Fund may
invest in securities of those funds selected by the Non-Affiliated Trustees
in order to match the deferred compensation obligation. The detail of
cumulative deferred compensation (including interest) owed to current
Trustees by each series, including the Fund, is shown in Table C below. The
deferred compensation plan is described above the Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for their respective fiscal years ended in 1998. The retirement
plan is described above the Compensation Table.
(4) This is the sum of the estimated maximum annual benefits payable by the
operating investment companies in the Fund Complex for each year of the
10-year period commencing in the year of such trustee's anticipated
retirement. The Retirement Plan is described above the Compensation Table.
Each Non-Affiliated Trustee of the Board of Trustees has served as a member
of the Board of Trustees since he or she was first appointed or elected in
the year set forth in Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1998 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1998. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
trustees were not trustees of such investment companies. Combining the Fund
Complex with other investment companies advised by the Advisers and their
affiliates, Mr. Whalen received Total Compensation of $285,825 during the
calendar year ended December 31, 1998.
As of January 4, 1999, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
B-38
<PAGE> 389
TABLE A
1998 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL --------------------------------------------------------------------------
FUND NAME YEAR-END* BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............. 9/30 $2,352 $2,152 $2,352 $2,352 $2,352 $2,352 $2,352 $0
Tax Free High Income Fund................ 9/30 1,961 1,761 1,961 1,961 1,961 1,961 1,961 0
California Insured Tax Free Fund......... 9/30 1,005 805 1,005 1,005 1,005 1,005 1,005 0
Municipal Income Fund.................... 9/30 1,931 1,731 1,931 1,931 1,931 1,931 1,931 0
Intermediate Term Municipal Income
Fund................................... 9/30 841 641 841 841 841 841 841 0
Florida Insured Tax Free Income Fund..... 9/30 858 658 858 858 858 858 858 0
New York Tax Free Income Fund............ 9/30 842 642 842 842 842 842 842 0
------ ------ ------ ------ ------ ------ ------ --
Trust Total............................ $9,790 $8,390 $9,790 $9,790 $9,790 $9,790 $9,790 $0
====== ====== ====== ====== ====== ====== ====== ==
</TABLE>
*In 1998, the Fund changed its fiscal year-end from December 31 to September
30. Accordingly, the information reported in this column represents information
for the nine-month fiscal period ended September 30, 1998.
TABLE B
1998 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL --------------------------------------------------------------------------
FUND NAME YEAR-END* BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............. 9/30 $2,352 $2,152 $1,176 $2,352 $2,352 $1,176 $2,352 $0
Tax Free High Income Fund................ 9/30 1,961 1,761 981 1,961 1,961 981 1,961 0
California Insured Tax Free Fund......... 9/30 1,005 805 503 1,005 1,005 503 1,005 0
Municipal Income Fund.................... 9/30 1,931 1,731 966 1,931 1,931 966 1,931 0
Intermediate Term Municipal Income
Fund................................... 9/30 841 641 421 841 841 421 841 0
Florida Insured Tax Free Income Fund..... 9/30 858 658 429 858 858 429 858 0
New York Tax Free Income Fund............ 9/30 842 642 421 842 842 421 842 0
------ ------ ------ ------ ------ ------ ------ --
Trust Total............................ $9,790 $8,390 $4,897 $9,790 $9,790 $4,897 $9,790 $0
====== ====== ====== ====== ====== ====== ====== ==
</TABLE>
*In 1998, the Fund changed its fiscal year-end from December 31 to September
30. Accordingly, the information reported in this column represents information
for the nine-month fiscal period ended September 30, 1998.
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEES
FISCAL --------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- -------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund..................... 9/30 $ 6,579 $ 8,672 $12,057 $ 17,744 $ 3,758 $ 4,177 $15,328 $0
Tax Free High Income
Fund..................... 9/30 6,211 8,299 11,879 17,384 3,388 2,473 14,960 0
California Insured Tax Free
Fund..................... 9/30 5,320 7,393 11,446 16,513 2,492 2,035 14,067 0
Municipal Income Fund...... 9/30 7,043 9,700 15,366 22,215 3,622 8,799 19,040 0
Intermediate Term Municipal
Income Fund.............. 9/30 5,166 7,238 11,372 16,363 2,337 1,959 13,913 0
Florida Insured Tax Free
Income Fund.............. 9/30 5,183 7,254 7,093 11,846 2,354 1,967 10,870 0
New York Tax Free Income
Fund..................... 9/30 2,288 1,814 3,430 5,111 1,700 958 4,413 0
------- ------- ------- -------- ------- ------- ------- --
Trust Total............ $37,790 $50,370 $72,643 $107,176 $19,651 $22,368 $92,591 $0
======= ======= ======= ======== ======= ======= ======= ==
<CAPTION>
FORMER TRUSTEES
-----------------------------------------------------------------
FUND NAME CARUSO GAUGHAN LIPSHIE MILLER REES ROBINSON VERNON
--------- ------ ------- ------- ------ ---- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund..................... $2,695 $1,985 $ 212 $ 9,164 $ 0 $13,380 $ 327
Tax Free High Income
Fund..................... 0 1,985 0 9,164 0 13,380 0
California Insured Tax Free
Fund..................... 0 1,985 0 9,164 0 13,380 0
Municipal Income Fund...... 5,804 2,455 961 12,382 7,502 17,483 1,287
Intermediate Term Municipal
Income Fund.............. 0 1,985 0 9,164 0 13,380 0
Florida Insured Tax Free
Income Fund.............. 0 927 0 5,817 0 9,599 0
New York Tax Free Income
Fund..................... 0 295 0 2,344 0 3,740 0
------ ------- ------ ------- ------ ------- ------
Trust Total............ $8,499 $11,617 $1,173 $57,199 $7,502 $84,342 $1,614
====== ======= ====== ======= ====== ======= ======
</TABLE>
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------
FUND NAME BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......................... 1995 1995 1993 1984 1997 1995 1984 1998
Tax Free High Income Fund............................ 1995 1995 1993 1985 1997 1995 1985 1998
California Insured Tax Free Fund..................... 1995 1995 1993 1985 1997 1995 1985 1998
Municipal Income Fund................................ 1995 1995 1993 1990 1997 1995 1990 1998
Intermediate Term Municipal Income Fund.............. 1995 1995 1993 1993 1997 1995 1993 1998
Florida Insured Tax Free Income Fund................. 1995 1995 1994 1994 1997 1995 1994 1998
New York Tax Free Income Fund........................ 1995 1995 1994 1994 1997 1995 1994 1998
</TABLE>
B-39
<PAGE> 390
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate and
implement the Fund's investment objectives. The Adviser also furnishes the
services of the Fund's President and such other executive and clerical personnel
as are necessary to prepare the various reports and statements and conduct the
Fund's day-to-day operations. The Fund, however, bears the cost of its
accounting services, which include maintaining its financial books and records
and calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of the Fund's Treasurer and the
personnel operating under his direction. Charges are allocated among the
investment companies advised or subadvised by the Adviser or its affiliates. A
portion of these amounts is paid to the Adviser or its affiliates in
reimbursement of personnel, office space, facilities and equipment costs
attributable to the provision of accounting services to the Fund. See
"Accounting Services Agreement" below. The Fund also pays distribution fees,
service fees, custodian fees, legal and auditing fees, the costs of reports to
shareholders, and all other ordinary business expenses not specifically assumed
by the Adviser. The Advisory Agreement also provides that the Adviser shall not
be liable to the Fund for any error of judgment or of law, or for any loss
suffered by the Fund in connection with the matters to which the agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence on the part of the Adviser in the performance of its obligations and
duties, or by reason of its reckless disregard of its obligations and duties
under the agreement.
Under the Advisory Agreement, the Fund pays to the Adviser, as compensation
for the services rendered, facilities furnished, and expenses paid by it, a
monthly fee payable computed based upon an annual rate applied to the average
daily net assets of the Fund as follows: 0.500% on the first $100 million of
average daily net assets, 0.450% on the average daily net assets of the next
$150 million, 0.425% on the average daily net assets of the next $250 million
and 0.400% on the average daily net assets over $500 million.
The Fund's average net assets are determined by taking the average of all
of the determinations of the net assets during a given calendar month. Such fee
is payable for each calendar month as soon as practicable after the end of that
month.
The Advisory Agreement also provides that, in the event the annual expenses
of the Fund for any fiscal year exceed the most stringent limit in any state in
which the Fund's shares are offered for sale, the compensation due the Adviser
will be reduced by the amount of such excess and that, if a reduction in and
refund of the advisory fee is insufficient, the Adviser will pay the Fund
monthly an amount sufficient to make up the deficiency, subject to readjustment
during the year.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on 60 days' written notice.
During the fiscal period ended September 30, 1998 and the fiscal years
ended December 31, 1997 and 1996, the Adviser received approximately $648,200,
$814,400 and $827,900, respectively, in advisory fees from the Fund.
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which Advisory Corp. provides accounting services
to the Fund. The Fund shares together with the other Van Kampen funds in the
cost of providing such services, with 25% of such costs shared proportionately
based on the respective number of classes of securities issued per fund and the
remaining 75% of such cost based proportionally on their respective net assets
per fund.
B-40
<PAGE> 391
During the fiscal period ended September 30, 1998 and the fiscal years
ended December 31, 1997 and 1996, Advisory Corp. received approximately $57,200,
$70,200 and $14,700, respectively, in accounting services fees from the Fund.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen funds
advised by the Adviser and distributed by the Distributor have entered into
Legal Services Agreements pursuant to which Van Kampen Investments provides
legal services, including without limitation: accurate maintenance of the fund's
minute books and records, preparation and oversight of the fund's regulatory
reports, and other information provided to shareholders, as well as responding
to day-to-day legal issues on behalf of the funds. Payment by the Fund for such
services is made on a cost basis for the salary and salary related benefits,
including but not limited to bonuses, group insurance and other regular wages
for the employment of personnel, as well as overhead and the expenses related to
the office space and the equipment necessary to render the legal services. Other
funds distributed by the Distributor also receive legal services from Van Kampen
Investments. Of the total costs for legal services provided to funds distributed
by the Distributor, one half of such costs are allocated equally to each fund
and the remaining one half of such costs are allocated to specific funds based
on monthly time records.
During the fiscal period ended September 30, 1998 and the fiscal years
ended December 31, 1997 and 1996, Van Kampen Investments received approximately
$6,800, $9,100 and $9,900, respectively, in legal services fees from the Fund.
DISTRIBUTION AND SERVICE
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Fund through
authorized dealers on a continuous basis. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required to
take and pay for only such shares of the Fund as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and certain other costs including the cost of
supplemental sales literature and advertising. The Distribution and Service
Agreement is renewable from year to year if approved (a)(i) by the Fund's
Trustees or (ii) by the affirmative vote of a majority of the Fund's outstanding
voting securities and (b) by the affirmative vote of a majority of Trustees who
are not parties to the Distribution and Service Agreement or interested persons
of any party, by votes cast in person at a meeting called for such purpose. The
Distribution and Service Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on 90 days'
written notice. Total underwriting commissions on the sale of shares of the Fund
for the last three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
TOTAL UNDER- AMOUNTS
WRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------ --------------
<S> <C> <C>
Fiscal Period Ended September 30, 1998...................... $252,767 $19,360
Fiscal Year Ended December 31, 1997......................... $212,285 $24,787
Fiscal Year Ended December 31, 1996......................... $279,148 $37,329
</TABLE>
B-41
<PAGE> 392
With respect to sales of Class A Shares of the Fund, the total sales
charges and concessions reallowed to authorized dealers at the time of purchase
are as follows:
CLASS A SHARES SALES CHARGE TABLE
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-------------------------------------------------
REALLOWED TO
AS % OF NET DEALERS AS
AS % OF AMOUNT A % OF
SIZE OF INVESTMENT OFFERING PRICE INVESTED OFFERING PRICE
------------------ ------------------ ----------- --------------
<S> <C> <C> <C>
Less than $25,000...................................... 3.25% 3.36% 3.00%
$25,000 but less than $250,000......................... 2.75% 2.83% 2.50%
$250,000 but less than $500,000........................ 1.75% 1.78% 1.50%
$500,000 but less than $1,000,000...................... 1.50% 1.52% 1.25%
$1,000,000 or more..................................... * * *
</TABLE>
- ---------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a deferred
sales charge of 1.00% on certain redemptions made within one year of the
purchase. A commission or transaction fee will be paid by the Distributor at
the time of purchase directly out of the Distributor's assets (and not out of
the Fund's assets) to authorized dealers who initiate and are responsible for
purchases of $1 million or more computed based on a percentage of the dollar
value of such shares sold as follows: 1.00% on sales to $2 million, plus 0.80%
on the next $1 million and 0.50% on the excess over $3 million.
With respect to sales of Class B Shares and Class C Shares of the Fund, a
commission or transaction fee generally will be paid by the Distributor at the
time of purchase directly out of the Distributor's assets (and not out of the
Fund's assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 3.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any deferred sales charge and any distribution fees on Class
B Shares and Class C Shares of the Fund are paid to the Distributor and are used
by the Distributor to defray its distribution related expenses in connection
with the sale of the Fund's shares, such as the payment to authorized dealers
for selling such shares. With respect to Class C Shares, the authorized dealers
generally are paid the ongoing commission and transaction fees of up to 0.75% of
the average daily net assets of the Fund's Class C Shares annually commencing in
the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any authorized dealer that sponsors
sales contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the authorized dealer at the public offering price during such programs.
Other programs provide, among other things and subject to certain conditions,
for certain favorable distribution arrangements for shares of the Fund. Also,
the Distributor in its discretion may from time to time, pursuant to objective
criteria established by the Distributor, pay fees to, and sponsor business
seminars for, qualifying authorized dealers for certain services or activities
which are primarily intended to result in sales of shares of the Fund. Fees may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives for meetings or seminars
of a business nature. In some instances additional compensation or promotional
incentives may be offered to brokers, dealers or financial intermediaries that
have sold or may sell significant amounts of shares during specified periods of
time. The Distributor may provide additional compensation to Edward D. Jones &
Co. or an affiliate thereof based on a combination of its sales of shares and
increases in assets under management. All of the foregoing payments are made by
the Distributor out of its own assets. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of the Fund on an annual basis. These
programs will not change the price an investor will pay for shares or the amount
that a Fund will receive from such sale.
B-42
<PAGE> 393
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. State securities
laws regarding registration of banks and other financial institutions may differ
from the interpretations of federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to
certain state laws.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans". The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Distribution Plan and the Service Plan are being implemented
through an agreement (the "Distribution and Service Agreement") with the
Distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance, which may include, but not
be limited to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
The Distributor must submit quarterly reports to the Board of Trustees of
the Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Distribution Plan and the purposes for which
such expenditures were made, together with such other information as from time
to time is reasonably requested by the Trustees. The Plans provide that they
will continue in full force and effect from year to year so long as such
continuance is specifically approved by a vote of the Trustees, and also by a
vote of the disinterested Trustees, cast in person at a meeting called for the
purpose of voting on the Plans. Each of the Plans may not be amended to increase
materially the amount to be spent for the services described therein with
respect to any class of shares without approval by a vote of a majority of the
outstanding voting shares of such class, and all material amendments to either
of the Plans must be approved by the Trustees and also by the disinterested
Trustees. Each of the Plans may be terminated with respect to any class of
shares at any time by a vote of a majority of the disinterested Trustees or by a
vote of a majority of the outstanding voting shares of such class.
The Plans generally provide for the Fund to reimburse the lesser of (i) the
distribution and service fees at the rates specified in the prospectus or (ii)
the amount of the Distributor's actual expenses incurred less any deferred sales
charges it received. For Class A Shares, to the extent the Distributor is not
fully reimbursed in a given year, there is no carryover of such unreimbursed
amounts to succeeding years. For each of the Class B Shares and Class C Shares,
to the extent the Distributor is not fully reimbursed in a given year, any
unreimbursed expenses for such class will be carried forward and paid by the
Fund in future years so long as such Plans are in effect. Except as mandated by
applicable law, the Fund does not impose any limit with respect to the number of
years into the future that such unreimbursed expenses may be carried forward (on
a Fund level basis). Because such expenses are accounted on a Fund level basis,
in periods of extreme net asset value fluctuation such amounts with respect to a
particular Class B Share of Class C Share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such share. In such circumstances, a shareholder of a share may be
deemed to incur expenses attributable to other shareholders of such class. As of
September 30, 1998, there were $529,923 and $4,660 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 1.31% and 0.10% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Plan were terminated
or not continued, the Fund would not be contractually obligated to
B-43
<PAGE> 394
pay the Distributor for any expenses not previously reimbursed by the Fund or
recovered through deferred sales charge.
Because the Fund is a series of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one series of the Trust may indirectly benefit
the other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution-related expenses
attributable to any other class of shares.
For the fiscal period ended September 30, 1998, the Fund's aggregate
expenses under the Plans for Class A Shares were $257,024 or 0.24% of the Class
A Shares' average daily net assets. Such expenses were paid to reimburse the
Distributor for payments made to financial intermediaries for servicing Fund
shareholders and for administering the Plans. For the fiscal period ended
September 30, 1998, the Fund's aggregate expenses under the Class B Plan were
$248,827 or 1.00% of the Class B Shares' average net assets. Such expenses were
paid to reimburse the Distributor for the following payments: $187,847 for
commissions and transaction fees paid to financial intermediaries in respect of
sales of Class B Shares of the Fund and $60,980 for fees paid to financial
intermediaries for servicing Class B shareholders and administering the Plans.
For the fiscal period ended September 30, 1998, the Fund's aggregate expenses
under the Plans for Class C Shares were $31,353 or 1.00% of the Class C Shares'
average net assets. Such expenses were paid to reimburse the Distributor for the
following payments; $14,941 for commissions and transaction fees paid to
financial intermediaries in respect of sales of Class C Shares of the Fund and
$16,412 for fees paid to financial intermediaries for servicing Class C
shareholders and administering the Class C Plan.
TRANSFER AGENT
The Fund's transfer agent is Van Kampen Investor Services Inc., PO Box
418256, Kansas City, MO 64141-9256. During the fiscal period ended September 30,
1998 and the fiscal years ended December 31, 1997 and 1996, Investor Services,
shareholder service agent and dividend disbursing agent for the Fund, received
fees aggregating $50,200, $112,100 and $142,100, respectively for these
services. Prior to 1998, these services were provided at cost plus a profit.
Beginning in 1998, the transfer agency prices are determined through
negotiations with the Fund's Board of Trustees and are based on competitive
benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of the Fund's
portfolio business, the policies and practices in this regard will at all times
be subject to review by the trustees of the Fund.
As most transactions made by the Fund are principal transactions at net
prices, the Fund generally incurs little or no brokerage costs. The portfolio
securities in which the Fund invests are normally purchased directly from the
issuer or in the over-the-counter market from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include a spread or markup to the dealer
between the bid and asked price. Sales to dealers are effected at bid prices.
The Fund may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid, or may purchase and
sell listed bonds on a exchange, which are effected through brokers who charge a
commission for their services.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker/dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size
B-44
<PAGE> 395
and breadth of the market for the security, the size of and difficulty in
executing the order, and the best net price. There are many instances when, in
the judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser to the Fund and still must be analyzed
and reviewed by its staff, the receipt of research information is not expected
to reduce its expenses materially. The investment advisory fee is not reduced as
a result of the Adviser's receipt of such research services. Services provided
may include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or pur-chasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Fund.
The Adviser also may place portfolio transactions, to the extent permitted
by law, with brokerage firms affiliated with the Fund, the Adviser or the
Distributor and with brokerage firms participating in the distribution of the
Fund's shares if it reasonably believes that the quality of execution and the
commission are comparable to that available from other qualified firms.
Similarly, to the extent permitted by law and subject to the same considerations
on quality of execution and comparable commission rates, the Adviser may direct
an executing broker to pay a portion or all of any commissions, concessions or
discounts to a firm supplying research or other services or to a firm
participating in the distribution of the Fund's shares.
The Adviser may place portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for the Fund and another advisory account.
In some cases, this procedure could have an adverse effect on the price or the
amount of securities available to the Fund. In making such allocations among the
Fund and other advisory accounts, the main factors considered by the Adviser are
the respective sizes of the Fund and other advisory accounts, the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
Effective October 31, 1996, Morgan Stanley Group Inc. ("Morgan Stanley")
became an affiliate of the Adviser. Effective May 31, 1997, Dean Witter Discover
& Co. ("Dean Witter") became an affiliate of the Adviser. The trustees have
adopted certain policies incorporating the standards of Rule 17e-1 issued by the
SEC under the 1940 Act which requires that the commissions paid to affiliates of
the Fund must be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time. The rule and procedures also contain review requirements and require
the Adviser to furnish reports to the trustees and to maintain records in
connection with such reviews. After consideration of all factors deemed
relevant, the trustees will consider from time to time whether the advisory fee
for the Fund will be reduced by all or a portion of the brokerage commission
given to affiliated brokers.
B-45
<PAGE> 396
The Fund paid the following commissions to all brokers and affiliated
brokers during the periods shown:
<TABLE>
<CAPTION>
AFFILIATED BROKERS
-------------------
MORGAN DEAN
BROKERS STANLEY WITTER
------- ---------- ------
<S> <C> <C> <C>
Commission paid:
Fiscal period ended September 30, 1998.................... $16,184 -- --
Fiscal year ended December 31, 1997....................... $ 0 $0 $0
Fiscal year ended December 31, 1996....................... $ 0 $0 NA
Fiscal period ended 1998 Percentages:
Commissions with affiliate to total commissions........... -- --
Value of brokerage transactions with affiliate to total
transactions........................................... -- --
</TABLE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's
shares of the Fund are held by Investor Services, the Fund's transfer agent.
Investor Services performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. Except as described
in the Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in any of the
Participating Funds will receive statements quarterly from Investor Services
showing any reinvestments of dividends and capital gains distributions and any
other activity in the account since the preceding statement. Such shareholders
also will receive separate confirmations for each purchase or sale transaction
other than reinvestment of dividends and capital gains distributions and
systematic purchases or redemptions. Additions to an investment account may be
made at any time by purchasing shares through authorized dealers or by mailing a
check directly to Investor Services.
SHARE CERTIFICATES
Generally, the Fund will not issue share certificates. However, upon
written or telephone request to the Fund, a share certificate will be issued
representing shares (with the exception of fractional shares) of the Fund. A
shareholder will be required to surrender such certificates upon redemption
thereof. In addition, if such certificates are lost the shareholder must write
to Van Kampen Funds, c/o Investor Services, PO Box 418256, Kansas City, MO
64141-9256, requesting an "affidavit of loss" and obtain a Surety Bond in a form
acceptable to Investor Services. On the date the letter is received, Investor
Services will calculate a fee for replacing the lost certificate equal to no
more than 2.00% of the net asset value of the issued shares, and bill the party
to whom the replacement certificate was mailed.
RETIREMENT PLANS
Eligible investors may establish individual retirement accounts ("IRAs");
SEP; 401(k) plans; Section 403(b)(7) plans in the case of employees of public
school systems and certain non-profit organizations; or other pension or profit
sharing plans. Documents and forms containing detailed information regarding
these plans are available from the Distributor. Van Kampen Trust Company serves
as custodian under the IRA, 403(b)(7) and Keogh plans. Details regarding fees,
as well as full plan administration for profit sharing, pension and 401(k)
plans, are available from the Distributor.
B-46
<PAGE> 397
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS
Holders of Class A Shares can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemptions transferred to a bank
account via the ACH plan are available to be credited to the account on the
second business day following normal payment. In order to utilize this option,
the shareholder's bank must be a member of ACH. In addition, the shareholder
must fill out the appropriate section of the account application. The
shareholder must also include a voided check or deposit slip from the bank
account into which redemptions are to be deposited together with the completed
application. Once Investor Services has received the application and the voided
check or deposit slip, such shareholder's designated bank account, following any
redemption, will be credited with the proceeds of such redemption. Once enrolled
in the ACH plan, a shareholder may terminate participation at any time by
writing Investor Services.
DIVIDEND DIVERSIFICATION
A shareholder may, upon written request or by completing the appropriate
section of the application form accompanying the Prospectus or by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired), elect to have all dividends
and other distributions paid on a class of shares of the Fund invested into
shares of the same class of any Participating Fund so long as the investor has a
pre-existing account for such class of shares of the other fund. Both accounts
must be of the same type, either non-retirement or retirement. If the accounts
are retirement accounts, they must both be for the same class and of the same
type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for the benefit
of the same individual. If a qualified, pre-existing account does not exist, the
shareholder must establish a new account subject to minimum investment and other
requirements of the fund into which distributions would be invested.
Distributions are invested into the selected fund at its net asset value per
share as of the payable date of the distribution.
SYSTEMATIC WITHDRAWAL PLAN
Any investor whose shares in a single account total $10,000 or more at the
offering price next computed after receipt of instructions may establish a
monthly, quarterly, semi-annual or annual withdrawal plan. Any investor whose
shares in a single account total $5,000 or more at the offering price next
computed after receipt of instructions may establish a quarterly, semiannual or
annual withdrawal plan. This plan provides for the orderly use of the entire
account, not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which any capital gain or loss will be
recognized. The planholder may arrange for monthly, quarterly, semi-annual or
annual checks in any amount, not less than $25. Such a systematic withdrawal
plan may also be maintained by an investor purchasing shares for a retirement
plan established on a form made available by the Fund.
Class B shareholders and Class C shareholders who establish a withdrawal
plan may redeem up to 12% annually of the shareholder's initial account balance
without incurring a CDSC. Initial account balance means the amount of the
shareholder's investment at the time the election to participate in the plan is
made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plans are reinvested in additional shares
at the next determined net asset value per share. If periodic withdrawals
continuously exceed reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Withdrawals made concurrently with the purchase of additional shares
ordinarily will be disadvantageous to the shareholder because of the duplication
of sales charges. Any gain or loss realized by the shareholder upon redemption
of shares is a taxable event. The Fund reserves the right to amend or terminate
the systematic withdrawal program on 30 days' notice to its shareholders.
REINSTATEMENT PRIVILEGE
A Class A shareholder or Class B shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class A Shares of the Fund. A Class C shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption
B-47
<PAGE> 398
in Class C Shares of the Fund with credit given for any CDSC paid upon such
redemption. Such reinstatement is made at the net asset value per share (without
sales charge) next determined after the order is received, which must be within
180 days after the date of the redemption. Reinstatement at net asset value per
share is also offered to participants in those eligible retirement plans held or
administered by Van Kampen Trust Company for repayment of principal (and
interest) on their borrowings on such plans.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed. The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
Additionally, if the Board of Trustees determines that payment wholly or
partly in cash would be detrimental to the best interests of the remaining
shareholders of the Fund, the Fund may pay the redemption proceeds in whole or
in part by a distribution-in-kind of portfolio securities held by the Fund in
lieu of cash in conformity with applicable rules of the SEC. Shareholders may
incur brokerage charges upon the sale of portfolio securities so received in
payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
For purposes of the CDSC-Class A, when shares of one fund are exchanged for
shares of another fund, the purchase date for the shares of the fund exchanged
into will be assumed to be the date on which shares were purchased in the fund
from which the exchange was made. If the exchanged shares themselves are
acquired through an exchange, the purchase date is assumed to carry over from
the date of the original election to purchase shares subject to a CDSC-Class A
rather than a front-end load sales charge. In determining whether a CDSC-Class A
is payable, it is assumed that shares held the longest are the first to be
redeemed.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED
SALES CHARGE ("CDSC-CLASS B AND C")
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a CDSC. The CDSC-Class B
and C is waived on redemptions of Class B Shares and Class C Shares in the
circumstances described below:
REDEMPTION UPON DEATH OR DISABILITY
The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B shareholder and Class C shareholder. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Code, which in pertinent part
defines a person as disabled if such person "is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of
long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of death or disability before it determines to
waive the CDSC-Class B and C.
In cases of death or disability, the CDSC-Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC-Class B and C applies to a total
B-48
<PAGE> 399
or partial redemption, but only to redemptions of shares held at the time of the
death or initial determination of disability.
REDEMPTION IN CONNECTION WITH CERTAIN DISTRIBUTIONS FROM RETIREMENT PLANS
The Fund will waive the CDSC-Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more Participating Funds;
in such event, as described below, the Fund will "tack" the period for which the
original shares were held on to the holding period of the shares acquired in the
transfer or rollover for purposes of determining what, if any, CDSC-Class B and
C is applicable in the event that such acquired shares are redeemed following
the transfer or rollover. The charge also will be waived on any redemption which
results from the return of an excess contribution pursuant to Section 408(d)(4)
or (5) of the Code, the return of excess deferral amounts pursuant to Code
Section 401(k)(8) or 402(g)(2), or from the death or disability of the employee
(see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition, the charge will be
waived on any minimum distribution required to be distributed in accordance with
Code Section 401(a)(9).
The Fund does not intend to waive the CDSC-Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
REDEMPTION PURSUANT TO A FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC-Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from the Fund without the imposition of a CDSC-Class B
and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
The Fund will waive the CDSC-Class B and C in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase of shares.
INVOLUNTARY REDEMPTIONS OF SHARES
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC-Class B and C upon
such involuntary redemption.
REINVESTMENT OF REDEMPTION PROCEEDS
A shareholder who has redeemed Class C Shares of a Fund may reinvest at net
asset value, with credit for any CDSC-Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C Shares of the Fund, provided that the reinvestment is effected
within 180 days after such redemption and the shareholder has not previously
exercised this reinvestment privilege with respect to Class C Shares of the
Fund. Shares acquired in this manner will be deemed to have the original cost
and purchase date of the redeemed shares for purposes of applying the CDSC-Class
C to subsequent redemptions.
B-49
<PAGE> 400
REDEMPTION BY ADVISER
The Fund may waive the CDSC-Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
TAXATION
FEDERAL INCOME TAXATION. The Trust and each of its series, including the
Fund, will be treated as separate corporations for federal income tax purposes.
The Fund has elected and qualified, and intends to continue to qualify each
year, to be treated as a regulated investment company under Subchapter M of the
Code. To qualify as a regulated investment company, the Fund must comply with
certain requirements of the Code relating to, among other things, the source of
its income and diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gain, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses), it
will not be required to pay federal income taxes on any income distributed to
shareholders. The Fund intends to distribute at least the minimum amount of net
investment income necessary to satisfy the 90% distribution requirement. The
Fund will not be subject to federal income tax on any net capital gains
distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute,
by December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income (not including tax-exempt income) for such year and (ii) 98%
of its capital gain net income (the latter of which generally is computed on the
basis of the one-year period ending on October 31st of such year), plus any
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.
If the Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Fund would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions
of the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have
B-50
<PAGE> 401
continued to hold. A portion of the discount relating to certain stripped
tax-exempt obligations may constitute taxable income when distributed to
shareholders.
DISTRIBUTIONS. The Fund intends to invest in sufficient tax-exempt
municipal securities to permit payment of "exempt-interest dividends" (as
defined in the Code). Dividends paid by the Fund from the net tax-exempt
interest earned from municipal securities qualify as exempt-interest dividends
if, at the close of each quarter of its taxable year, at least 50% of the value
of the total assets of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
Exempt-interest dividends are included in determining what portion, if any,
of a person's social security and railroad retirement benefits will be
includable in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund, or by the Trust if it is required to qualify as a regulated
investment company as described below. "Substantial user" is defined under U.S.
Treasury Regulations to include a non-exempt person who regularly uses in his
trade or business a part of any facilities financed with the tax-exempt
obligations and whose gross revenues derived from such facilities exceed 5% of
the total revenues derived from the facilities by all users, or who occupies
more than 5% of the useable area of the facilities or for whom the facilities or
a part thereof were specifically constructed, reconstructed or acquired.
Examples of "related persons" include certain related natural persons,
affiliated corporations, a partnership and its partners and an S corporation and
its shareholders.
While the Fund expects that a major portion of its net investment income
will constitute tax-exempt interest, a significant portion may consist of
investment company taxable income. Distributions of the Fund's net investment
company taxable income are taxable to shareholders as ordinary income to the
extent of the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains ("capital gain
dividends"), if any, are taxable to shareholders as long-term capital gains
regardless of the length of time shares of the Fund have been held by such
shareholders. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming such shares are held as a capital asset). For a summary of the
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates" below. Interest on indebtedness which is incurred to
purchase or carry
B-51
<PAGE> 402
shares of a mutual fund which distributes exempt interest dividends during the
year is not deductible for federal income tax purposes. Tax-exempt shareholders
not subject to federal income tax on their income generally will not be taxed on
distributions from the Fund.
Shareholders receiving distributions in the form of additional shares
issued by the Fund will be treated for federal income tax purposes as receiving
a distribution in an amount equal to the fair market value of the shares
received, determined as of the distribution date. The basis of such shares will
equal the fair market value on the distribution date.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt-interest dividends cannot exceed the
excess of the amount of interest exempt from tax under Section 103 of the Code
received by the Fund during the year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code. Since the percentage of dividends
which are exempt-interest dividends is determined on an average annual method
for the taxable year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax exempt during the period covered by the dividend.
Fund distributions generally will not qualify for the dividends received
deduction for corporations.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
SALE OF SHARES. The sale of shares (including transfers in connection with
a redemption or repurchase of shares) will be a taxable transaction for federal
income tax purposes. Selling shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
shares and the amount received. If such shares are held as a capital asset, the
gain or loss will be a capital gain or loss. For a summary of the tax rates
applicable to capital gains (including capital gain dividends), see "Capital
Gains Rates" below. Any loss recognized upon a taxable disposition of shares
held for six months or less will be treated as a long-term capital loss to the
extent of any capital gain dividends received with respect to such shares. For
purposes of determining whether shares have been held for six months or less,
the holding period is suspended for any periods during which the shareholder's
risk of loss is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES. The maximum tax rate applicable to net capital gains
recognized by individuals and other non-corporate taxpayers is (i) the same as
the maximum ordinary income tax rate for capital assets held for one year or
less or (ii) 20% for capital assets held for more than one year. A special 28%
tax rate may apply to a portion of the capital gain dividends paid by the Fund
with respect to its taxable year ended September 30, 1998. The maximum long-term
capital gains rate for corporations is 35%.
BACKUP WITHHOLDING. The Fund may be required to withhold federal income tax
at a rate of 31% ("backup withholding") from dividends and redemption proceeds
paid to non-corporate shareholders. This tax may be withheld from dividends if
(i) the shareholder fails to furnish the Fund with its correct taxpayer
identification number, (ii) the IRS notifies the Fund that the shareholder has
failed to properly report certain interest and dividend income to the IRS and to
respond to notices to that effect or (iii) when required to do so, the
shareholder fails to certify that he or she is not subject to backup
withholding. Redemption proceeds may be subject to withholding under the
circumstances described in (i) above.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's United States federal income tax liability,
if any, provided that the required information is furnished to the IRS.
B-52
<PAGE> 403
GENERAL. The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal tax consequences of purchasing, holding and disposing of
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
CALIFORNIA
<TABLE>
<CAPTION>
FEDERAL STATE COMBINED
SINGLE RETURN JOINT RETURN TAX BRACKET TAX BRACKET* TAX BRACKET*
------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
$ 0-25,750 $ 0-43,050 15.00% 6.00% 20.10%
25,750-62,450 43,050-104,050 28.00% 9.30% 34.70%
62,450-130,250 104,050-158,550 31.00% 9.30% 37.40%
130,250-283,150 158,550-283,150 36.00% 9.30% 42.00%
Over 283,150 Over 283,150 39.60% 9.30% 45.20%
</TABLE>
- ---------------
* Please note that the table does not reflect (i) any federal or state
limitations on the amounts of allowable itemized deductions, phase-outs of
personal or dependent exemption credits or other allowable credits, (ii) any
local taxes imposed, or (iii) any taxes other than personal income taxes. The
table assumes that federal taxable income is equal to state income subject to
tax, and in cases where more than one state rate falls within a federal
bracket, the highest state rate corresponding to the highest income within
that federal bracket is used.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one year, five year and ten year periods. Other total
return quotations, aggregate or average, over other time periods may also be
included.
The total return of the Fund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the Fund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the current maximum public
offering price (which includes a maximum sales charge of 4.75% for Class A
Shares); that all income dividends or capital gains distributions during the
period are reinvested in Fund shares at net asset value; and that any applicable
CDSC has been paid. The Fund's total return will vary depending on market
conditions, the securities comprising the Fund's portfolio, the Fund's operating
expenses and unrealized net capital gains or losses during the period. Total
return is based on historical earnings and asset value fluctuations and is not
intended to indicate future performance. No adjustments are made to reflect any
income taxes payable by shareholders on dividends and distributions paid by the
Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares.
Non-standardized total return calculations do not reflect the imposition of
a contingent deferred sales charge, and if any such contingent deferred sales
charge with respect to the CDSC imposed at the time of redemption were
reflected, it would reduce the performance quoted.
B-53
<PAGE> 404
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Yield and total return are calculated separately for Class A Shares, Class
B Shares and Class C Shares. Class A Shares total return figures include the
maximum sales charge of 4.75%; Class B Shares and Class C Shares total return
figures include any applicable CDSC. Because of the differences in sales charges
and distribution fees, the total returns for each of the classes will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield, which is a measure of
the income actually earned by the Fund's investments, and from total return
which is a measure of the income actually earned by the Fund's investments plus
the effect of any realized and unrealized appreciation or depreciation of such
investments during a stated period. Distribution rate is, therefore, not
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
From time to time marketing materials may provide a portfolio manager
update, an adviser update or discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top five sectors, ten largest holdings and other Fund asset
structures, such as duration, maturity, coupon, NAV, rating breakdown, AMT
exposure and number of issues in the portfolio. Materials may also mention how
the Distributor believes the Fund compares relative to other Van Kampen funds.
Materials may also discuss the Dalbar Financial Services study from 1984 to 1994
which studied investor cash flow into and out of all types of mutual funds. The
ten year study found that investors who bought mutual fund shares and held such
shares outperformed investors who bought and sold. The Dalbar study conclusions
were consistent regardless of if shareholders purchased their funds in direct or
sales force distribution channels. The study showed that investors working with
a professional representative have tended over time to earn higher returns than
those who invested directly. The Fund will also be marketed on the internet.
In reports or other communications to shareholders or in advertising
material, the Fund may compare its performance with that of other mutual funds
as listed in the rankings or ratings prepared by Lipper Analytical Services,
Inc., CDA, Morningstar Mutual Funds or similar independent services which
monitor the performance of mutual funds with the Consumer Price Index, other
appropriate indices of investment securities, or with investment or savings
vehicles. The performance information may also include evaluations of the Fund
published by nationally recognized ranking services and by nationally recognized
financial
B-54
<PAGE> 405
publications. Such comparative performance information will be stated in the
same terms in which the comparative data or indices are stated. Such
advertisements and sales material may also include a yield quotation as of a
current period. In each case, such total return and yield information, if any,
will be calculated pursuant to rules established by the SEC and will be computed
separately for each class of the Fund's shares. For these purposes, the
performance of the Fund, as well as the performance of other mutual funds or
indices, do not reflect sales charges, the inclusion of which would reduce Fund
performance. The Fund will include performance data for each class of shares of
the Fund in any advertisement or information including performance data of the
Fund.
The Fund may also utilize performance information in hypothetical
illustrations. For example, the Fund may, from time to time: (1) illustrate the
benefits of tax-deferral by comparing taxable investments to investments made
through tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
of different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return.
Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
computed by dividing that portion of the yield of the Fund (as computed above)
which is tax-exempt by a percentage equal to 100% minus a stated percentage
income tax rate and adding the result to that portion of the Fund's yield, if
any, that is not tax-exempt.
The Fund's Annual Report and Semi-Annual Report contain additional
performance information. A copy of the Annual Report or Semi-Annual Report may
be obtained without charge by calling or writing the Fund at the telephone
number and address printed on the back cover of the Prospectus.
From time to time marketing materials may provide a portfolio manager
update, an adviser update or discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top five sectors, ten largest holdings and other Fund asset
structures, such as duration, maturity, coupon, NAV, rating breakdown, AMT
exposure and number of issues in the portfolio. Materials may also mention how
Van Kampen believes the Fund compares relative to other Van Kampen funds.
Materials may also discuss the Dalbar Financial Services study from 1984 to 1994
which studied investor cash flow into and out of all types of mutual funds. The
ten year study found that investors who bought mutual fund shares and held such
shares outperformed investors who bought and sold. The Dalbar study conclusions
were consistent regardless of if shareholders purchased their funds in direct or
sales force distribution channels. The study showed that investors working with
a professional representative have tended over time to earn higher returns than
those who invested directly. The Fund will also be marketed on the Internet.
CLASS A SHARES
The average total return, including payment of the maximum sales charge,
with respect to the Class A Shares for (i) the one year period ended September
30, 1998 was 6.03%; (ii) the five year period ended September 30, 1998 was 4.90%
and (iii) the ten year period ended September 30, 1998 was 7.83%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.46%. The Fund's current distribution
rate with respect to the Class A Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.55%. The Fund's taxable equivalent distribution rate with
respect to Class A Shares for the month ending September 30, 1998 was 7.84%.
The Fund's cumulative non-standardized total return, including payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to the end of the current period was 167.98%.
B-55
<PAGE> 406
The Fund's cumulative non-standardized total return, excluding payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to the end of the current period was 177.01%.
CLASS B SHARES
The average total return, including payment of the CDSC, with respect to
the Class B Shares for (i) the one year period ended September 30, 1998 was
5.73%, (ii) the five year period ended September 30, 1998 was 4.77% and (iii)
the approximately five year, five month period of May 1, 1993 (commencement of
distribution) through September 30, 1998 was 5.68%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 2.81%. The Fund's current distribution
rate with respect to the Class B Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.00%. The Fund's taxable equivalent distribution rate with
respect to Class B Shares for the month ending September 30, 1998 was 6.90%.
The Fund's cumulative non-standardized total return, including payment of
the CDSC, with respect to the Class B Shares from its inception to the end of
the current period was 34.83%.
The Fund's cumulative non-standardized total return, excluding payment of
the CDSC, with respect to the Class B Shares from its inception to the end of
the current period was 34.83%.
CLASS C SHARES
The average total return, including payment of the CDSC, with respect to
the Class C Shares for the (i) one year period ending September 30, 1998 was
7.67%, (ii) the five year period ended September 30, 1998 was 4.77% and (iii)
the approximately five year, one month period from August 13, 1993 (commencement
of distribution) through September 30, 1998 was 5.20%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 2.83%. The Fund's current distribution
rate with respect to the Class C Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.00%. The Fund's taxable equivalent distribution rate with
respect to Class C Shares for the month ending September 30, 1998 was 6.90%.
The Fund's cumulative non-standardized total return, including payment of
the CDSC, with respect to the Class C Shares from its inception to the end of
the current period was 29.70%.
The Fund's cumulative non-standardized total return, excluding payment of
the CDSC, with respect to the Class C Shares from its inception to the end of
the current period was 29.70%.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash,
including proceeds from the sale of shares of the Fund and of securities in the
Fund's investment portfolio, are held by State Street Bank and Trust Company,
225 West Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual statements are furnished to
shareholders, and annually such statements are audited by the independent
accountants.
INDEPENDENT ACCOUNTANTS -- KPMG LLP, 303 East Wacker Drive, Chicago,
Illinois 60601, the independent accountants for the Fund, performs an annual
audit of the Fund's financial statements.
LEGAL COUNSEL -- Counsel to the Fund is Skadden, Arps, Slate, Meagher &
Flom (Illinois).
B-56
<PAGE> 407
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen California Insured Tax Free Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen California Insured Tax Free Fund (the "Fund"), including the portfolio of
investments, as of September 30, 1998, and the related statement of operations
for the nine-month period ended September 30, 1998 and the year ended December
31, 1997, the statement of changes in net assets for the nine-month period ended
September 30, 1998 and for each of the two years in the period ended December
31, 1997, 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
September 30, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen California Insured Tax Free Fund as of September 30, 1998, the results of
its operations for the nine-month period ended September 30, 1998 and the year
ended December 31, 1997, the changes in its net assets for the nine-month period
ended September 30, 1998 and for each of the two years in the period ended
December 31, 1997, and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
November 6, 1998
F-1
<PAGE> 408
PORTFOLIO OF INVESTMENTS
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS 97.7%
$ 2,000 Anaheim, CA Pub Fin Auth Tax Alloc Rev (Inverse
Fltg) (MBIA Insd)................................ 9.070% 12/28/18 $ 2,652,500
1,000 Antioch Area Pub Fac Fin Agy CA Spl Tax Cmnty Fac
Dist (FGIC Insd)................................. 5.000 08/01/18 1,012,290
3,675 Bakersfield, CA Ctfs Partn Convention Cent
Expansion Proj (MBIA Insd)....................... 5.800 04/01/17 4,033,790
3,000 Bakersfield, CA Ctfs Partn Convention Cent
Expansion Proj (MBIA Insd)....................... 5.875 04/01/22 3,313,140
1,000 Banning, CA Ctfs Partn Administration Bldg Proj
Ser A Rfdg (MBIA Insd)........................... 5.500 11/01/20 1,068,910
3,000 Bay Area Govt Assn CA Rev Tax Alloc CA Redev Agy
Pool Ser A2 (FSA Insd)........................... 6.400 12/15/14 3,441,750
1,000 Brawley, CA Ctfs Partn Wtr Sys Impt Proj Rfdg
(MBIA Insd)...................................... 5.000 12/01/24 1,006,740
1,000 Brea & Olinda, CA Uni Sch Dist Ctfs Partn Sr High
Sch Pgm Ser A Rfdg (FSA Insd).................... 6.000 08/01/09 1,091,210
1,000 California Edl Fac Auth Rev Loyola Marymount Univ
Rfdg (MBIA Insd)................................. 5.000 10/01/17 1,031,180
1,625 California Hlth Fac Fin Auth Rev Insd Sutter Hlth
Ser A Rfdg (FSA Insd)............................ 5.250 08/15/27 1,666,210
2,000 California Hlth Fac Fin Auth Rev Adventist Hlth
Ser A Rfdg (MBIA Insd)........................... 6.500 03/01/14 2,151,400
2,000 California Hlth Fac Fin Auth Rev Kaiser
Permanente Ser A (FSA Insd)...................... 5.550 08/15/25 2,065,360
4,000 California Hsg Fin Agy Rev Home Mtg Ser A (MBIA
Insd)............................................ 5.850 08/01/16 4,294,920
15 California Hsg Fin Agy Rev Hsg Ser B (MBIA
Insd)............................................ 8.625 08/01/15 15,801
1,135 California Pub Cap Impt Fin Auth Rev Pooled Proj
Ser B (BIGI Insd)................................ 8.100 03/01/18 1,162,002
1,050 California Spl Dist Assn Fin Corp Ctfs Partn Spl
Dists Fin Pgm Ser DD (FSA Insd).................. 5.625 01/01/27 1,132,205
1,250 California St (FGIC Insd)........................ 6.250 09/01/12 1,504,000
240 California St (MBIA Insd)........................ 6.000 10/01/14 263,798
1,000 California St Univ Fresno Assn Inc Rev Auxiliary
Residence Student Proj (MBIA Insd)............... 6.250 02/01/17 1,128,060
1,000 California Statewide Cmntys Dev Auth Ctfs Partn
San Diego St Univ Fndtn Rfdg (AMBAC Insd)........ 5.250 03/01/22 1,024,560
1,570 California Statewide Cmntys Dev Auth Rev Ctfs
Partn Insd Children's Hosps Rfdg (MBIA Insd)..... 6.000 06/01/10 1,826,114
1,300 California Statewide Cmntys Dev Auth Rev Ctfs
Partn Student Residence Ser A (MBIA Insd)........ 5.000 06/01/29 1,306,851
2,000 Capistrano, CA Uni Sch Dist Cmnty Fac Dist Spl
Tax (MBIA Insd).................................. 5.000 09/01/18 2,051,440
2,000 Castaic Lake Wtr Agy CA Ctfs Partn Wtr Sys Impt
Proj Ser A Rfdg (MBIA Insd)...................... 7.000 08/01/12 2,535,680
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 409
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$ 1,000 Central Vly Sch Dists Fin Auth CA Cap Apprec Sch
Dist G O A Rfdg (MBIA Insd)...................... * 08/01/10 $ 595,690
1,205 Channel Islands Beach CA Cmnty Svcs Dist Ctfs
Partn (FSA Insd)................................. 5.700% 09/01/21 1,322,403
1,105 Chino, CA Ctfs Partn Redev Agy (MBIA Insd)....... 6.200 09/01/18 1,233,622
2,350 Chino, CA Uni Sch Dist Ctfs Partn Master Lease
Pgm (FSA Insd)................................... 6.250 03/01/09 2,667,837
1,500 Chino, CA Uni Sch Dist Ctfs Partn Master Lease
Pgm (FSA Insd)................................... 6.000 03/01/14 1,672,530
1,000 Clovis, CA Pub Landfill Impt Proj Rfdg (AMBAC
Insd)............................................ 5.000 09/01/18 1,024,910
290 Colton, CA Jt Uni Sch Dist Cmnty Fac Dist Spl Tax
Southridge Vlg Rfdg (FSA Insd)................... 5.900 09/01/14 290,612
2,000 Colton, CA Pub Fin Auth Rev Tax Alloc Ser A (MBIA
Insd)............................................ 5.000 08/01/18 2,051,120
20 Concord, CA Redev Agy Tax Alloc Cent Concord
Redev Proj Ser 3 (BIGI Insd)..................... 8.000 07/01/18 20,620
1,000 Contra Costa Cnty, CA Ctfs Partn Contra Costa
Cnty Pub Fac Co (BIGI Insd)...................... 7.800 06/01/06 1,049,190
500 Contra Costa Cnty, CA Ctfs Partn Contra Costa
Cnty Pub Fac Co (BIGI Insd)...................... 7.800 06/01/07 524,595
1,550 Contra Costa, CA Wtr Auth Wtr Treatment Rev Ser A
Rfdg (FGIC Insd)................................. 5.750 10/01/14 1,680,975
5,165 Corona, CA Redev Agy Tax Alloc Redev Proj Area A
Ser A Rfdg (FGIC Insd)........................... 6.250 09/01/13 5,866,872
1,150 El Centro, CA Redev Agy Tax El Centro Redev Proj
Rfdg (MBIA Insd)................................. 5.500 11/01/26 1,227,464
1,000 Emeryville, CA Pub Fin Auth Shellmound Park Redev
& Hsg Proj B (MBIA Insd)......................... 5.000 09/01/19 1,016,380
2,000 Fairfield Suisun, CA Swr Dist Swr Rev Ser A Rfdg
(MBIA Insd)...................................... 6.250 05/01/16 2,158,140
1,000 Folsom, CA Pub Fin Auth Rev Rfdg (AMBAC Insd).... 6.000 10/01/12 1,093,290
1,400 Folsom, CA Pub Fin Auth Rev Rfdg (AMBAC Insd).... 6.000 10/01/19 1,534,442
2,000 Folsom, CA Spl Tax Cmnty Fac Dist No 2 Rfdg
(Connie Lee Insd)................................ 5.250 12/01/19 2,043,120
1,745 Gilroy, CA Uni Sch Dist Ctfs Partn Measure J Cap
Projs Rfdg (FSA Insd)............................ 5.875 09/01/06 1,968,657
1,810 Gilroy, CA Uni Sch Dist Ctfs Partn Measure J Cap
Projs Rfdg (FSA Insd)............................ 6.250 09/01/12 2,045,698
20,000 Grossmont, CA Union High Sch Dist Ctfs Partn
(MBIA Insd)...................................... * 11/15/21 4,625,800
4,000 Hayward, CA Ctfs Partn Civic Cent Proj (MBIA
Insd)............................................ 5.250 08/01/26 4,118,960
1,250 Hemet, CA Uni Sch Dist Ctfs Partn Nutrition Cent
Proj (FSA Insd).................................. 5.875 04/01/27 1,388,100
1,545 Imperial, CA Irrig Dist Elec Rev Sys Rfdg (MBIA
Insd)............................................ 5.000 11/01/18 1,582,621
1,000 Kern, CA Cmnty College Dist Ctfs Partn Rfdg (MBIA
Insd)............................................ 5.000 01/01/18 1,022,890
1,225 Lincoln, CA Uni Sch Dist (MBIA Insd)............. 5.600 09/01/26 1,317,096
1,835 Local Govt Fin Auth CA Rev Cap Apprec San
Francisco Redev (Prerefunded @ 08/01/04) (MBIA
Insd)............................................ * 08/01/08 1,148,196
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 410
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$ 850 Loma Linda, CA Hosp Rev Loma Linda Univ Med Cent
Proj B Rfdg (AMBAC Insd)......................... 7.000% 12/01/15 $ 897,634
1,535 Long Beach, CA Redev Agy Tax Alloc Sub Redev Proj
Rfdg (AMBAC Insd)................................ 5.125 04/01/20 1,553,328
662 Los Angeles Cnty, CA Tran Comm Lease Rev Dia RR
Lease Ltd (FSA Insd)............................. 7.375 12/15/06 727,094
2,380 Los Angeles, CA Mtg Rev FHA Security 8 Asstd Proj
Ser A Rfdg (MBIA Insd)........................... 6.100 07/01/25 2,496,311
500 M-S-R Pub Pwr Agy CA San Juan Proj Rev Ser E
(MBIA Insd)...................................... 6.000 07/01/22 526,520
2,000 Madera Cnty, CA Ctfs Partn Vly Childrens Hosp
Proj (MBIA Insd)................................. 5.000 03/15/23 2,006,020
4,095 Modesto, CA Irrigation Dist Fin Auth Rev Domestic
Wtr Proj Ser D Rfdg (AMBAC Insd)................. 5.000 09/01/17 4,215,393
1,250 North City West, CA Sch Fac Fin Auth Spl Tax Ser
B Rfdg (FSA Insd)................................ 5.750 09/01/15 1,387,025
1,640 North City West, CA Sch Fac Fin Auth Spl Tax Ser
B Rfdg (FSA Insd)................................ 6.000 09/01/19 1,824,779
500 Northern CA Pwr Agy Pub Pwr Rev Combustion
Turbine Proj 1 Ser A Rfdg (MBIA Insd)............ 6.000 08/15/10 510,865
400 Northern CA Pwr Agy Pub Pwr Rev Hydro Elec Proj 1
Ser A Rfdg (Prerefunded @ 07/01/21) (AMBAC
Insd)............................................ 7.500 07/01/23 537,088
2,760 Oakland, CA Uni Sch Dist Alameda Cnty Cap Apprec
Ser A (Prerefunded @ 08/01/06) (FGIC Insd)....... * 08/01/13 1,321,764
3,475 Oakland, CA Uni Sch Dist Alameda Cnty Cap Apprec
Ser A (Prerefunded @ 08/01/06) (FGIC Insd)....... * 08/01/14 1,558,051
1,220 Oceanside, CA Cmnty Dev Mtg FHA North River Club
Ser A Rfdg (MBIA Insd)........................... 5.850 07/01/16 1,292,309
1,000 Pajaro Vly, CA Unified Sch Dist Ctfs Partn Sch
Fac Brdg Fdg Pgm (FSA Insd)...................... 5.850 09/01/32 1,112,240
3,000 Palm Desert, CA Fin Auth Tax Alloc Rev (Inverse
Fltg) (MBIA Insd)................................ 8.855 04/01/22 3,577,500
1,000 Palmdale, CA Wtr Dist Rev Ctfs Parn Rfdg (FGIC
Insd)............................................ 5.000 10/01/18 1,022,210
1,000 Perris, CA Sch Dist Ctfs Partn Rfdg (FSA Insd)... 6.100 03/01/16 1,110,360
1,000 Pinole, CA Redev Agy Tax Alloc Pinole Vista Redev
Proj A Rfdg (MBIA Insd).......................... 5.000 08/01/17 1,027,320
1,945 Pittsburg, CA Uni Sch Dist Ctfs Partn (AMBAC
Insd)............................................ 6.300 09/01/15 2,174,452
2,000 Placer Cnty, CA Ctfs Partn Juvenile Detention Fac
Rfdg (MBIA Insd)................................. 5.000 07/01/25 2,012,260
1,360 Port Hueneme, CA Ctfs Partn Cap Impt Pgm Rfdg
(MBIA Insd)...................................... 6.000 04/01/19 1,590,058
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 411
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$ 1,000 Rancho Cucamonga, CA Redev Agy Tax Alloc Rancho
Redev Proj (MBIA Insd)........................... 7.125% 09/01/19 $ 1,051,510
1,235 Rancho Cucamonga, CA Redev Agy Tax Alloc Rancho
Redev Proj (MBIA Insd)........................... 6.750 09/01/20 1,294,119
1,680 Rancho, CA Wtr Dist Spl Tax Cmnty Fac Dist 883
Ser A Rfdg (AMBAC Insd).......................... 6.000 09/01/17 1,871,654
1,000 Redding, CA Elec Sys Rev Ctfs Partn (Inverse
Fltg) (MBIA Insd)................................ 8.803 07/08/22 1,376,250
2,000 Rialto, CA Spl Tax Cmnty Fac Dist 87-1 Rfdg (FSA
Insd)............................................ 5.625 09/01/18 2,164,220
3,000 Riverside Cnty, CA Ctfs Partn Historic Courthouse
Proj (MBIA Insd)................................. 5.875 11/01/27 3,348,840
1,070 Riverside, CA Elec Rev Rfdg (AMBAC Insd)......... 5.000 10/01/18 1,078,656
1,000 Roseville, CA Fin Auth Local Agy Rev Northeast
Cfd Bond Refng Ser A Rfdg (FSA Insd)............. 5.000 09/01/21 1,015,410
1,000 Sacramento Cnty, CA Airport Sys Rev Pfc Sub Ser B
Rfdg (FGIC Insd)................................. 5.000 07/01/18 1,021,790
1,000 Sacramento, CA Cogeneration Auth Cogeneration
Proj Rev Rfdg (MBIA Insd)........................ 5.000 07/01/16 1,025,420
2,000 Sacramento, CA Muni Util Dist Elec Rev Ser A Rfdg
(MBIA Insd)...................................... 5.750 08/15/13 2,138,820
1,000 Salinas, CA Santn Swr Sys Rev (FGIC Insd)........ 5.000 08/01/20 1,007,430
2,500 San Bernardino Cnty, CA Ctfs Partn Ser B
(Embedded Swap) (MBIA Insd)...................... 7.000 07/01/16 2,748,075
2,000 San Diego, CA Convention Cent Expansion Fin Auth
Lease Rev Ser A (AMBAC Insd)..................... 4.750 04/01/28 1,967,240
1,000 San Diego, CA Indl Dev Rev San Diego Gas & Elec
Ser A (MBIA Insd)................................ 6.400 09/01/18 1,108,940
1,000 San Dimas, CA Redev Agy Tax Alloc Creative Growth
Ser A (FSA Insd)................................. 5.000 09/01/16 1,038,680
1,110 San Francisco, CA St Bldg Auth Lease Rev (AMBAC
Insd)............................................ 5.250 12/01/16 1,179,597
1,000 San Gabriel, CA Uni Sch Dist Ctfs Partn (FSA
Insd)............................................ 6.000 09/01/15 1,102,050
7,050 San Joaquin Hills, CA Tran Corridor Agy Toll Rd
Rev Ser A Rfdg (MBIA Insd)....................... 5.375 01/15/29 7,401,936
5,000 San Joaquin Hills, CA Trns Corridor Agy Toll Rd
Rev Cap Apprec Ser A Rfdg (MBIA Insd)............ * 01/15/30 1,069,800
5,750 San Jose, CA Fin Auth Rev Convention Proj Ser C
(FSA Insd)....................................... 6.375 09/01/13 6,274,227
2,000 Santa Ana, CA Uni Sch Dist Ctfs Part Fin Proj Ser
A (FSA Insd)..................................... 5.000 04/01/18 2,050,160
1,000 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 1,192,770
1,000 Santa Clara, CA Redev Agy Tax Alloc (AMBAC
Insd)............................................ 7.000 07/01/10 1,250,660
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 412
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CALIFORNIA MUNICIPAL BONDS (CONTINUED)
$ 1,000 Santa Fe Springs, CA Cmnty Dev Commn Tax Alloc
Cons Redev Proj Ser A Rfdg (MBIA Insd)........... 5.000% 09/01/17 $ 1,027,510
1,000 Shasta Lake, CA Ctfs Partn (FSA Insd)............ 6.000 04/01/16 1,106,800
1,990 South Cnty, CA Regl Wastewtr Auth Rev Regl
Wastewtr Fac Proj Ser A (FGIC Insd).............. 6.000 08/01/14 2,181,120
3,735 South Orange Cnty, CA Pub Fin Auth Spl Tax Rev Sr
Lien Ser A Rfdg (MBIA Insd)...................... 7.000 09/01/08 4,657,059
3,000 South Orange Cnty, CA Pub Fin Auth Spl Tax Rev Sr
Lien Ser A Rfdg (MBIA Insd)...................... 7.000 09/01/09 3,767,070
1,050 Stockton, CA Rev Ctfs Partn Wastewtr Treatment
Plant Expansion Ser A (Prerefunded @ 09/01/04)
(FGIC Insd)...................................... 6.400 09/01/07 1,220,919
1,015 Stockton, CA Rev Ctfs Partn Wastewtr Treatment
Plant Expansion Ser A (Prerefunded @ 09/01/04)
(FGIC Insd)...................................... 6.500 09/01/08 1,185,581
1,100 Sunnyvale, CA Ctfs Partn Parking Fac Ser A Rfdg
(AMBAC Insd)..................................... 5.000 10/01/17 1,125,443
570 Temecula Vly, CA Uni Sch Dist Ctfs Partn Rfdg
(FSA Insd)....................................... 6.000 09/01/18 634,627
2,000 Torrance, CA Hosp Rev Torrance Mem Hosp Rfdg
(MBIA Insd)...................................... 6.750 01/01/12 2,016,080
------------
TOTAL LONG-TERM INVESTMENTS 97.7%
(Cost $172,213,797)........................................................ 191,252,785
SHORT-TERM INVESTMENTS 1.4%
(Cost $2,800,000).......................................................... 2,800,000
------------
TOTAL INVESTMENTS 99.1%
(Cost $175,013,797)........................................................ 194,052,785
OTHER ASSETS IN EXCESS OF LIABILITIES 0.9%.................................. 1,841,348
------------
NET ASSETS 100.0%........................................................... $195,894,133
============
</TABLE>
* Zero coupon bond
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
F-6
<PAGE> 413
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $175,013,797)....................... $194,052,785
Cash........................................................ 189,076
Receivables:
Interest.................................................. 1,988,426
Fund Shares Sold.......................................... 402,072
Other....................................................... 19,046
------------
Total Assets.......................................... 196,651,405
------------
LIABILITIES:
Payables:
Income Distributions...................................... 288,861
Distributor and Affiliates................................ 123,213
Investment Advisory Fee................................... 74,865
Fund Shares Repurchased................................... 41,727
Trustees' Deferred Compensation and Retirement Plans........ 150,007
Accrued Expenses............................................ 78,599
------------
Total Liabilities..................................... 757,272
------------
NET ASSETS.................................................. $195,894,133
============
NET ASSETS CONSIST OF:
Capital..................................................... $178,790,697
Net Unrealized Appreciation................................. 19,038,988
Accumulated Undistributed Net Investment Income............. 252,535
Accumulated Net Realized Loss............................... (2,188,087)
------------
NET ASSETS.................................................. $195,894,133
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $150,959,105 and 8,043,260 shares of
beneficial interest issued and outstanding)............. $ 18.77
Maximum sales charge (3.25%* of offering price)......... .63
------------
Maximum offering price to public........................ $ 19.40
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $40,153,059 and 2,140,606 shares of
beneficial interest issued and outstanding)............. $ 18.76
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $4,781,969 and 254,972 shares of
beneficial interest issued and outstanding)............. $ 18.75
============
*On sales of $25,000 or more, the sales charge will be
reduced.
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 414
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998
and the Year Ended December 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest........................................... $ 7,517,715 $ 10,042,391
------------------ -----------------
EXPENSES:
Investment Advisory Fee............................ 648,214 814,437
Distribution (12b-1) and Service Fees (Attributed
to Classes A, B and C of $258,828, $256,685 and
$32,011, respectively, for the nine months ended
9/30/98 and $332,822, $294,905 and $27,556,
respectively, for the year ended 12/31/97)....... 547,524 655,283
Shareholder Services............................... 73,876 189,171
Trustees' Fees and Expenses........................ 27,906 40,111
Custody............................................ 11,466 22,085
Legal.............................................. 7,425 26,280
Insurance.......................................... 2,398 3,624
Other.............................................. 91,961 119,773
------------------ -----------------
Total Expenses................................. 1,410,770 1,870,764
------------------ -----------------
NET INVESTMENT INCOME.............................. $ 6,106,945 $ 8,171,627
================== =================
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments...................................... $ 1,824,072 $ 1,292,756
Futures.......................................... (128,677) (106,018)
------------------ -----------------
Net Realized Gain.................................. 1,695,395 1,186,738
------------------ -----------------
Unrealized Appreciation/Depreciation:
Beginning of the Period.......................... 15,629,825 10,633,466
End of the Period:
Investments.................................... 19,038,988 15,629,825
------------------ -----------------
Net Unrealized Appreciation During the Period...... 3,409,163 4,996,359
------------------ -----------------
NET REALIZED AND UNREALIZED GAIN................... $ 5,104,558 $ 6,183,097
================== =================
NET INCREASE IN NET ASSETS FROM OPERATIONS......... $ 11,211,503 $ 14,354,724
================== =================
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 415
STATEMENT OF CHANGES IN NET ASSETS
For the Nine Months Ended September 30, 1998 and
the Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Year Ended
September 30, 1998 December 31, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income........... $ 6,106,945 $ 8,171,627 $ 8,319,890
Net Realized Gain............... 1,695,395 1,186,738 2,275,283
Net Unrealized
Appreciation/Depreciation
During the Period............. 3,409,163 4,996,359 (3,715,835)
------------ ------------ -----------
Change in Net Assets from
Operations.................... 11,211,503 14,354,724 6,879,338
------------ ------------ -----------
Distributions from Net
Investment Income:
Class A Shares................ (5,158,867) (6,593,552) (7,012,876)
Class B Shares................ (1,050,450) (1,190,355) (1,094,958)
Class C Shares................ (131,241) (110,912) (79,245)
------------ ------------ -----------
Total Distributions............. (6,340,558) (7,894,819) (8,187,079)
------------ ------------ -----------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES......... 4,870,945 6,459,905 (1,307,741)
------------ ------------ -----------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold....... 29,485,437 21,168,004 25,623,230
Net Asset Value of Shares Issued
Through Dividend
Reinvestment.................. 3,827,238 4,809,591 4,933,967
Cost of Shares Repurchased...... (17,753,835) (30,260,768) (29,969,162)
------------ ------------ -----------
NET CHANGE IN NET ASSETS FROM
CAPITAL TRANSACTIONS.......... 15,558,840 (4,283,173) 588,035
------------ ------------ -----------
TOTAL INCREASE/DECREASE IN NET
ASSETS........................ 20,429,785 2,176,732 (719,706)
NET ASSETS:
Beginning of the Period......... 175,464,348 173,287,616 174,007,322
------------ ------------ -----------
End of the Period (Including
accumulated undistributed net
investment income of $252,535,
$486,148 and $209,340,
respectively)................. $195,894,133 $175,464,348 $173,287,616
============ ============ ============
</TABLE>
See Notes to Financial Statements
F-9
<PAGE> 416
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
Nine Months Ended -----------------------------------------------
Class A Shares September 30, 1998 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $18.294 $17.605 $17.736 $15.802 $18.286 $16.858
------- ------- ------- ------- ------- -------
Net Investment Income.............. .638 .880 .857 .884 .912 .967
Net Realized and Unrealized
Gain/Loss........................ .498 .658 (.145) 1.938 (2.484) 1.441
------- ------- ------- ------- ------- -------
Total from Investment Operations... 1.136 1.538 .712 2.822 (1.572) 2.408
Less Distributions from Investment
Income........................... .662 .849 .843 .888 .912 .980
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period........................... $18.768 $18.294 $17.605 $17.736 $15.802 $18.286
======= ======= ======= ======= ======= =======
Total Return* (a).................. 6.38%** 8.93% 4.20% 18.28% (8.75%) 14.54%
Net Assets at End of the Period (In
millions)........................ $151.0 $140.7 $142.5 $147.6 $130.3 $151.1
Ratio of Expenses to Average Net
Assets*.......................... .88% .96% 1.02% .89% .78% .69%
Ratio of Net Investment Income to
Average Net Assets*.............. 4.66% 4.96% 4.94% 5.23% 5.46% 5.37%
Portfolio Turnover................. 21%** 46% 35% 42% 56% 36%
* If certain expenses had not been reimbursed by Van Kampen, total return would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net
Assets........................... N/A N/A 1.03% 1.05% 1.08% 1.01%
Ratio of Net Investment Income to
Average Net Assets............... N/A N/A 4.94% 5.07% 5.16% 5.05%
</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
F-10
<PAGE> 417
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
Nine Months Ended ------------------------------------- Distribution) to
Class B Shares September 30, 1998 1997 1996 1995 1994 December 31, 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period............. $18.289 $17.603 $17.736 $15.805 $18.266 $17.570
------- ------- ------- ------- ------- -------
Net Investment Income....... .526 .741 .720 .766 .785 .549
Net Realized and Unrealized
Gain/Loss................. .506 .662 (.142) 1.926 (2.482) .705
------- ------- ------- ------- ------- -------
Total from Investment
Operations................ 1.032 1.403 .578 2.692 (1.697) 1.254
Less Distributions from Net
Investment Income......... .563 .717 .711 .761 .764 .558
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period.................... $18.758 $18.289 $17.603 $17.736 $15.805 $18.266
======= ======= ======= ======= ======= =======
Total Return* (a)........... 5.76%** 8.19% 3.35% 17.33% (9.39%) 7.25%**
Net Assets at End of the
Period (In millions)...... $40.1 $31.0 $28.6 $24.6 $17.1 $15.3
Ratio of Expenses to Average
Net Assets*............... 1.64% 1.72% 1.79% 1.61% 1.52% 1.45%
Ratio of Net Investment
Income to Average Net
Assets*................... 3.89% 4.18% 4.17% 4.51% 4.71% 4.06%
Portfolio Turnover.......... 21%** 46% 35% 42% 56% 36%
* If certain expenses had not been reimbursed by Van Kampen, total return would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average
Net Assets................ N/A N/A 1.79% 1.77% 1.82% 1.77%
Ratio of Net Investment
Income to Average Net
Assets.................... N/A 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
F-11
<PAGE> 418
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
Nine Months Ended ------------------------------------- Distribution) to
Class C Shares September 30, 1998 1997 1996 1995 1994 December 31, 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period............. $18.286 $17.602 $17.736 $15.798 $18.257 $18.010
------- ------- ------- ------- ------- -------
Net Investment Income....... .529 .727 .722 .758 .773 .307
Net Realized and Unrealized
Gain/Loss................. .502 .674 (.145) 1.941 (2.468) .258
------- ------- ------- ------- ------- -------
Total from Investment
Operations................ 1.031 1.401 .577 2.699 (1.695) .565
Less Distributions from Net
Investment Income......... .563 .717 .711 .761 .764 .318
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period.................... $18.754 $18.286 $17.602 $17.736 $15.798 $18.257
======= ======= ======= ======= ======= =======
Total Return* (a)........... 5.70** 8.19% 3.35% 17.40% (9.40%) 3.17%**
Net Assets at End of the
Period (In millions)...... $4.8 $3.8 $2.2 $1.8 $2.8 $4.0
Ratio of Expenses to Average
Net Assets*............... 1.63% 1.71% 1.79% 1.60% 1.51% 1.45%
Ratio of Net Investment
Income to Average Net
Assets*................... 3.87% 4.15% 4.16% 4.50% 4.71% 3.82%
Portfolio Turnover.......... 21%** 46% 35% 42% 56% 36%
*If certain expenses had not been reimbursed by Van Kampen, total return would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average
Net Assets................ N/A N/A 1.80% 1.75% 1.82% 1.76%
Ratio of Net Investment
Income to Average Net
Assets.................... N/A 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
F-12
<PAGE> 419
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen California Insured Tax Free Fund (the "Fund"), is organized as a
series of the Van Kampen 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. In July, 1998, the Fund's
Board of Trustees approved a change in the Fund's fiscal year end from December
31 to September 30. As a result, this financial report reflects the nine-month
period commencing on January 1, 1998, and ending on September 30, 1998.
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. At September 30, 1998, there were no
when issued or delayed delivery purchase commitments.
F-13
<PAGE> 420
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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, 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 September 30, 1998, the Fund had an accumulated capital loss
carryforward for tax purposes of $2,188,087, which will expire between September
30, 2002 and September 30, 2003.
At September 30, 1998, for federal income tax purposes, cost of long- and
short-term investments is $175,013,797; the aggregate gross unrealized
appreciation is $19,038,988 and the aggregate gross unrealized depreciation is
$0, resulting in net unrealized appreciation of $19,038,988.
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 the nine months ended September 30, 1998, 100% of the income
distributions made by the Fund were exempt from federal income taxes. In
January, 1999, the Fund will provide tax information to shareholders for the
1998 calendar year.
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.
F-14
<PAGE> 421
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
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 nine months ended September 30, 1998 and the year ended December 31,
1997, the Fund recognized expenses of approximately $5,900 and $10,600,
respectively, 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 nine months ended September 30, 1998 and the year ended December 31,
1997, the Fund recognized expenses of approximately $64,000 and $79,300,
respectively, representing Van Kampen Inc.'s or its affiliates' (collectively
"Van Kampen") cost of providing accounting and legal services to the Fund.
Van Kampen Investor Services Inc. ("VKIS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the nine months ended
September 30, 1998 and the year ended December 31, 1997, the Fund recognized
expenses of approximately $50,200 and $112,100, respectively. Beginning in 1998,
the transfer agency fees are determined through negotiations with the Fund's
Board of Trustees and are based on competitive market benchmarks.
Additionally, for the year ended December 31, 1997, the Fund reimbursed Van
Kampen approximately $12,800 related to the direct cost of consolidating the Van
Kampen 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
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. 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 $2,500.
F-15
<PAGE> 422
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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 September 30, 1998, capital aggregated $135,566,795, $38,277,053 and
$4,946,849 for Classes A, B and C, respectively. For the nine months ended
September 30, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.......................................... 896,618 $ 16,459,740
Class B.......................................... 595,781 10,920,471
Class C.......................................... 114,887 2,105,226
---------- ------------
Total Sales........................................ 1,607,286 $ 29,485,437
========= ============
Dividend Reinvestment:
Class A.......................................... 167,488 $ 3,075,115
Class B.......................................... 37,047 680,216
Class C.......................................... 3,916 71,907
---------- ------------
Total Dividend Reinvestment........................ 208,451 $ 3,827,238
========== ============
Repurchases:
Class A.......................................... (709,317) $(13,003,362)
Class B.......................................... (188,629) (3,456,135)
Class C.......................................... (70,739) (1,294,338)
---------- ------------
Total Repurchases.................................. (968,685) $(17,753,835)
=========== ============
</TABLE>
F-16
<PAGE> 423
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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>
F-17
<PAGE> 424
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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). Class B shares will
automatically convert to Class A shares after the sixth year following purchase.
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>
F-18
<PAGE> 425
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
For the nine months ended September 30, 1998 and the year ended December 31,
1997, Van Kampen, as Distributor for the Fund, received commissions on sales of
the Fund's Class A shares of approximately $19,900 and $24,400, respectively,
and CDSC on redeemed shares of approximately $32,500 and $64,300, respectively.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
For the nine months ended September 30, 1998, the cost of purchases and proceeds
from sales of investments, excluding short-term investments, were $48,986,116
and $38,024,164, respectively. For the year ended December 31, 1997, 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).
F-19
<PAGE> 426
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
Transactions in futures contracts for the year ended December 31, 1997 and
the nine months ended September 30, 1998, 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-
Futures Opened............................................. 1,024
Futures Closed............................................. (1,024)
------
Outstanding at September 30, 1998.......................... -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 nine months ended September 30, 1998 and the year ended December 31,
1997, are payments retained by Van Kampen of approximately $219,900 and
$226,300, respectively.
7. YEAR 2000 COMPLIANCE (UNAUDITED)
Van Kampen utilizes a number of computer programs across its entire operation
relying on both internal software systems as well as external software systems
provided by third
F-20
<PAGE> 427
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
parties. In 1996 Van Kampen initiated a CountDown 2000 Project to review both
the internal systems and external vendor connections. The goal of this project
is to position its business to continue unaffected as a result of the century
change. At this time, there can be no assurance that the steps taken will be
sufficient to avoid any adverse impact to the Fund, but Van Kampen does not
anticipate that the move to Year 2000 will have a material impact on its ability
to continue to provide the Fund with service at current levels. In addition, it
is possible that the securities markets in which the Fund invests may be
detrimentally affected by computer failures throughout the financial services
industry beginning January 1, 2000. Improperly functioning trading systems may
result in settlement problems and liquidity issues.
F-21
<PAGE> 428
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN MUNICIPAL INCOME FUND
Van Kampen Municipal Income Fund (the "Fund") is a mutual fund with an
investment objective to provide investors with a high level of current income
exempt from federal income tax, consistent with preservation of capital. The
Fund's management seeks to achieve the investment objective by investing
primarily in a portfolio of municipal securities that are rated investment grade
at the time of purchase.
The Fund is organized as a diversified series of Van Kampen Tax Free Trust, an
open-end, management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This Statement
of Additional Information should be read in conjunction with the Fund's
Prospectus (the "Prospectus") dated as of the same date as this Statement of
Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-2833
for the hearing impaired).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... B-2
Investment Objective and Policies........................... B-3
Investment Restrictions..................................... B-12
Description of Securities Ratings........................... B-13
Trustees and Officers....................................... B-18
Investment Advisory and Other Services...................... B-27
Distribution and Service.................................... B-28
Transfer Agent.............................................. B-31
Portfolio Transactions and Brokerage Allocation............. B-31
Shareholder Services........................................ B-33
Redemption of Shares........................................ B-34
Contingent Deferred Sales Charge-Class A.................... B-35
Waiver of Class B and Class C Contingent Deferred Sales
Charge ("CDSC-Class B and C")............................. B-35
Taxation.................................................... B-36
Fund Performance............................................ B-39
Other Information........................................... B-42
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-20
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY 28, 1999.
B-1
<PAGE> 429
GENERAL INFORMATION
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated May 10, 1995. The Declaration of Trust permits the Trustees to
create one or more separate investment portfolios and issue a series of shares
for each portfolio. The Trustees can further sub-divide each series of shares
into one or more classes of shares for each portfolio.
The Trust was originally organized in 1985 under the name Van Kampen Merritt
Tax Free Trust as a Massachusetts business trust (the "Massachusetts Trust").
The Massachusetts Trust was reorganized into the Trust under the name Van Kampen
American Capital Tax Free Trust on July 31, 1995. The Trust was created for the
purpose of facilitating the Massachusetts Trust reorganization into a Delaware
business trust. On July 14, 1998, the Trust adopted its current name.
The Fund was originally organized in 1985 under the name Van Kampen Merritt
Municipal Income Fund as a sub-trust of the Massachusetts Trust. The Fund was
reorganized as a series of the Trust under the name Van Kampen American Capital
Municipal Income Fund on July 31, 1995. On July 14, 1998, the Fund adopted its
current name.
Van Kampen Investment Advisory Corp. (the "Adviser" or "Advisory Corp"), Van
Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley Dean Witter & Co. The principal office of the Trust, the Fund,
the Adviser, the Distributor and Van Kampen Investments is located at 1 Parkview
Plaza, PO Box 5555, Oakbrook Terrace, Illinois 60181-5555.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and securities lending.
The authorized capitalization of the Trust consists of an unlimited number of
shares of beneficial interest, par value $0.01 per share, which can be divided
into series such as the Fund and further subdivided into classes of each series.
Each share represents an equal proportionate interest in the assets of the
series with each other share in such series and no interest in any other series.
No series is subject to the liabilities of any other series. The Declaration of
Trust provides that shareholders are not liable for any liabilities of the Trust
or any of its series, requires inclusion of a clause to that effect in every
agreement entered into by the Trust or any of its series and indemnifies
shareholders against any such liability.
The Fund currently offers three classes of shares, designated Class A Shares,
Class B Shares and Class C Shares. Other classes may be established from time to
time in accordance with provisions of the Declaration of Trust. Each class of
shares of the Fund generally are identical in all respects except that each
class bears certain distribution expenses and has exclusive voting rights with
respect to its distribution fee.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution fee for a class of a series
would be voted upon by shareholders of only the class of such series involved.
Except as otherwise described in the Prospectus or herein, shares do not have
cumulative voting rights, preemptive rights or any conversion, subscription or
exchange rights.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to
B-2
<PAGE> 430
consider the removal of Trustees by a vote of two-thirds of the shares then
outstanding cast in person or by proxy at such meeting. The Fund will assist
such holders in communicating with other shareholders of the Fund to the extent
required by the Investment Company Act of 1940, as amended (the "1940 Act"), or
rules or regulations promulgated by the Securities and Exchange Commission
("SEC").
In the event of liquidation, each of the shares of the Fund is entitled to its
portion of all of the Fund's net assets after all debts and expenses of the Fund
have been paid. Since Class B Shares and Class C Shares have higher distribution
fees and transfer agency costs, the liquidation proceeds to holders of Class B
Shares and Class C Shares are likely to be lower than to holders of Class A
Shares.
The Trustees may amend the Declaration of Trust (including with respect to any
series) in any manner without shareholder approval, except that the Trustees may
not adopt any amendment adversely affecting the rights of shareholders of any
series without approval by a majority of the shares of each affected series
present at a meeting of shareholders (or such higher vote as may be required by
the 1940 Act or other applicable law) and except that the Trustees cannot amend
the Declaration of Trust to impose any liability on shareholders, make any
assessment on shares or impose liabilities on the Trustees without approval from
each affected shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
As of January 4, 1999, no person was known by the Fund to own beneficially or
to hold of record 5% or more of the outstanding Class A Shares, Class B Shares
or Class C Shares of the Fund, except as follows:
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT
NAME AND ADDRESS JANUARY 4, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OWNERSHIP
- ------------------------------------------------------------ ------------ --------- ----------
<S> <C> <C> <C>
Merrill Lynch Pierce Fenner & Smith Inc..................... 122,910 C 12.61%
For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East
2nd Floor
Jacksonville, FL 32246-6484
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to this
caption in the Prospectus for a complete presentation of the matters disclosed
below.
MUNICIPAL SECURITIES
Municipal securities include long-term obligations, which often are called
municipal bonds, as well as shorter term municipal notes, municipal leases, and
tax exempt commercial paper. Under normal market conditions, longer term
municipal securities generally provide a higher yield than shorter term
municipal securities, and therefore the Fund generally expects to be invested
primarily in longer term municipal securities. The Fund will, however, invest in
shorter term municipal securities when yields are greater than yields available
on longer term municipal securities, for temporary defensive purposes and when
redemption requests are expected. The two principal classifications of municipal
securities are "general obligation" and "revenue" or "special obligation"
securities, which include "industrial revenue bonds." General obligation
securities are secured by the issuer's pledge of its faith, credit, and taxing
power for the payment of principal and interest. Revenue or special obligation
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source, such as from the user of the facility
being financed. The Fund may also invest in "moral obligation" bonds which are
normally issued by special purpose public authorities. If an issuer of moral
B-3
<PAGE> 431
obligation bonds is unable to meet its obligations, the repayment of such bonds
becomes a moral commitment but not a legal obligation of the state or
municipality in question.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of state and local
governments or authorities used to finance the acquisition of equipment and
facilities. Lease obligations generally do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged. A lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. In addition to the "non-appropriation" risk, these securities represent
a relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. Additionally,
use of the leased property may be limited by state or local law to a specified
use thereby further limiting ability to rent. There is no limitation on the
percentage of the Fund's assets that may be invested in "non-appropriation"
lease obligations. In evaluating such lease obligations, the Adviser will
consider such factors as it deems appropriate, which factors may include (a)
whether the lease can be cancelled, (b) the ability of the lease obligee to
direct the sale of the underlying assets, (c) the general creditworthiness of
the lease obligor, (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality, (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding and (f) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services than those covered by the lease obligation.
Also included in the term municipal securities are participation certificates
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 15% of its total assets in derivative variable
rate municipal securities such as inverse floaters whose rates vary inversely
with changes in market rates of interest or range floaters or capped floaters
whose rates are subject to periodic or lifetime caps. Derivative variable rate
municipal securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative variable rate municipal securities in response to changes in
market rates of interest generally will be larger than comparable changes in the
value of an equal principal amount of a fixed rate municipal security having
similar credit quality, redemption provisions and maturity.
The Fund also may acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain municipal securities. The underwriter of
these certificates or receipts typically purchases municipal securities and
deposits the securities in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Although under the terms of a custodial receipt, the
Fund typically would be authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights as may exist against the underlying
issuer. Thus, in
B-4
<PAGE> 432
the event the underlying issuer fails to pay principal or interest when due, the
Fund may be subject to delays, expenses and risks that are greater than those
that would have been involved if the Fund had purchased a direct obligation of
the issuer. In addition, in the event that the trust or custodial account in
which the underlying security has been deposited is determined to be an
association taxable as a corporation, instead of a non-taxable entity, the yield
on the underlying security would be reduced in recognition of any taxes paid.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantor
of such payment obligations, of the municipal securities.
Municipal securities, like other debt obligations, are subject to the risk of
non-payment. The ability of issuers of municipal securities to make timely
payments of interest and principal may be adversely impacted in general economic
downturns and as relative governmental cost burdens are allocated and
reallocated among federal, state and local governmental units. Such non-payment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal security experiencing non-payment and a
potential decrease in the net asset value of the Fund. Issuers of municipal
securities might seek protection under the bankruptcy laws. In the event of
bankruptcy of such an issuer, the Fund could experience delays and limitations
with respect to the collection of principal and interest on such municipal
securities and the Fund may not, in all circumstances, be able to collect all
principal and interest to which it is entitled. To enforce its rights in the
event of a default in the payment of interest or repayment of principal, or
both, the Fund may take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase the Fund's operating
expenses and adversely affect the net asset value of the Fund. Any income
derived from the Fund's ownership or operation of such assets may not be
tax-exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the extent to which the Fund may exercise its rights by
taking possession of such assets, because as a regulated investment company the
Fund is subject to certain limitations on its investments and on the nature of
its income. Further, in connection with the working out or restructuring of a
defaulted security, the Fund may acquire additional securities of the issuer,
the acquisition of which may be deemed to be a loan of money or property. Such
additional securities should be considered speculative with respect to the
capacity to pay interest or repay principal in accordance with their terms.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, financial futures, interest rate indices and
other financial instruments, purchase and sell financial futures contracts and
options thereon, or enter into various interest rate transactions such as swaps,
caps, floors or collars (collectively, all the above are called "Strategic
Transactions"). Strategic Transactions may be used to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets fluctuations, to
protect the Fund's unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of the Fund's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchasing or
selling particular securities.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be
B-5
<PAGE> 433
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of futures and options transactions should tend to minimize the
risk of loss due to a decline in the value of the hedged position, at the same
time they tend to limit any potential gain which might result from an increase
in value of such position. Finally, the daily variation margin requirements for
futures contracts would create a greater ongoing potential financial risk than
would purchases of options, where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Strategic Transactions would
reduce net asset value, and possibly income, and such losses can be greater than
if the Strategic Transactions had not been utilized. Income earned or deemed to
be earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed
B-6
<PAGE> 434
options are closed by entering into offsetting purchase or sale transactions
that do not result in ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only enter into OTC options that have a buy-back provision permitting
the Fund to require the Counterparty to close the option at a formula price
within seven days. The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that, in general, OTC options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities "covering"
the amount of the Fund's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on illiquid securities described herein.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities that are traded on securities exchanges
and in the over-the-counter markets and related futures on such contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it
B-7
<PAGE> 435
might otherwise have sold. In the event of exercise of a call option sold by the
Fund with respect to securities not owned by the Fund, the Fund may be required
to acquire the underlying security at a disadvantageous price in order to
satisfy its obligation with respect to the call option.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and corporate debt securities (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The purchase of a futures contract
creates a firm obligation by the Fund, as purchaser, to take delivery from the
seller the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) for other than bona fide hedging purposes if, immediately
thereafter, the sum of the amount of its initial margin and premiums on open
futures contracts and options thereon would exceed 5% of the Fund's total assets
(taken at current value); however, in the case of an option that is in-the-money
at the time of the purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. The segregation requirements with respect to
futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is
B-8
<PAGE> 436
obligated, in return for the premium received, to make delivery of this amount.
The gain or loss on an option on an index depends on price movements in the
instruments making up the market, market segment, industry or other composite on
which the underlying index is based, rather than price movements in individual
securities, as is the case with respect to options on securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash and liquid
securities with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities
B-9
<PAGE> 437
convertible into the needed securities without additional consideration) or to
segregate cash and liquid securities sufficient to purchase and deliver the
securities if the call is exercised. A call option sold by the Fund on an index
will require the Fund to own portfolio securities which correlate with the index
or to segregate cash and liquid securities equal to the excess of the index
value over the exercise price on a current basis. A put option written by the
Fund requires the Fund to segregate cash and liquid securities equal to the
exercise price.
OTC options entered into by the Fund, including those on securities, financial
instruments or indices and OCC issued and exchange listed index options, will
generally provide for cash settlement. As a result, when the Fund sells these
instruments it will only segregate an amount of cash and liquid securities equal
to its accrued net obligations, as there is no requirement for payment or
delivery of amounts in excess of the net amount. These amounts will equal 100%
of the exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out cash and liquid securities equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, and the Fund will segregate an
amount of cash and liquid securities equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement, will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
cash and liquid securities sufficient to meet its obligation to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of cash and liquid securities with a value equal to the Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash and
liquid securities, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating cash and liquid
securities if the Fund held a futures or forward contract, it could purchase a
put option on the same futures or forward contract with a strike price as high
or higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction no segregation is required, but if it
terminates prior to such time, cash and liquid securities equal to any remaining
obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of the Code for qualification as a regulated investment company.
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may also purchase and sell municipal securities on a "when-issued"
and "delayed delivery" basis. No income accrues to the Fund on municipal
securities in connection with such transactions prior to the date the Fund
actually takes delivery of such securities. These transactions are subject to
market fluctuation; the value of the municipal securities at delivery may be
more or less than their purchase price, and yields generally available on
municipal securities when delivery occurs may be higher or lower than yields on
the municipal securities obtained pursuant to such transactions. Because the
Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. When the Fund is the buyer in such a transaction, however, it
will maintain, in a segregated account with its custodian, cash or liquid
securities having an aggregate value equal to the amount of such purchase
commitments until payment
B-10
<PAGE> 438
is made. The Fund will make commitments to purchase municipal securities on such
basis only with the intention of actually acquiring these securities, but the
Fund may sell such securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when-issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
securities for the Fund's portfolio consistent with the Fund's investment
objectives and policies and not for the purposes of investment leverage. No
specific limitation exists as to the percentage of the Fund's assets which may
be used to acquire securities on a "when-issued" or "delayed delivery" basis.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The Fund's portfolio turnover rate (the lesser of
the value of the securities purchased or securities sold divided by the average
value of the securities held in the Fund's portfolio excluding all securities
whose maturities at acquisition were one year or less) is shown in the table of
"Financial Highlights" in the Prospectus. A high portfolio turnover rate (100%
or more) increases the Fund's transaction costs, including brokerage
commissions, and may result in the realization of more short-term capital gains
than if the Fund had a lower portfolio turnover. The turnover rate will not be a
limiting factor, however, if the Adviser deems portfolio changes appropriate.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities, which
includes securities that are not readily marketable, repurchase agreements which
have a maturity of longer than seven days and generally includes securities that
are restricted from sale to the public without registration under the Securities
Act of 1933, as amended (the "1933 Act"). The sale of such securities often
requires more time and results in higher brokerage charges or dealer discounts
and other selling expenses than does the sale of liquid securities trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities are often purchased at a discount from the market price of
unrestricted securities of the same issuer reflecting the fact that such
securities may not be readily marketable without some time delay. Investments in
securities which have no ready market are valued at fair value as determined in
good faith by the Adviser in accordance with procedures approved by the Fund's
Trustees. Ordinarily, the Fund would invest in restricted securities only when
it receives the issuer's commitment to register the securities without expense
to the Fund. However, registration and underwriting expenses (which may range
from 7% to 15% of the gross proceeds of the securities sold) may be paid by the
Fund. Restricted securities which can be offered and sold to qualified
institutional buyers under Rule 144A under the 1933 Act ("144A Securities") and
are determined to be liquid under guidelines adopted by and subject to the
supervision of the Fund's Board of Trustees are not subject to the limitation on
illiquid securities. Such 144A Securities are subject to monitoring and may
become illiquid to the extent qualified institutional buyers become, for a time,
uninterested in purchasing such securities. Factors used to determine whether
144A Securities are liquid include, among other things, a security's trading
history, the availability of reliable pricing information, the number of dealers
making quotes or making a market in such security and the number of potential
purchasers in the market for such security. For purposes hereof, investments by
the Fund in securities of other investment companies will not be considered
investments in restricted securities to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption
or other relief from the provisions of the 1940 Act.
B-11
<PAGE> 439
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions which
may not be changed without approval by the vote of a majority of its outstanding
voting shares, which is defined by the 1940 Act as the lesser of (i) 67% or more
of the voting securities present in person or by proxy at the meeting, if the
holders of more than 50% of the outstanding voting securities are present in
person or by proxy; or (ii) more than 50% of the outstanding voting securities.
The Fund may not:
1. With respect to 75% of its total assets, purchase any securities (other
than obligations guaranteed by the United States Government or by its
agencies or instrumentalities), if, as a result, more than 5% of the
Fund's total assets (taken at current market value) would then be invested
in securities of a single issuer or, if, as a result, the Fund would hold
more than 10% of the outstanding voting securities of an issuer, except
that the Fund may purchase securities of other investment companies to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
2. Invest more than 25% of its assets in a single industry, however, the Fund
may from time to time invest more than 25% of its assets in a particular
segment of the municipal bond market; however, the Fund will not invest
more than 25% of its assets in industrial development bonds in a single
industry, and except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
3. Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the total asset value of the Fund, or mortgage,
pledge, or hypothecate any assets except in connection with a borrowing
and in amounts not in excess of 10% of the total asset value of the Fund.
Borrowings may not be made for investment leverage, but only to enable the
Fund to satisfy redemption requests where liquidation of portfolio
securities is considered disadvantageous or inconvenient. In this
connection, the Fund will not purchase portfolio securities during any
period that such borrowings exceed 5% of the total asset value of the
Fund. Notwithstanding this investment restriction, the Fund may enter into
when issued and delayed delivery transactions.
4. Make loans of money or property to any person, except to the extent the
securities in which the Fund may invest are considered to be loans and
except that the Fund may lend money or property in connection with
maintenance of the value of, or the Fund's interest with respect to, the
securities owned by the Fund.
5. Buy any securities "on margin." Neither the deposit of initial or
maintenance margin in connection with hedging transactions nor short term
credits as may be necessary for the clearance of transactions is
considered the purchase of a security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except as hedging or risk
management transactions in accordance with the requirements of the
Securities and Exchange Commission and the Commodity Futures Trading
Commission.
7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
8. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under agreements related to securities owned by the Fund would be deemed
to constitute such control or participation and except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
B-12
<PAGE> 440
9. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except that the Fund
may purchase securities of other investment companies extent permitted by
(i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
10. Invest in oil, gas or mineral leases or in equity interests in oil, gas,
or other mineral exploration or development programs.
11. Purchase or sell real estate, commodities or commodity contracts, except
to the extent the securities the Fund may invest in are considered to be
interest in real estate, commodities or commodity contracts or to the
extent the Fund exercises its rights under agreements relating to such
securities (in which case the Fund may own, hold, foreclose, liquidate or
otherwise dispose of real estate acquired as a result of a default on a
mortgage), and except to the extent the options and futures and index
contracts in which such Funds may invest for hedging and risk management
purposes are considered to be commodities or commodities contracts.
As long as the percentage restrictions described above are satisfied at the
time of the investment or borrowing, the Fund will be considered to have abided
by those restrictions even if, at a later time, a change in values or net assets
causes an increase or decrease in percentage beyond that allowed.
DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S--A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P follows):
A S&P corporate or municipal debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment--capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the
terms of the obligation:
2. Nature of and provisions of the obligation:
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditor's rights.
LONG-TERM DEBT--INVESTMENT GRADE
<TABLE>
<S> <C>
AAA: Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to meet its financial commitment on the obligation
is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only
in small degree. Capacity to meet its financial commitment
on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions
than obligations in higher rated categories. Capacity to
meet its financial commitment on the obligation is still
strong.
</TABLE>
B-13
<PAGE> 441
<TABLE>
<S> <C>
BBB: Debt rated "BBB" exhibits adequate protection parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to meet its financial
commitment on the obligation.
</TABLE>
LONG-TERM DEBT -- SPECULATIVE GRADE
BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
<TABLE>
<S> <C>
BB: Debt rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the
obligation.
B: Debt rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the
capacity to meet its financial commitment on the obligation.
Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and
economic conditions for the obligor to meet its financial
commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is
not likely to have the capacity to meet its financial
commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to
nonpayment.
C: The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being
continued.
D: Debt rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made
on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period. The "D" rating also will be used
upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
R: This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to
principal or volatility of expected returns which are not
addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment
risk--such as interest-only or principal-only mortgage
securities; and obligations with unusually risky interest
terms, such as inverse floaters.
</TABLE>
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating.
The following criteria will be used in making that assessment.
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note).
B-14
<PAGE> 442
Note rating symbols are as follows:
<TABLE>
<S> <C>
SP-1: Strong or strong capacity to pay principal and interest.
Issues determined to possess very strong characteristics are
a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse Financial and economic changes
over the term of the notes.
SP-3: Speculative capacity to pay principal and interest.
</TABLE>
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from
'A-1' for the highest quality obligations to 'D' for the lowest. These
categories are as follows:
<TABLE>
<S> <C>
A-1: A short-term obligation rated A-1 is rated in the highest
category by S&P. The obligor's capacity to meet its
financial commitment on the obligation is strong. Within
this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is
extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is
satisfactory.
A-3: A short-term obligation rated A-3 exhibits adequate
protection parameters. However, adverse economic conditions
or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated B is regarded as having
significant speculative characteristics. The obligor
currently has the capacity to meet its financial commitment
on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C: A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent on favorable business,
financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D: A short-term obligation rated D is in payment default. The D
rating is used when payments on an obligation are not made
on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
</TABLE>
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by
the issuer or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in
or unavailability of, such information.
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option
or demand feature as part of their structure.
The first rating addresses the likelihood of repayment of principal
and interest as due, and the second rating addresses only the demand
feature. The long-term debt rating symbols are used for bonds to denote the
long-term maturity and the commercial paper rating symbols for the put
option (for example, 'AAA/ A-1+'). With short-term demand debt, S&P's note
rating symbols are used with the commercial paper rating symbols (for
example, 'SP-1+/A-1+').
B-15
<PAGE> 443
MOODY'S INVESTORS SERVICE INC.--A brief description of the applicable Moody's
Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
<TABLE>
<S> <C>
AAA: Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edged." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some
time in the future.
BAA: Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor
poorly secured). Interest payment and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may
be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
CA: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers, 1, 2, and 3 in each
generic rating classification from Aa to B. The modifier 1
indicates that the issue ranks in the higher end of its
generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
</TABLE>
Absence of Rating: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the
quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
B-16
<PAGE> 444
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date date to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term ratings, while other factors of major importance
in bond risk, long-term secular trends for example, may be less important
over the short run. A short-term rating may also be assigned on an issue
having a demand feature-variable rate demand obligation. Such ratings will
be designated as VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
SG. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity
in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933,
nor does it represent that any specific note is a valid obligation of a
rated issuer or issued in conformity with any applicable law.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Issuers rated Prime-1 (on supporting institutions) have a superior
ability for repayment of short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
B-17
<PAGE> 445
-- Well established access to a ranges of financial markets and
assured sources of alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or supported institutions) have an acceptable
ability for repayment of short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the prime rating
categories.
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and officers of the Fund and
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with Van
Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment
Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Management
Inc., Van Kampen Advisors Inc., Van Kampen Insurance Agency of Illinois Inc.,
Van Kampen Insurance Agency of Texas Inc., Van Kampen System Inc., Van Kampen
Recordkeeping Services Inc., American Capital Contractual Services, Inc., Van
Kampen Trust Company, Van Kampen Exchange Corp. and Van Kampen Investor Services
Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are
referred to herein collectively as the "Advisers". For purposes hereof, the term
"Fund Complex" includes each of the open-end investment companies advised by the
Advisers (excluding Van Kampen Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee/Director of each of the
funds in the Fund Complex.
</TABLE>
B-18
<PAGE> 446
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Richard M. DeMartini*..................... Chairman and Chief Executive Officer of International
Two World Trade Center Private Client Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Chairman of Dean Witter Futures & Currency
New York, NY 10048 Management Inc. and Demeter Management Corporation.
Date of Birth: 10/12/52 Director of Dean Witter Reynolds Inc. Chairman and
Director of Dean Witter Capital Corporation. Chairman,
Chief Executive Officer, President and a Director of Dean
Witter Alliance Capital Corporation, Director of the
National Healthcare Resources, Inc., Morgan Stanley Dean
Witter Distributors, Inc., Dean Witter Realty Inc., Dean
Witter Reynolds Venture Equities Inc., DW Window Covering
Holding, Inc., and is a member of the Morgan Stanley Dean
Witter Management Committee. Prior to December of 1998,
Mr. DeMartini was President and Chief Operating Officer
of Morgan Stanley Dean Witter Individual Asset Management
and a Director of Morgan Stanley Dean Witter Trust FSB.
Formerly Vice Chairman of the Board of the National
Association of Securities Dealers, Inc. and Chairman of
the Board of the Nasdaq Stock Market, Inc. Trustee of the
TCW/DW Funds, Director of the Morgan Stanley Dean Witter
Funds and Trustee/Director of each of the funds in the
Fund Complex.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board,
Vice Chair of the Board of The YMCA of Metropolitan
Chicago and a member of the Women's Board of the
University of Chicago. Prior to 1996, Trustee of The
International House Board. Trustee/Director of each of
the funds in the Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and Member of the Investment Committee
of the Joyce Foundation, a private foundation.
Trustee/Director of each of the funds in the Fund
Complex.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee/Director of each of
the funds in the Fund Complex.
</TABLE>
B-19
<PAGE> 447
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Don G. Powell*............................ Currently a member of the board of governors and
3 Wexford Court executive committee for the Investment Company Institute,
Houston, TX 77024 and a member of the Board of Trustees of the Houston
Date of Birth: 10/19/39 Museum of Natural Science. Immediate past Chairman of the
Investment Company Institute. Prior to January 1999,
Chairman and a Director of Van Kampen Investments, the
Advisers, the Distributor and Investor Services and
Director or officer of certain other subsidiaries of Van
Kampen Investments. Prior to July of 1998, Director and
Chairman of VK/AC Holding, Inc. Prior to November 1996,
President, Chief Executive Officer and a Director of
VK/AC Holding, Inc. Trustee/Director of each of the funds
in the Fund Complex and Trustee of other funds advised by
the Advisers or Van Kampen Management Inc.
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer services company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company and
Date of Birth: 07/08/44 the Urban Shopping Centers Inc., a retail mall management
company. Trustee, University of Notre Dame. Prior to
1998, Director of Stone Smurfit Container Corp., a paper
manufacturing company. Formerly, President, Chief
Executive Officer and Chief Operating Officer of Waste
Management, Inc., an environmental services company.
Trustee/Director of each of the funds in the Fund
Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen Management Inc.
Trustee/Director of each of the funds in the Fund
Complex, and Trustee/Managing General Partner of other
open-end and closed-end funds advised by the Advisers or
Van Kampen Management Inc.
Paul G. Yovovich.......................... Private investor. Prior to April 1996, President of
Sears Tower Advance Ross Corporation. Director of 3Com Corporation,
233 South Wacker Drive APAC Teleservices, Inc., and COMARCO, Inc.
Suite 9700 Trustee/Director of each of the Funds in the Fund
Chicago, IL 60606 Complex.
Date of Birth: 10/29/53
</TABLE>
- ------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
current or former positions with Morgan Stanley Dean Witter & Co. or its
affiliates.
B-20
<PAGE> 448
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Sullivan, Wood, Dalmaso, Martin, Wetherell
and Hill are located at 1 Parkview Plaza, PO Box 5555, Oakbrook Terrace, IL
60181-5555. The Fund's other officers are located at 2800 Post Oak Blvd.,
Houston, TX 77056.
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Dennis J. McDonnell.................. Executive Vice President and a Director of Van Kampen
Date of Birth: 05/20/42 Investments. President, Chief Operating Officer and a
President Director of the Advisers, Van Kampen Advisors Inc., and Van
Kampen Management Inc. Prior to July of 1998, Director and
Executive Vice President of VK/AC Holding, Inc. Prior to
April of 1998, President and a Director of Van Kampen
Merritt Equity Advisors Corp. Prior to April of 1997, Mr.
McDonnell was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996, Mr. McDonnell was
Chief Executive Officer and Director of MCM Group, Inc.,
McCarthy, Crisanti & Maffei, Inc. and Chairman and Director
of MCM Asia Pacific Company, Limited and MCM (Europe)
Limited. Prior to July of 1996, Mr. McDonnell was President,
Chief Operating Officer and Trustee of VSM Inc. and VCJ Inc.
President of each of the funds in the Fund Complex.
President, Chairman of the Board and Trustee/Managing
General Partner of other investment companies advised by the
Advisers or their affiliates.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Prior to July
Vice President of 1996, Mr. Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of McCarthy, Crisanti &
Maffei, Inc. Vice President of each of the funds in the Fund
Complex and certain other investment companies advised by
the Advisers or their affiliates.
John L. Sullivan..................... First Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Treasurer, Vice President and Chief Financial
Treasurer, Vice President and Chief Officer of each of the funds in the Fund Complex and certain
Financial Officer other investment companies advised by the Advisers or their
affiliates.
Curtis W. Morell..................... Senior Vice President of the Advisers, Vice President and
Date of Birth: 08/04/46 Chief Accounting Officer of each of the funds in the Fund
Vice President and Chief Accounting Complex and certain other investment companies advised by
Officer the Advisers or their affiliates.
</TABLE>
B-21
<PAGE> 449
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Ronald A. Nyberg..................... Executive Vice President, General Counsel, Secretary and
Date of Birth: 07/29/53 Director of Van Kampen Investments. Mr. Nyberg is Executive
Vice President and Secretary Vice President, General Counsel, Assistant Secretary and a
Director of the Advisers and the Distributor, Van Kampen
Advisors Inc., Van Kampen Management Inc., Van Kampen
Exchange Corp., American Capital Contractual Services, Inc.
and Van Kampen Trust Company. Executive Vice President,
General Counsel and Assistant Secretary of Investor Services
and River View International Inc. Director or officer of
certain other subsidiaries of Van Kampen Investments.
Director of ICI Mutual Insurance Co., a provider of
insurance to members of the Investment Company Institute.
Prior to July of 1998, Director and Executive Vice
President, General Counsel and Secretary of VK/AC Holding,
Inc. Prior to April of 1998, Executive Vice President,
General Counsel and Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he was Executive Vice
President, General Counsel and a Director of Van Kampen
Merritt Equity Holdings Corp. Prior to September of 1996, he
was General Counsel of McCarthy, Crisanti & Maffei, Inc.
Prior to July of 1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc. and Executive Vice
President and General Counsel of VCJ Inc. Vice President and
Secretary of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Paul R. Wolkenberg................... Executive Vice President and Director of Van Kampen
Date of Birth: 11/10/44 Investments. Executive Vice President of Asset Management
Vice President and the Distributor. President and a Director of Investor
Services. President and Chief Operating Officer of Van
Kampen Recordkeeping Services Inc. Prior to July of 1998,
Director and Executive Vice President of VK/AC Holding, Inc.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Edward C. Wood III................... Senior Vice President of the Advisers, Van Kampen
Date of Birth: 01/11/56 Investments and Van Kampen Management Inc. Senior Vice
Vice President President and Chief Operating Officer of the Distributor.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Tanya M. Loden....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 11/19/59 Controller of each of the funds in the Fund Complex and
Controller other investment companies advised by the Advisers or their
affiliates.
Nicholas Dalmaso..................... Associate General Counsel and Assistant Secretary of Van
Date of Birth: 03/01/65 Kampen Investments. Vice President, Associate General
Assistant Secretary Counsel and Assistant Secretary of the Advisers, the
Distributor, Van Kampen Advisors Inc. and Van Kampen
Management Inc. Assistant Secretary of each of the funds in
the Fund Complex and other investment companies advised by
the Advisers or their affiliates.
</TABLE>
B-22
<PAGE> 450
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Scott E. Martin...................... Senior Vice President, Deputy General Counsel and Assistant
Date of Birth: 08/20/56 Secretary of Van Kampen Investments. Senior Vice President,
Assistant Secretary Deputy General Counsel and Secretary of the Advisers, the
Distributor, Investor Services, American Capital Contractual
Services, Inc., Van Kampen Management Inc., Van Kampen
Exchange Corp., Van Kampen Advisors Inc., Van Kampen
Insurance Agency of Illinois Inc., Van Kampen System Inc.
and Van Kampen Recordkeeping Services Inc. Prior to July of
1998, Senior Vice President, Deputy General Counsel and
Assistant Secretary of VK/AC Holding, Inc. Prior to April of
1998, Van Kampen Merritt Equity Advisors Corp. Prior to
April of 1997, Senior Vice President, Deputy General Counsel
and Secretary of Van Kampen American Capital Services, Inc.
and Van Kampen Merritt Holdings Corp. Prior to September of
1996, Mr. Martin was Deputy General Counsel and Secretary of
McCarthy, Crisanti & Maffei, Inc., and prior to July of
1996, he was Senior Vice President, Deputy General Counsel
and Secretary of VSM Inc. and VCJ Inc. Assistant Secretary
of each of the funds in the Fund Complex and other
investment companies advised by the Advisers or their
affiliates.
Weston B. Wetherell.................. Vice President, Associate General Counsel and Assistant
Date of Birth: 06/15/56 Secretary of Van Kampen Investments, the Advisers, the
Assistant Secretary Distributor, Van Kampen Management Inc. and Van Kampen
Advisors Inc. Prior to September of 1996, Mr. Wetherell was
Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.
Assistant Secretary of each of the funds in the Fund Complex
and other investment companies advised by the Advisers or
their affiliates.
Steven M. Hill....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 10/16/64 Assistant Treasurer of each of the funds in the Fund Complex
Assistant Treasurer and other investment companies advised by the Advisers or
their affiliates.
Michael Robert Sullivan.............. Assistant Vice President of the Advisers. Assistant
Date of Birth: 03/30/33 Controller of each of the funds in the Fund Complex and
Assistant Controller other investment companies advised by the Advisers or their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 65 operating funds in the Fund Complex. Each trustee/director who is not an
affiliated person of Van Kampen Investments, the Advisers or the Distributor
(each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex (except the money market series of the Van Kampen Series Fund,
Inc.) provides a deferred compensation plan to its Non-Affiliated Trustees that
allows trustees/directors to defer receipt of their compensation and earn a
return on such deferred amounts. Deferring compensation has the economic effect
as if the Non-Affiliated Trustee reinvested his or her compensation into the
funds. Each fund in the Fund Complex (except the money market series of the Van
Kampen Series Fund, Inc.) provides a retirement plan to its Non-Affiliated
Trustees that provides Non-Affiliated Trustees with compensation after
retirement, provided that certain eligibility requirements are met as more fully
described below.
Effective January 1, 1998, the trustees adopted a standardized compensation
and benefits program for each fund in the Fund Complex. The compensation of each
Non-Affiliated Trustee includes an annual retainer in an amount equal to $50,000
per calendar year, due in four quarterly installments on the first business day
of each quarter. Payment of the annual retainer is allocated among the funds in
the Fund Complex (except the money market series of the Van Kampen Series Fund,
Inc.) on the basis of the relative net assets of each fund as of the last
business day of the preceding calendar quarter. The compensation of each
Non-Affiliated Trustee
B-23
<PAGE> 451
includes a per meeting fee from each fund in the Fund Complex (except the money
market series of the Van Kampen Series Fund, Inc.) in the amount of $200 per
quarterly or special meeting attended by the Non-Affiliated Trustee, due on the
date of the meeting, plus reasonable expenses incurred by the Non-Affiliated
Trustee in connection with his or her services as a trustee, provided that no
compensation will be paid in connection with certain telephonic special
meetings.
Under the deferred compensation plan, each Non-Affiliated Trustee generally
can elect to defer receipt of all or a portion of the compensation earned by
such Non-Affiliated Trustee until retirement. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to the return on the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
----------------------------------------------------------
AGGREGATE AGGREGATE TOTAL
PENSION OR ESTIMATED MAXIMUM COMPENSATION
AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan $9,790 $35,691 $60,000 $125,200
Linda Hutton Heagy 8,390 3,861 60,000 112,800
R. Craig Kennedy 9,790 2,652 60,000 125,200
Jack E. Nelson 9,790 18,385 60,000 125,200
Phillip B. Rooney 9,790 6,002 60,000 125,200
Dr. Fernando Sisto 9,790 68,615 60,000 125,200
Wayne W. Whalen 9,790 12,658 60,000 125,200
Paul G. Yovovich(1) 0 0 60,000 25,300
</TABLE>
- ---------------
(1) Mr. Paul G. Yovovich became a member of the Board of Trustees effective
October 22, 1998 and thus does not have a full fiscal year of information to
report. Trustees not eligible for compensation or retirement benefits are
not shown in the table.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Trust's fiscal period ended September 30, 1998.
The detail of aggregate compensation before deferral for each series,
including the Fund, is shown in Table A below. The detail of amounts
deferred for each series, including the Fund, is shown in Table B below.
Amounts deferred are retained by the Fund and earn a rate of return
determined by reference to either the return on the common shares of the
Fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, each Fund may invest in
securities of those funds selected by the Non-
B-24
<PAGE> 452
Affiliated Trustees in order to match the deferred compensation obligation.
The detail of cumulative deferred compensation (including interest) owed to
current Trustees by each series, including the Fund, is shown in Table C
below. The deferred compensation plan is described above the Compensation
Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for their respective fiscal years ended in 1998. The retirement
plan is described above the Compensation Table.
(4) This is the sum of the estimated maximum annual benefits payable by the
operating investment companies in the Fund Complex for each year of the
10-year period commencing in the year of such trustee's anticipated
retirement. The Retirement Plan is described above the Compensation Table.
Each Non-Affiliated Trustee of the Board of Trustees has served as a member
of the Board of Trustees since he or she was first appointed or elected in
the year set forth in Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1998 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1998. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
trustees were not trustees of such investment companies. Combining the Fund
Complex with other investment companies advised by the Advisers and their
affiliates, Mr. Whalen received Total Compensation of $285,825 during the
calendar year ended December 31, 1998.
As of January 4, 1999, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.
B-25
<PAGE> 453
TABLE A
1998 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL --------------------------------------------------------------------------
FUND NAME YEAR-END* BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............. 9/30 $2,352 $2,152 $2,352 $2,352 $2,352 $2,352 $2,352 $0
Tax Free High Income Fund................ 9/30 1,961 1,761 1,961 1,961 1,961 1,961 1,961 0
California Insured Tax Free Fund......... 9/30 1,005 805 1,005 1,005 1,005 1,005 1,005 0
Municipal Income Fund.................... 9/30 1,931 1,731 1,931 1,931 1,931 1,931 1,931 0
Intermediate Term Municipal Income
Fund................................... 9/30 841 641 841 841 841 841 841 0
Florida Insured Tax Free Income Fund..... 9/30 858 658 858 858 858 858 858 0
New York Tax Free Income Fund............ 9/30 842 642 842 842 842 842 842 0
------ ------ ------ ------ ------ ------ ------ --
Trust Total............................ $9,790 $8,390 $9,790 $9,790 $9,790 $9,790 $9,790 $0
====== ====== ====== ====== ====== ====== ====== ==
</TABLE>
*In 1998, the Fund changed its fiscal year-end from December 31 to September
30. Accordingly, the information reported in this column represents information
for the nine-month fiscal period ended September 30, 1998.
TABLE B
1998 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL --------------------------------------------------------------------------
FUND NAME YEAR-END* BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............. 9/30 $2,352 $2,152 $1,176 $2,352 $2,352 $1,176 $2,352 $0
Tax Free High Income Fund................ 9/30 1,961 1,761 981 1,961 1,961 981 1,961 0
California Insured Tax Free Fund......... 9/30 1,005 805 503 1,005 1,005 503 1,005 0
Municipal Income Fund.................... 9/30 1,931 1,731 966 1,931 1,931 966 1,931 0
Intermediate Term Municipal Income
Fund................................... 9/30 841 641 421 841 841 421 841 0
Florida Insured Tax Free Income Fund..... 9/30 858 658 429 858 858 429 858 0
New York Tax Free Income Fund............ 9/30 842 642 421 842 842 421 842 0
------ ------ ------ ------ ------ ------ ------ --
Trust Total............................ $9,790 $8,390 $4,897 $9,790 $9,790 $4,897 $9,790 $0
====== ====== ====== ====== ====== ====== ====== ==
</TABLE>
*In 1998, the Fund changed its fiscal year-end from December 31 to September
30. Accordingly, the information reported in this column represents information
for the nine-month fiscal period ended September 30, 1998.
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEES
FISCAL --------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- -------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund..................... 9/30 $ 6,579 $ 8,672 $12,057 $ 17,744 $ 3,758 $ 4,177 $15,328 $0
Tax Free High Income
Fund..................... 9/30 6,211 8,299 11,879 17,384 3,388 2,473 14,960 0
California Insured Tax Free
Fund..................... 9/30 5,320 7,393 11,446 16,513 2,492 2,035 14,067 0
Municipal Income Fund...... 9/30 7,043 9,700 15,366 22,215 3,622 8,799 19,040 0
Intermediate Term Municipal
Income Fund.............. 9/30 5,166 7,238 11,372 16,363 2,337 1,959 13,913 0
Florida Insured Tax Free
Income Fund.............. 9/30 5,183 7,254 7,093 11,846 2,354 1,967 10,870 0
New York Tax Free Income
Fund..................... 9/30 2,288 1,814 3,430 5,111 1,700 958 4,413 0
------- ------- ------- -------- ------- ------- ------- --
Trust Total............ $37,790 $50,370 $72,643 $107,176 $19,651 $22,368 $92,591 $0
======= ======= ======= ======== ======= ======= ======= ==
<CAPTION>
FORMER TRUSTEES
-----------------------------------------------------------------
FUND NAME CARUSO GAUGHAN LIPSHIE MILLER REES ROBINSON VERNON
--------- ------ ------- ------- ------ ---- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund..................... $2,695 $1,985 $ 212 $ 9,164 $ 0 $13,380 $ 327
Tax Free High Income
Fund..................... 0 1,985 0 9,164 0 13,380 0
California Insured Tax Free
Fund..................... 0 1,985 0 9,164 0 13,380 0
Municipal Income Fund...... 5,804 2,455 961 12,382 7,502 17,483 1,287
Intermediate Term Municipal
Income Fund.............. 0 1,985 0 9,164 0 13,380 0
Florida Insured Tax Free
Income Fund.............. 0 927 0 5,817 0 9,599 0
New York Tax Free Income
Fund..................... 0 295 0 2,344 0 3,740 0
------ ------- ------ ------- ------ ------- ------
Trust Total............ $8,499 $11,617 $1,173 $57,199 $7,502 $84,342 $1,614
====== ======= ====== ======= ====== ======= ======
</TABLE>
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------
FUND NAME BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......................... 1995 1995 1993 1984 1997 1995 1984 1998
Tax Free High Income Fund............................ 1995 1995 1993 1985 1997 1995 1985 1998
California Insured Tax Free Fund..................... 1995 1995 1993 1985 1997 1995 1985 1998
Municipal Income Fund................................ 1995 1995 1993 1990 1997 1995 1990 1998
Intermediate Term Municipal Income Fund.............. 1995 1995 1993 1993 1997 1995 1993 1998
Florida Insured Tax Free Income Fund................. 1995 1995 1994 1994 1997 1995 1994 1998
New York Tax Free Income Fund........................ 1995 1995 1994 1994 1997 1995 1994 1998
</TABLE>
B-26
<PAGE> 454
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement (the
"Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate and
implement the Fund's investment objectives. The Adviser also furnishes the
services of the Fund's President and such other executive and clerical personnel
as are necessary to prepare the various reports and statements and conduct the
Fund's day-to-day operations. The Fund, however, bears the cost of its
accounting services, which include maintaining its financial books and records
and calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of the Fund's Treasurer and the
personnel operating under his direction. Charges are allocated among the
investment companies advised or subadvised by the Adviser or its affiliates. A
portion of these amounts is paid to the Adviser or its affiliates in
reimbursement of personnel, office space, facilities and equipment costs
attributable to the provision of accounting services to the Fund. See
"Accounting Services Agreement" below. The Fund also pays distribution fees,
service fees, custodian fees, legal and auditing fees, the costs of reports to
shareholders, and all other ordinary business expenses not specifically assumed
by the Adviser. The Advisory Agreement also provides that the Adviser shall not
be liable to the Fund for any error of judgment or of law, or for any loss
suffered by the Fund in connection with the matters to which the agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence on the part of the Adviser in the performance of its obligations and
duties, or by reason of its reckless disregard of its obligations and duties
under the agreement.
Under the Advisory Agreement, the Fund pays to the Adviser, as compensation
for the services rendered, facilities furnished, and expenses paid by it, a
monthly fee payable computed based upon an annual rate applied to the average
daily net assets of the Fund as follows: 0.500% on the first $500 million of
average daily net assets and 0.450% on the average daily net assets over $500
million.
The Fund's average net assets are determined by taking the average of all of
the determinations of the net assets during a given calendar month. Such fee is
payable for each calendar month as soon as practicable after the end of that
month.
The Advisory Agreement also provides that, in the event the annual expenses of
the Fund for any fiscal year exceed the most stringent limit in any state in
which the Fund's shares are offered for sale, the compensation due the Adviser
will be reduced by the amount of such excess and that, if a reduction in and
refund of the advisory fee is insufficient, the Adviser will pay the Fund
monthly an amount sufficient to make up the deficiency, subject to readjustment
during the year.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on 60 days' written notice.
During the fiscal period ended September 30, 1998 and the fiscal years ended
December 31, 1997 and 1996, the Adviser received approximately $3,545,700,
$4,721,600 and $4,825,300, respectively, in advisory fees from the Fund.
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which Advisory Corp. provides accounting services
to the Fund. The Fund shares together with the other Van Kampen funds in the
cost of providing such services, with 25% of such costs shared proportionately
based on the respective number of classes of securities issued per fund and the
remaining 75% of such cost based proportionally on their respective net assets
per fund.
B-27
<PAGE> 455
During the fiscal period ended September 30, 1998 and the fiscal years ended
December 31, 1997 and 1996, Advisory Corp. received approximately $219,300,
$207,300 and $80,200, respectively, in accounting services fees from the Fund.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen funds
advised by the Adviser and distributed by the Distributor have entered into
Legal Services Agreements pursuant to which Van Kampen Investments provides
legal services, including without limitation: accurate maintenance of the fund's
minute books and records, preparation and oversight of the fund's regulatory
reports, and other information provided to shareholders, as well as responding
to day-to-day legal issues on behalf of the funds. Payment by the Fund for such
services is made on a cost basis for the salary and salary related benefits,
including but not limited to bonuses, group insurance and other regular wages
for the employment of personnel, as well as overhead and the expenses related to
the office space and the equipment necessary to render the legal services. Other
funds distributed by the Distributor also receive legal services from Van Kampen
Investments. Of the total costs for legal services provided to funds distributed
by the Distributor, one half of such costs are allocated equally to each fund
and the remaining one half of such costs are allocated to specific funds based
on monthly time records.
During the fiscal period ended September 30, 1998 and the fiscal years ended
December 31, 1997 and 1996, Van Kampen Investments received approximately
$26,600, $25,000 and $27,900, respectively, in legal services fees from the
Fund.
DISTRIBUTION AND SERVICE
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Fund through
authorized dealers on a continuous basis. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required to
take and pay for only such shares of the Fund as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and certain other costs including the cost of
supplemental sales literature and advertising. The Distribution and Service
Agreement is renewable from year to year if approved (a)(i) by the Fund's
Trustees or (ii) by the affirmative vote of a majority of the Fund's outstanding
voting securities and (b) by the affirmative vote of a majority of Trustees who
are not parties to the Distribution and Service Agreement or interested persons
of any party, by votes cast in person at a meeting called for such purpose. The
Distribution and Service Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on 90 days'
written notice. Total underwriting commissions on the sale of shares of the Fund
for the last three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
TOTAL AMOUNTS
UNDERWRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------ --------------
<S> <C> <C>
Fiscal Period Ended September 30, 1998...................... $ 727,531 $ 78,171
Fiscal Year Ended December 31, 1997......................... $ 939,551 $111,895
Fiscal Year Ended December 31, 1996......................... $1,088,499 $125,602
</TABLE>
With respect to sales of Class A Shares of the Fund, the total sales charges
and concessions reallowed to authorized dealers at the time of purchase are as
follows:
CLASS A SHARES SALES CHARGE TABLE
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
---------------------------------------------
REALLOWED TO
AS % OF NET DEALERS AS
AS % OF AMOUNT A % OF
SIZE OF INVESTMENT OFFERING PRICE INVESTED OFFERING PRICE
------------------ -------------- ----------- --------------
<S> <C> <C> <C>
Less than $100,000......................................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000............................ 3.75% 3.90% 3.25%
$250,000 but less than $500,000............................ 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000.......................... 2.00% 2.04% 1.75%
$1,000,000 or more......................................... * * *
</TABLE>
- ---------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a deferred
sales charge of 1.00% on certain redemptions made within one
B-28
<PAGE> 456
year of the purchase. A commission or transaction fee will be paid by the
Distributor at the time of purchase directly out of the Distributor's assets
(and not out of the Fund's assets) to authorized dealers who initiate and are
responsible for purchases of $1 million or more computed based on a percentage
of the dollar value of such shares sold as follows: 1.00% on sales to $2
million, plus 0.80% on the next $1 million and 0.50% on the excess over $3
million.
With respect to sales of Class B Shares and Class C Shares of the Fund, a
commission or transaction fee generally will be paid by the Distributor at the
time of purchase directly out of the Distributor's assets (and not out of the
Fund's assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 4.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any deferred sales charge and any distribution fees on Class B
Shares and Class C Shares of the Fund are paid to the Distributor and are used
by the Distributor to defray its distribution related expenses in connection
with the sale of the Fund's shares, such as the payment to authorized dealers
for selling such shares. With respect to Class C Shares, the authorized dealers
generally are paid the ongoing commission and transaction fees of up to 0.75% of
the average daily net assets of the Fund's Class C Shares annually commencing in
the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any authorized dealer that sponsors
sales contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the authorized dealer at the public offering price during such programs.
Other programs provide, among other things and subject to certain conditions,
for certain favorable distribution arrangements for shares of the Fund. Also,
the Distributor in its discretion may from time to time, pursuant to objective
criteria established by the Distributor, pay fees to, and sponsor business
seminars for, qualifying authorized dealers for certain services or activities
which are primarily intended to result in sales of shares of the Fund. Fees may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives for meetings or seminars
of a business nature. In some instances additional compensation or promotional
incentives may be offered to brokers, dealers or financial intermediaries that
have sold or may sell significant amounts of shares during specified periods of
time. The Distributor may provide additional compensation to Edward D. Jones &
Co. or an affiliate thereof based on a combination of its sales of shares and
increases in assets under management. All of the foregoing payments are made by
the Distributor out of its own assets. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of the Fund on an annual basis. These
programs will not change the price an investor will pay for shares or the amount
that a Fund will receive from such sale.
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. State securities
laws regarding registration of banks and other financial institutions may differ
from the interpretations of federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to
certain state laws.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans". The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Distribution Plan and the Service Plan are being implemented
through an agreement (the "Distribution and Service Agreement") with the
Distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members
B-29
<PAGE> 457
who are acting as brokers or agents and similar agreements between the Fund and
financial intermediaries who are acting as brokers (collectively, "Selling
Agreements") that may provide for their customers or clients certain services or
assistance, which may include, but not be limited to, processing purchase and
redemption transactions, establishing and maintaining shareholder accounts
regarding the Fund, and such other services as may be agreed to from time to
time and as may be permitted by applicable statute, rule or regulation. Brokers,
dealers and financial intermediaries that have entered into sub-agreements with
the Distributor and sell shares of the Fund are referred to herein as "financial
intermediaries."
For shares sold prior to the implementation date of the Distribution Plan, the
financial intermediary was not eligible to receive compensation pursuant to such
Distribution and Service Agreement or Selling Agreement. To the extent that
there remain outstanding shares of the Fund that were purchased prior to the
implementation date of the Distribution Plan, the percentage of the total
average daily net asset value of a class of shares that may be utilized pursuant
to the Distribution and Service Agreement will be less than the maximum
percentage amount permissible with respect to such class of shares under the
Distribution and Service Agreement.
The Distributor must submit quarterly reports to the Board of Trustees of the
Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Distribution Plan and the purposes for which
such expenditures were made, together with such other information as from time
to time is reasonably requested by the Trustees. The Plans provide that they
will continue in full force and effect from year to year so long as such
continuance is specifically approved by a vote of the Trustees, and also by a
vote of the disinterested Trustees, cast in person at a meeting called for the
purpose of voting on the Plans. Each of the Plans may not be amended to increase
materially the amount to be spent for the services described therein with
respect to any class of shares without approval by a vote of a majority of the
outstanding voting shares of such class, and all material amendments to either
of the Plans must be approved by the Trustees and also by the disinterested
Trustees. Each of the Plans may be terminated with respect to any class of
shares at any time by a vote of a majority of the disinterested Trustees or by a
vote of a majority of the outstanding voting shares of such class.
The Plans generally provide for the Fund to reimburse the lesser of (i) the
distribution and service fees at the rates specified in the prospectus or (ii)
the amount of the Distributor's actual expenses incurred less any deferred sales
charges it received. For Class A Shares, to the extent the Distributor is not
fully reimbursed in a given year, there is no carryover of such unreimbursed
amounts to succeeding years. For each of the Class B Shares and Class C Shares,
to the extent the Distributor is not fully reimbursed in a given year, any
unreimbursed expenses for such class will be carried forward and paid by the
Fund in future years so long as such Plans are in effect. Except as mandated by
applicable law, the Fund does not impose any limit with respect to the number of
years into the future that such unreimbursed expenses may be carried forward (on
a Fund level basis). Because such expenses are accounted on a Fund level basis,
in periods of extreme net asset value fluctuation such amounts with respect to a
particular Class B Share of Class C Share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such share. In such circumstances, a shareholder of a share may be
deemed to incur expenses attributable to other shareholders of such class. As of
September 30, 1998, there were $1,914,034 and $10,121 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 9.70% and 0.07% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Plan were terminated
or not continued, the Fund would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through deferred sales charge.
Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution-related expenses
attributable to any other class of shares.
For the fiscal period ended September 30, 1998, the Fund's aggregate expenses
under the Plans for Class A Shares were $1,331,063 or 0.23% of the Class A
Shares' average daily net assets. Such expenses were paid to
B-30
<PAGE> 458
reimburse the Distributor for payments made to financial intermediaries for
servicing Fund shareholders and for administering the Plans. For the fiscal
period ended September 30, 1998, the Fund's aggregate expenses under the Class B
Plan were $1,547,772 or 1.00% of the Class B Shares' average net assets. Such
expenses were paid to reimburse the Distributor for the following payments:
$1,160,922 for commissions and transaction fees paid to financial intermediaries
in respect of sales of Class B Shares of the Fund and $386,850 for fees paid to
financial intermediaries for servicing Class B shareholders and administering
the Plans. For the fiscal period ended September 30, 1998, the Fund's aggregate
expenses under the Plans for Class C Shares were $110,474 or 1.00% of the Class
C Shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments; $34,761 for commissions and transaction
fees paid to financial intermediaries in respect of sales of Class C Shares of
the Fund and $75,713 for fees paid to financial intermediaries for servicing
Class C shareholders and administering the Class C Plan.
TRANSFER AGENT
The Fund's transfer agent is Van Kampen Investor Services Inc., PO Box 418256,
Kansas City, MO 64141-9256. During the fiscal period ended September 30, 1998
and the fiscal years ended December 31, 1997 and 1996, Investor Services,
shareholder service agent and dividend disbursing agent for the Fund, received
fees aggregating approximately $447,400, $649,000 and $892,000, respectively for
these services. Prior to 1998, these services were provided at cost plus a
profit. Beginning in 1998, the transfer agency prices are determined through
negotiations with the Fund's Board of Trustees and are based on competitive
benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of the Fund's
portfolio business, the policies and practices in this regard will at all times
be subject to review by the trustees of the Fund.
As most transactions made by the Fund are principal transactions at net
prices, the Fund generally incurs little or no brokerage costs. The portfolio
securities in which the Fund invests are normally purchased directly from the
issuer or in the over-the-counter market from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include a spread or markup to the dealer
between the bid and asked price. Sales to dealers are effected at bid prices.
The Fund may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid, or may purchase and
sell listed bonds on a exchange, which are effected through brokers who charge a
commission for their services.
The Adviser is responsible for placing portfolio transactions and does so in a
manner deemed fair and reasonable to the Fund and not according to any formula.
The primary consideration in all portfolio transactions is prompt execution of
orders in an effective manner at the most favorable price. In selecting
broker/dealers and in negotiating prices and any brokerage commissions on such
transactions, the Adviser considers the firm's reliability, integrity and
financial condition and the firm's execution capability, the size and breadth of
the market for the security, the size of and difficulty in executing the order,
and the best net price. There are many instances when, in the judgment of the
Adviser, more than one firm can offer comparable execution services. In
selecting among such firms, consideration may be given to those firms which
supply research and other services in addition to execution services. The
Adviser is authorized to pay higher commissions to brokerage firms that provide
it with investment and research information than to firms which do not provide
such services if the Adviser determines that such commissions are reasonable in
relation to the overall services provided. No specific value can be assigned to
such research services which are furnished without cost to the Adviser. Since
statistical and other research information is only supplementary to the research
efforts of the Adviser to the Fund and still must be analyzed and reviewed by
its staff, the receipt of research information is not expected to reduce its
expenses materially. The investment advisory fee is not
B-31
<PAGE> 459
reduced as a result of the Adviser's receipt of such research services. Services
provided may include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Fund.
The Adviser also may place portfolio transactions, to the extent permitted by
law, with brokerage firms affiliated with the Fund, the Adviser or the
Distributor and with brokerage firms participating in the distribution of the
Fund's shares if it reasonably believes that the quality of execution and the
commission are comparable to that available from other qualified firms.
Similarly, to the extent permitted by law and subject to the same considerations
on quality of execution and comparable commission rates, the Adviser may direct
an executing broker to pay a portion or all of any commissions, concessions or
discounts to a firm supplying research or other services or to a firm
participating in the distribution of the Fund's shares.
The Adviser may place portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for the Fund and another advisory account.
In some cases, this procedure could have an adverse effect on the price or the
amount of securities available to the Fund. In making such allocations among the
Fund and other advisory accounts, the main factors considered by the Adviser are
the respective sizes of the Fund and other advisory accounts, the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
Effective October 31, 1996, Morgan Stanley Group Inc. ("Morgan Stanley")
became an affiliate of the Adviser. Effective May 31, 1997, Dean Witter Discover
& Co. ("Dean Witter") became an affiliate of the Adviser. The trustees have
adopted certain policies incorporating the standards of Rule 17e-1 issued by the
SEC under the 1940 Act which requires that the commissions paid to affiliates of
the Fund must be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time. The rule and procedures also contain review requirements and require
the Adviser to furnish reports to the trustees and to maintain records in
connection with such reviews. After consideration of all factors deemed
relevant, the trustees will consider from time to time whether the advisory fee
for the Fund will be reduced by all or a portion of the brokerage commission
given to affiliated brokers.
The Fund paid the following commissions to all brokers and affiliated brokers
during the periods shown:
<TABLE>
<CAPTION>
AFFILIATED BROKERS
-------------------
MORGAN DEAN
BROKERS STANLEY WITTER
-------- ---------- ------
<S> <C> <C> <C>
Commission paid:
Fiscal period ended September 30, 1998.................... $362,296 -- --
Fiscal year ended December 31, 1997....................... $868,930 -- --
Fiscal year ended December 31, 1996....................... $ 0 -- --
Fiscal period 1998 Percentages:
Commissions with affiliate to total commissions........... -- --
Value of brokerage transactions with affiliate to total
transactions........................................... -- --
</TABLE>
B-32
<PAGE> 460
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's shares
of the Fund are held by Investor Services, the Fund's transfer agent. Investor
Services performs bookkeeping, data processing and administrative services
related to the maintenance of shareholder accounts. Except as described in the
Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in any of the
Participating Funds will receive statements quarterly from Investor Services
showing any reinvestments of dividends and capital gains distributions and any
other activity in the account since the preceding statement. Such shareholders
also will receive separate confirmations for each purchase or sale transaction
other than reinvestment of dividends and capital gains distributions and
systematic purchases or redemptions. Additions to an investment account may be
made at any time by purchasing shares through authorized dealers or by mailing a
check directly to Investor Services.
SHARE CERTIFICATES
Generally, the Fund will not issue share certificates. However, upon written
or telephone request to the Fund, a share certificate will be issued
representing shares (with the exception of fractional shares) of the Fund. A
shareholder will be required to surrender such certificates upon redemption
thereof. In addition, if such certificates are lost the shareholder must write
to Van Kampen Funds, c/o Investor Services, PO Box 418256, Kansas City, MO
64141-9256, requesting an "affidavit of loss" and obtain a Surety Bond in a form
acceptable to Investor Services. On the date the letter is received, Investor
Services will calculate a fee for replacing the lost certificate equal to no
more than 2.00% of the net asset value of the issued shares, and bill the party
to whom the replacement certificate was mailed.
RETIREMENT PLANS
Eligible investors may establish individual retirement accounts ("IRAs"); SEP;
401(k) plans; Section 403(b)(7) plans in the case of employees of public school
systems and certain non-profit organizations; or other pension or profit sharing
plans. Documents and forms containing detailed information regarding these plans
are available from the Distributor. Van Kampen Trust Company serves as custodian
under the IRA, 403(b)(7) and Keogh plans. Details regarding fees, as well as
full plan administration for profit sharing, pension and 401(k) plans, are
available from the Distributor.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS
Holders of Class A Shares can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemptions transferred to a bank
account via the ACH plan are available to be credited to the account on the
second business day following normal payment. In order to utilize this option,
the shareholder's bank must be a member of ACH. In addition, the shareholder
must fill out the appropriate section of the account application. The
shareholder must also include a voided check or deposit slip from the bank
account into which redemptions are to be deposited together with the completed
application. Once Investor Services has received the application and the voided
check or deposit slip, such shareholder's designated bank account, following any
redemption, will be credited with the proceeds of such redemption. Once enrolled
in the ACH plan, a shareholder may terminate participation at any time by
writing Investor Services.
DIVIDEND DIVERSIFICATION
A shareholder may, upon written request or by completing the appropriate
section of the application form accompanying the Prospectus or by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired), elect
B-33
<PAGE> 461
to have all dividends and other distributions paid on a class of shares of the
Fund invested into shares of the same class of any Participating Fund so long as
the investor has a pre-existing account for such class of shares of the other
fund. Both accounts must be of the same type, either non-retirement or
retirement. If the accounts are retirement accounts, they must both be for the
same class and of the same type of retirement plan (e.g. IRA, 403(b)(7), 401(k),
Keogh) and for the benefit of the same individual. If a qualified, pre-existing
account does not exist, the shareholder must establish a new account subject to
minimum investment and other requirements of the fund into which distributions
would be invested. Distributions are invested into the selected fund at its net
asset value per share as of the payable date of the distribution.
SYSTEMATIC WITHDRAWAL PLAN
Any investor whose shares in a single account total $10,000 or more at the
offering price next computed after receipt of instructions may establish a
monthly, quarterly, semi-annual or annual withdrawal plan. Any investor whose
shares in a single account total $5,000 or more at the offering price next
computed after receipt of instructions may establish a quarterly, semiannual or
annual withdrawal plan. This plan provides for the orderly use of the entire
account, not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which any capital gain or loss will be
recognized. The planholder may arrange for monthly, quarterly, semi-annual or
annual checks in any amount, not less than $25. Such a systematic withdrawal
plan may also be maintained by an investor purchasing shares for a retirement
plan established on a form made available by the Fund.
Class B shareholders and Class C shareholders who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a CDSC. Initial account balance means the amount of the
shareholder's investment at the time the election to participate in the plan is
made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plans are reinvested in additional shares
at the next determined net asset value per share. If periodic withdrawals
continuously exceed reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Withdrawals made concurrently with the purchase of additional shares
ordinarily will be disadvantageous to the shareholder because of the duplication
of sales charges. Any gain or loss realized by the shareholder upon redemption
of shares is a taxable event. The Fund reserves the right to amend or terminate
the systematic withdrawal program on 30 days' notice to its shareholders.
REINSTATEMENT PRIVILEGE
A Class A shareholder or Class B shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class A Shares of the Fund. A Class C shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class C Shares of the Fund with credit given for any CDSC paid upon such
redemption. Such reinstatement is made at the net asset value per share (without
sales charge) next determined after the order is received, which must be within
180 days after the date of the redemption. Reinstatement at net asset value per
share is also offered to participants in those eligible retirement plans held or
administered by Van Kampen Trust Company for repayment of principal (and
interest) on their borrowings on such plans.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed. The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
Additionally, if the Board of Trustees determines that payment wholly or
partly in cash would be detrimental to the best interests of the remaining
shareholders of the Fund, the Fund may pay the redemption
B-34
<PAGE> 462
proceeds in whole or in part by a distribution-in-kind of portfolio securities
held by the Fund in lieu of cash in conformity with applicable rules of the SEC.
Shareholders may incur brokerage charges upon the sale of portfolio securities
so received in payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
For purposes of the CDSC-Class A, when shares of one fund are exchanged for
shares of another fund, the purchase date for the shares of the fund exchanged
into will be assumed to be the date on which shares were purchased in the fund
from which the exchange was made. If the exchanged shares themselves are
acquired through an exchange, the purchase date is assumed to carry over from
the date of the original election to purchase shares subject to a CDSC-Class A
rather than a front-end load sales charge. In determining whether a CDSC-Class A
is payable, it is assumed that shares held the longest are the first to be
redeemed.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED
SALES CHARGE ("CDSC-CLASS B AND C")
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a CDSC. The CDSC-Class B
and C is waived on redemptions of Class B Shares and Class C Shares in the
circumstances described below:
REDEMPTION UPON DEATH OR DISABILITY
The Fund will waive the CDSC-Class B and C on redemptions following the death
or disability of a Class B shareholder and Class C shareholder. An individual
will be considered disabled for this purpose if he or she meets the definition
thereof in Section 72(m)(7) of the Code, which in pertinent part defines a
person as disabled if such person "is unable to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or to be of long-continued
and indefinite duration." While the Fund does not specifically adopt the balance
of the Code's definition which pertains to furnishing the Secretary of Treasury
with such proof as he or she may require, the Distributor will require
satisfactory proof of death or disability before it determines to waive the
CDSC-Class B and C.
In cases of death or disability, the CDSC-Class B and C will be waived where
the decedent or disabled person is either an individual shareholder or owns the
shares as a joint tenant with right of survivorship or is the beneficial owner
of a custodial or fiduciary account, and where the redemption is made within one
year of the death or initial determination of disability. This waiver of the
CDSC-Class B and C applies to a total or partial redemption, but only to
redemptions of shares held at the time of the death or initial determination of
disability.
REDEMPTION IN CONNECTION WITH CERTAIN DISTRIBUTIONS FROM RETIREMENT PLANS
The Fund will waive the CDSC-Class B and C when a total or partial redemption
is made in connection with certain distributions from Retirement Plans. The
charge will be waived upon the tax-free rollover or transfer of assets to
another Retirement Plan invested in one or more Participating Funds; in such
event, as described below, the Fund will "tack" the period for which the
original shares were held on to the holding period of the shares acquired in the
transfer or rollover for purposes of determining what, if any, CDSC-Class B and
C is applicable in the event that such acquired shares are redeemed following
the transfer or rollover. The charge also will be waived on any redemption which
results from the return of an excess contribution pursuant to Section 408(d)(4)
or (5) of the Code, the return of excess deferral amounts pursuant to Code
Section 401(k)(8) or 402(g)(2), or from the death or disability of the employee
(see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition, the charge will be
waived on any minimum distribution required to be distributed in accordance with
Code Section 401(a)(9).
The Fund does not intend to waive the CDSC-Class B and C for any distributions
from IRAs or other Retirement Plans not specifically described above.
B-35
<PAGE> 463
REDEMPTION PURSUANT TO A FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC-Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the election
to participate in the Plan is made with respect to the Fund is hereinafter
referred to as the "initial account balance." The amount to be systematically
redeemed from the Fund without the imposition of a CDSC-Class B and C may not
exceed a maximum of 12% annually of the shareholder's initial account balance.
The Fund reserves the right to change the terms and conditions of the Plan and
the ability to offer the Plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
The Fund will waive the CDSC-Class B and C in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase of shares.
INVOLUNTARY REDEMPTIONS OF SHARES
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC-Class B and C upon
such involuntary redemption.
REINVESTMENT OF REDEMPTION PROCEEDS
A shareholder who has redeemed Class C Shares of a Fund may reinvest at net
asset value, with credit for any CDSC-Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C Shares of the Fund, provided that the reinvestment is effected
within 180 days after such redemption and the shareholder has not previously
exercised this reinvestment privilege with respect to Class C Shares of the
Fund. Shares acquired in this manner will be deemed to have the original cost
and purchase date of the redeemed shares for purposes of applying the CDSC-Class
C to subsequent redemptions.
REDEMPTION BY ADVISER
The Fund may waive the CDSC-Class B and C when a total or partial redemption
is made by the Adviser with respect to its investments in the Fund.
TAXATION
FEDERAL INCOME TAXATION. The Trust and each of its series, including the Fund,
will be treated as separate corporations for federal income tax purposes. The
Fund has elected and qualified, and intends to continue to qualify each year, to
be treated as a regulated investment company under Subchapter M of the Code. To
qualify as a regulated investment company, the Fund must comply with certain
requirements of the Code relating to, among other things, the source of its
income and diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gain, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses), it
will not be required to pay federal income taxes on any income distributed to
shareholders. The Fund intends to distribute at least the minimum amount of net
investment income necessary to satisfy the 90% distribution requirement. The
Fund will not be subject to federal income tax on any net capital gains
distributed to shareholders.
B-36
<PAGE> 464
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income (not including tax-exempt income) for such year and (ii) 98%
of its capital gain net income (the latter of which generally is computed on the
basis of the one-year period ending on October 31st of such year), plus any
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have continued to hold. A
portion of the discount relating to certain stripped tax-exempt obligations may
constitute taxable income when distributed to shareholders.
DISTRIBUTIONS. The Fund intends to invest in sufficient tax-exempt municipal
securities to permit payment of "exempt-interest dividends" (as defined in the
Code). Dividends paid by the Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
B-37
<PAGE> 465
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
Exempt-interest dividends are included in determining what portion, if any, of
a person's social security and railroad retirement benefits will be includable
in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund. "Substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses in his trade or business a part
of any facilities financed with the tax-exempt obligations and whose gross
revenues derived from such facilities exceed 5% of the total revenues derived
from the facilities by all users, or who occupies more than 5% of the useable
area of the facilities or for whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
While the Fund expects that a major portion of its net investment income will
constitute tax-exempt interest, a significant portion may consist of investment
company taxable income. Distributions of the Fund's net investment company
taxable income are taxable to shareholders as ordinary income to the extent of
the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains ("capital gain
dividends"), if any, are taxable to shareholders as long-term capital gains
regardless of the length of time shares of the Fund have been held by such
shareholders. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming such shares are held as a capital asset). For a summary of the
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates" below. Interest on indebtedness which is incurred to
purchase or carry shares of a mutual fund which distributes exempt interest
dividends during the year is not deductible for federal income tax purposes.
Tax-exempt shareholders not subject to federal income tax on their income
generally will not be taxed on distributions from the Fund.
Shareholders receiving distributions in the form of additional shares issued
by the Fund will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the distribution date. The basis of such shares will equal the
fair market value on the distribution date.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt-interest dividends cannot exceed the
excess of the amount of interest exempt from tax under Section 103 of the Code
received by the Fund during the year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code. Since the percentage of dividends
which are exempt-interest dividends is determined on an average annual method
for the taxable year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax exempt during the period covered by the dividend.
Fund distributions generally will not qualify for the dividends received
deduction for corporations.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
B-38
<PAGE> 466
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
SALE OF SHARES. The sale of shares (including transfers in connection with a
redemption or repurchase of shares) will be a taxable transaction for federal
income tax purposes. Selling shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
shares and the amount received. If such shares are held as a capital asset, the
gain or loss will be a capital gain or loss. For a summary of the tax rates
applicable to capital gains (including capital gain dividends), see "Capital
Gains Rates" below. Any loss recognized upon a taxable disposition of shares
held for six months or less will be treated as a long-term capital loss to the
extent of any capital gain dividends received with respect to such shares. For
purposes of determining whether shares have been held for six months or less,
the holding period is suspended for any periods during which the shareholder's
risk of loss is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES. The maximum tax rate applicable to net capital gains
recognized by individuals and other non-corporate taxpayers is (i) the same as
the maximum ordinary income tax rate for capital assets held for one year or
less or (ii) 20% for capital assets held for more than one year. A special 28%
tax rate may apply to a portion of the capital gain dividends paid by the Fund
with respect to its taxable year ended September 30, 1998. The maximum long-term
capital gains rate for corporations is 35%.
BACKUP WITHHOLDING. The Fund may be required to withhold federal income tax at
a rate of 31% ("backup withholding") from dividends and redemption proceeds paid
to non-corporate shareholders. This tax may be withheld from dividends if (i)
the shareholder fails to furnish the Fund with its correct taxpayer
identification number, (ii) the IRS notifies the Fund that the shareholder has
failed to properly report certain interest and dividend income to the IRS and to
respond to notices to that effect or (iii) when required to do so, the
shareholder fails to certify that he or she is not subject to backup
withholding. Redemption proceeds may be subject to withholding under the
circumstances described in (i) above.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's United States federal income tax liability,
if any, provided that the required information is furnished to the IRS.
GENERAL. The federal, income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal tax consequences of purchasing, holding and disposing of
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one year, five year and ten year periods (or since the
commencement of investment operations). Other total return quotations, aggregate
or average, over other time periods may also be included.
The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes the maximum sales charge for Class A Shares); that all income
dividends or capital gains distributions during the period are reinvested in
Fund shares at net asset value; and that any applicable CDSC has been paid. The
Fund's total return will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and unrealized
net capital gains or losses during the period. Total return is based on
historical earnings and asset value fluctuations and is not intended to indicate
future performance. No adjustments are made to reflect any income taxes payable
by shareholders on dividends and distributions paid by the Fund.
B-39
<PAGE> 467
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares.
Non-standardized total return calculations do not reflect the imposition of a
contingent deferred sales charge, and if any such contingent deferred sales
charge with respect to the CDSC imposed at the time of redemption were
reflected, it would reduce the performance quoted.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Yield and total return are calculated separately for Class A Shares, Class B
Shares and Class C Shares. Class A Shares total return figures include the
maximum sales charge; Class B Shares and Class C Shares total return figures
include any applicable CDSC. Because of the differences in sales charges and
distribution fees, the total returns for each of the classes will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield, which is a measure of
the income actually earned by the Fund's investments, and from total return
which is a measure of the income actually earned by the Fund's investments plus
the effect of any realized and unrealized appreciation or depreciation of such
investments during a stated period. Distribution rate is, therefore, not
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
From time to time marketing materials may provide a portfolio manager update,
an adviser update or discuss general economic conditions and outlooks. The
Fund's marketing materials may also show the Fund's asset class diversification,
top five sectors, ten largest holdings and other Fund asset structures, such as
duration, maturity, coupon, NAV, rating breakdown, AMT exposure and number of
issues in the portfolio. Materials may also mention how the Distributor believes
the Fund compares relative to other Van Kampen
B-40
<PAGE> 468
funds. Materials may also discuss the Dalbar Financial Services study from 1984
to 1994 which studied investor cash flow into and out of all types of mutual
funds. The ten year study found that investors who bought mutual fund shares and
held such shares outperformed investors who bought and sold. The Dalbar study
conclusions were consistent regardless of if shareholders purchased their funds
in direct or sales force distribution channels. The study showed that investors
working with a professional representative have tended over time to earn higher
returns than those who invested directly. The Fund will also be marketed on the
internet.
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the rankings or ratings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds with the Consumer Price Index, other appropriate
indices of investment securities, or with investment or savings vehicles. The
performance information may also include evaluations of the Fund published by
nationally recognized ranking services and by nationally recognized financial
publications. Such comparative performance information will be stated in the
same terms in which the comparative data or indices are stated. Such
advertisements and sales material may also include a yield quotation as of a
current period. In each case, such total return and yield information, if any,
will be calculated pursuant to rules established by the SEC and will be computed
separately for each class of the Fund's shares. For these purposes, the
performance of the Fund, as well as the performance of other mutual funds or
indices, do not reflect sales charges, the inclusion of which would reduce Fund
performance. The Fund will include performance data for each class of shares of
the Fund in any advertisement or information including performance data of the
Fund.
The Fund may also utilize performance information in hypothetical
illustrations. For example, the Fund may, from time to time: (1) illustrate the
benefits of tax-deferral by comparing taxable investments to investments made
through tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
of different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return.
Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
computed by dividing that portion of the yield of the Fund (as computed above)
which is tax-exempt by a percentage equal to 100% minus a stated percentage
income tax rate and adding the result to that portion of the Fund's yield, if
any, that is not tax-exempt.
The Fund's Annual Report and Semi-Annual Report contain additional performance
information. A copy of the Annual Report or Semi-Annual Report may be obtained
without charge by calling or writing the Fund at the telephone number and
address printed on the back cover of the Prospectus.
CLASS A SHARES
The average annualized total return, including payment of the sales charge,
with respect to the Class A Shares for (i) the one year period ended September
30, 1998 was 3.37%, (ii) the five year period ended September 30, 1998 was 4.64%
and (iii) the approximately eight year, two month period from August 1, 1990
(the commencement of investment operations of the Fund) through September 30,
1998 was 7.31%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.94%. The Fund's current distribution
rate with respect to the Class A Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 5.04%. The Fund's taxable equivalent distribution rate with
respect to the Class A Shares for the month ending September 30, 1998 was 7.88%.
The Class A Shares cumulative non-standardized total return, including payment
of the maximum sales charge, with respect to the Class A Shares from its
inception to September 30, 1998 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 77.96%.
B-41
<PAGE> 469
The Fund's cumulative non-standardized total return, excluding payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
September 30, 1998 was 86.83%.
CLASS B SHARES
The average annualized total return, including payment of the CDSC, with
respect to the Class B Shares for (i) the one year period ended September 30,
1998 was 3.79%, (ii) the five year period ended September 30, 1998 was 4.66% and
(iii) the approximately six year, one month period of August 24, 1992
(commencement of investment operations of the Fund) through September 30, 1998
was 5.95%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.34%. The Fund's current distribution
rate with respect to the Class B Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.58%. The Fund's taxable equivalent distribution rate with
respect to the Class B Shares for the month ending September 30, 1998 was 7.16%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class B Shares from its inception to September 30,
1998 (as calculated in the manner described in the Prospectus under the heading
"Fund Performance") was 42.26%.
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to September 30,
1998 was 42.26%.
CLASS C SHARES
The average annualized total return, including payment of the CDSC, with
respect to the Class C Shares for (i) the one year period ended September 30,
1998 was 6.73%, (ii) the five year period ended September 30, 1998 was 4.88% and
(iii) the approximately five year, one month period from August 13, 1993 (the
commencement of investment operations of the Fund) through September 30, 1998
was 5.08%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.31%. The Fund's current distribution
rate with respect to the Class C Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.58%. The Fund's taxable equivalent distribution rate with
respect to the Class C Shares for the month ending September 30, 1998 was 7.16%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class C Shares from its inception to September 30,
1998 (as calculated in the manner described in the Prospectus under the heading
"Fund Performance") was 28.97%.
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class C Shares from its inception to September 30,
1998 was 28.97%.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash, including
proceeds from the sale of shares of the Fund and of securities in the Fund's
investment portfolio, are held by State Street Bank and Trust Company, 225 West
Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual statements are furnished to shareholders,
and annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS -- KPMG LLP, 303 East Wacker Drive, Chicago, Illinois
60601, the independent accountants for the Fund, performs an annual audit of the
Fund's financial statements.
LEGAL COUNSEL -- Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom
(Illinois).
B-42
<PAGE> 470
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen Municipal Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Municipal Income Fund (the "Fund"), including the portfolio of
investments, as of September 30, 1998, and the related statement of operations
for the nine-month period ended September 30, 1998 and the year ended December
31, 1997, the statement of changes in net assets for the nine-month period ended
September 30, 1998 and for each of the two years in the period ended December
31, 1997, 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
September 30, 1998, 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 Municipal Income Fund as of September 30, 1998, the results of its
operations for the nine-month period ended September 30, 1998 and the year ended
December 31, 1997, the changes in its net assets for the nine-month period ended
September 30, 1998 and for each of the two years in the period ended December
31, 1997, and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
November 5, 1998
F-1
<PAGE> 471
PORTFOLIO OF INVESTMENTS
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS 104.0%
ALABAMA 2.0%
$ 2,100 Alabama St Indl Dev Auth Rev UNR-ROHN Inc Expansion
Proj........................................................ 7.500% 09/15/11 $ 2,380,264
3,045 Alabama Wtr Pollutn Ctl Auth Revolving Fund Ln Ser A (AMBAC
Insd)....................................................... 4.750 08/15/17 3,039,184
2,000 Alabama Wtr Pollutn Ctl Auth Revolving Fund Ln Ser A (AMBAC
Insd)....................................................... 4.750 08/15/18 1,983,380
2,930 Alabama Wtr Pollutn Ctl Auth Revolving Fund Ln Ser A (AMBAC
Insd) (b)................................................... 6.750 08/15/17 3,344,742
525 Bessemer, AL Indl Dev Brd ROHN Inc Proj..................... 9.000 09/15/01 570,953
1,750 Bessemer, AL Indl Dev Brd ROHN Inc Proj..................... 9.500 09/15/11 2,251,638
250 Mobile, AL Indl Dev Brd Solid Waste Disp Rev Mobile Energy
Svcs Co Proj Rfdg........................................... 6.950 01/01/20 130,000
1,000 Montgomery, AL Med Clinic Brd Jackson Hosp & Clinic (AMBAC
Insd)....................................................... 5.875 03/01/16 1,089,970
5,150 West Jefferson Cnty, AL Amusement & Pub Pk Auth First Mtg
Visionland Proj............................................. 8.000 12/01/26 5,572,145
--------------
20,362,276
--------------
ALASKA 2.0%
2,500 Alaska Energy Auth Pwr Rev Bradley Lake Proj Ser 1 (BIGI
Insd) (b)................................................... 6.250 07/01/21 2,547,950
1,250 Alaska Indl Dev & Expt Auth Pwr Rev Snettisham Hydroelec
First Ser (AMBAC Insd)...................................... 5.500 01/01/16 1,324,137
1,260 Alaska Indl Dev & Expt Auth Pwr Rev Snettisham Hydroelec
First Ser (AMBAC Insd)...................................... 5.500 01/01/17 1,331,581
5,000 Alaska Indl Dev & Expt Auth Pwr Rev Snettisham Hydroelec
First Ser (AMBAC Insd)...................................... 5.375 01/01/34 5,139,800
1,000 Alaska Indl Dev and Expt Auth Pwr Rev Upper Lynn Canal Regl
Pwr......................................................... 5.700 01/01/12 1,014,510
1,800 Alaska Indl Dev and Expt Auth Pwr Rev Upper Lynn Canal Regl
Pwr......................................................... 5.875 01/01/32 1,832,598
6,500 North Slope Borough, AK Cap Apprec Ser A (MBIA Insd)........ * 06/30/09 4,071,145
3,265 North Slope Borough, AK Cap Apprec Ser A (MBIA Insd)........ * 06/30/10 1,935,525
1,000 Valdez, AK Marine Term Rev Sohio Pipeline Rfdg.............. 7.125 12/01/25 1,120,300
--------------
20,317,546
--------------
ARIZONA 2.1%
1,000 Maricopa Cnty, AZ Indl Dev Auth Multi-Family Hsg Rev Rfdg... 6.500 07/01/09 1,081,310
595 Pima Cnty, AZ Indl Dev Auth Single Family Mtg Rev (GNMA
Collateralized)............................................. 6.625 11/01/14 637,055
5,220 Pinal Cnty, AZ Sch Dist No 8 Mammoth Ser A (b).............. 9.500 07/01/10 5,817,116
500 Scottsdale, AZ Indl Dev Auth Rev First Mtg Westminster Vlg
Ser A Rfdg.................................................. 8.250 06/01/15 574,775
1,875 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp Ser A Rfdg
(AMBAC Insd)................................................ 6.000 09/01/12 2,090,925
1,750 Scottsdale, AZ Indl Dev Hosp Scottsdale Mem Hosp Ser A Rfdg
(AMBAC Insd)................................................ 6.125 09/01/17 1,946,927
1,500 Sedona, AZ Wastewtr Muni Ppty Corp Excise Tax Rev Rfdg (MBIA
Insd)....................................................... * 07/01/21 496,155
1,000 Sedona, AZ Wastewtr Muni Ppty Corp Excise Tax Rev Rfdg (MBIA
Insd)....................................................... * 07/01/23 299,540
7,000 Tucson, AZ Arpt Auth Inc Spl Fac Rev Lockheed Aermod Cent
Inc (b)..................................................... 8.700 09/01/19 7,728,280
--------------
20,672,083
--------------
ARKANSAS 0.9%
5,230 Dogwood Addition PRD Muni Ppty Owners Multi-Purp Impt Dist
No 8 AR Impt Ser A (d)(f)................................... 7.500 01/31/06 5,020,800
5,470 Dogwood Addition PRD Muni Ppty Owners Multi-Purp Impt Dist
No 8 AR Impt Ser B (d)(f)................................... 7.500 01/31/06 1,641,000
1,925 Jackson Cnty, AR Hlthcare Fac Brd First Mtg Hosp Rev Newport
Hosp & Clinic Inc........................................... 7.375 11/01/11 2,035,668
--------------
8,697,468
--------------
CALIFORNIA 6.6%
25,855 Anaheim, CA Pub Fin Auth Cap Apprec Sub Pub Impts Proj C
(FSA Insd).................................................. * 09/01/24 7,193,895
8,945 Anaheim, CA Pub Fin Auth Lease Rev Cap Apprec Sub Pub Impts
Proj C (FSA Insd)........................................... * 09/01/21 2,897,643
10,000 Anaheim, CA Pub Fin Auth Lease Rev Cap Apprec Sub Pub Impts
Proj C (FSA Insd)........................................... * 09/01/22 3,079,700
25,865 Anaheim, CA Pub Fin Auth Lease Rev Cap Apprec Sub Pub Impts
Proj C (FSA Insd)........................................... * 09/01/23 7,571,720
5,000 Anaheim, CA Pub Fin Auth Lease Rev Cap Apprec Sub Pub Impts
Proj C (FSA Insd)........................................... * 09/01/25 1,322,100
5,105 California Edl Fac Auth Rev College of Osteopathic Med
Pacific (Prerefunded @ 06/01/03)............................ 7.500 06/01/18 5,870,035
2,880 California Edl Fac Auth Rev Univ of La Verne................ 6.300 04/01/09 3,108,730
4,285 Delano, CA Ctfs Partn Ser A (Prerefunded @ 01/01/03)........ 9.250 01/01/22 5,339,496
2,660 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd)....... * 09/01/10 1,444,433
5,875 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd)....... * 09/01/11 2,965,171
3,890 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd)....... * 09/01/13 1,700,086
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 472
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALIFORNIA (CONTINUED)
$ 5,430 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd)....... * 09/01/14 $ 2,207,838
3,500 Escondido, CA Union High Sch Dist Cap Apprec (MBIA Insd).... * 11/01/19 1,259,825
5,000 Escondido, CA Union High Sch Dist Cap Apprec (MBIA Insd).... * 11/01/20 1,711,650
900 Fairfield, CA Hsg Auth Mtg Rev Creekside Estates Proj
Rfdg........................................................ 7.875% 02/01/15 942,759
1,000 Madera Cnty, CA Ctfs Partn Vly Children's Hosp (MBIA
Insd)....................................................... 6.125 03/15/23 1,154,880
2,825 Midpeninsula Regl Dist CA Fin Auth Rev (AMBAC Insd)......... * 09/01/15 1,258,820
1,155 Midpeninsula Regl Open Space CA (AMBAC Insd)................ * 09/01/19 415,708
1,265 Midpeninsula Regl Open Space CA (AMBAC Insd)................ * 09/01/22 389,582
1,380 Midpeninsula Regl Open Space CA (AMBAC Insd)................ * 09/01/25 364,900
900 Monterey, CA Regl Wastewtr Fin Auth Wastewtr Contract Rev
(FSA Insd).................................................. * 06/01/10 521,919
800 Monterey, CA Regl Wastewtr Fin Auth Wastewtr Contract Rev
(FSA Insd).................................................. * 06/01/11 434,664
700 Monterey, CA Regl Wastewtr Fin Auth Wastewtr Contract Rev
(FSA Insd).................................................. * 06/01/12 357,385
700 Monterey, CA Regl Wastewtr Fin Auth Wastewtr Contract Rev
(FSA Insd).................................................. * 06/01/13 334,733
700 Monterey, CA Regl Wastewtr Fin Auth Wastewtr Contract Rev
(FSA Insd).................................................. * 06/01/14 315,259
2,865 Paramount, CA Uni Sch Dist Cap Apprec Ser A (FSA Insd)...... * 09/01/22 890,585
4,000 Riverside Cnty, CA Air Force Vlg West Inc Ser A Rfdg........ 8.125 06/15/20 4,445,600
15,920 San Joaquin Hills, CA Tran Corridor Agy Toll Rd Rev Cap
Apprec Rfdg Ser A (MBIA Insd)............................... * 01/15/25 4,391,532
2,000 Santa Ana, CA Cmnty Redev Agy Tax Alloc Ser B Rfdg.......... 7.500 09/01/16 2,078,360
--------------
65,969,008
--------------
COLORADO 5.0%
2,840 Adams Cnty, CO Single Family Mtg Rev Ser A.................. 8.875 08/01/11 4,005,110
3,985 Adams Cnty, CO Single Family Mtg Rev Ser A.................. 8.875 08/01/12 5,774,624
10,500 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy Rev E-470 Proj Ser
C (Prerefunded @ 08/31/05).................................. * 08/31/26 1,654,485
500 Berry Creek Metro Dist CO Rfdg & Impt....................... 8.250 12/01/11 547,845
1,000 Bowles Metro Dist CO........................................ 7.750 12/01/15 1,067,380
2,000 Denver, CO City & Cnty Arpt Rev Ser A (b)................... 7.000 11/15/99 2,070,220
7,810 Denver, CO City & Cnty Arpt Rev Ser A....................... 8.500 11/15/23 8,632,549
4,570 Denver, CO City & Cnty Arpt Rev Ser A....................... 8.000 11/15/25 4,995,513
740 Denver, CO City & Cnty Arpt Rev Ser A (Prerefunded @
11/15/00)................................................... 8.500 11/15/23 826,691
430 Denver, CO City & Cnty Arpt Rev Ser A (Prerefunded @
11/15/00)................................................... 8.000 11/15/25 476,019
2,200 Denver, CO City & Cnty Spl Fac Arpt Rev United Airls Proj
Ser A....................................................... 6.875 10/01/32 2,392,456
1,000 Edgewater, CO Redev Auth Tax Increment Rev.................. 6.750 12/01/08 1,100,650
1,320 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (MBIA
Insd)....................................................... * 12/15/14 568,141
1,420 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (MBIA
Insd)....................................................... * 12/15/15 574,077
1,420 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (MBIA
Insd)....................................................... * 12/15/16 535,965
1,330 El Paso Cnty, CO Sch Dist No 003 Widefield Ser A (MBIA
Insd)....................................................... * 12/15/18 439,844
3,690 Jefferson Cnty, CO Residential Mtg Rev...................... 11.500 09/01/12 6,348,350
5,000 Meridian Metro Dist CO Peninsular & Oriental Steam Navig Co
Rfdg (b).................................................... 7.500 12/01/11 5,484,250
2,000 Northern Metro Dist CO Adams Cnty Rfdg...................... 6.500 12/01/16 2,172,900
--------------
49,667,069
--------------
CONNECTICUT 1.8%
5,005 Connecticut St Hlth & Edl Fac Auth Rev Nursing Home Pgm
AHF/Hartford (b)............................................ 7.125 11/01/14 5,839,433
2,530 Mashantucket Western Pequot Tribe CT Spl Rev Ser A,
144A-Private Placement (a).................................. 6.400 09/01/11 2,825,150
495 Mashantucket Western Pequot Tribe CT Spl Rev Ser A,
144A-Private Placement (a).................................. 6.500 09/01/06 577,101
505 Mashantucket Western Pequot Tribe CT Spl Rev Ser A,
144A-Private Placement (a).................................. 6.500 09/01/06 579,245
2,470 Mashantucket Western Pequot Tribe CT Spl Rev Ser A,
144A-Private Placement (Prerefunded @ 09/01/07) (a)......... 6.400 09/01/11 2,908,944
4,000 Mashantucket Western Pequot Tribe CT Spl Rev Ser B,
144A-Private Placement (a).................................. 5.750 09/01/18 4,220,600
1,500 Mashantucket Western Pequot Tribe CT Spl Rev Ser B, 144-A
(a)......................................................... 5.750 09/01/27 1,578,870
--------------
18,529,343
--------------
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 473
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DISTRICT OF COLUMBIA 0.3%
$ 2,500 District of Columbia Rev Natl Pub Radio Ser A (b)........... 7.700% 01/01/23 $ 2,749,425
--------------
FLORIDA 7.4%
430 Atlantic Beach, FL Rev Fleet Landing Proj Ser A Rfdg &
Impt........................................................ 7.500 10/01/02 451,874
500 Atlantic Beach, FL Rev Fleet Landing Proj Ser A Rfdg &
Impt........................................................ 7.875 10/01/08 571,430
1,865 Boca Raton, FL Comm Redev Agy Mizner Park Proj Rfdg (FSA
Insd) (c)................................................... 4.500 03/01/12 1,865,709
1,500 Boca Raton, FL Comm Redev Agy Mizner Park Proj Rfdg (FSA
Insd) (c)................................................... 4.600 03/01/13 1,506,000
2,000 Boca Raton, FL Comm Redev Agy Mizner Park Proj Rfdg (FSA
Insd) (c)................................................... 4.625 03/01/14 1,997,740
1,565 Broward Cnty, FL Res Recovery Rev Waste Energy North Proj... 7.950 12/01/08 1,676,584
2,050 Broward Cnty, FL Res Recovery Rev Waste Energy South Proj... 7.950 12/01/08 2,196,165
24,000 Dade Cnty, FL Gtd Entitlement Rev Cap Apprec Ser A Rfdg
(MBIA Insd)................................................. * 02/01/18 8,349,360
1,800 Florida Hsg Fin Corp Rev Hsg Beacon Hill Apts Ser C......... 6.610 07/01/38 1,835,136
3,000 Florida Hsg Fin Corp Rev Hsg Cypress Trace Apts Ser G....... 6.600 07/01/38 3,056,100
2,000 Florida Hsg Fin Corp Rev Hsg Westchase Apts Ser B........... 6.610 07/01/38 2,039,040
560 Florida St Brd Edl Cap Outlay Pub Edl Ser A Rfdg............ 7.250 06/01/23 600,326
590 Florida St Brd Edl Cap Outlay Pub Edl Ser A Rfdg
(Prerefunded @ 06/01/00).................................... 7.250 06/01/23 636,291
5,000 Hillsborough Cnty, FL Edl Fac Univ Tampa Proj Rfdg.......... 5.750 04/01/18 5,222,400
2,875 Martin Cnty, FL Indl Dev Auth Indl Dev Rev Indiantown
Cogeneration Proj A Rfdg (b)................................ 7.875 12/15/25 3,388,504
1,840 Northern Palm Beach Cnty Impt Dist FL Wtr Ctl & Impt Unit
Dev 5A Rfdg................................................. 6.000 08/01/10 1,892,477
1,500 Orange Cnty, FL Hlth Fac Auth Rev First Mtg Orlando Lutheran
Twr Rfdg.................................................... 8.750 07/01/26 1,790,850
595 Orange Cnty, FL Tourist Dev Tax Rev (AMBAC Insd)............ 6.000 10/01/16 618,324
405 Orange Cnty, FL Tourist Dev Tax Rev (Prerefunded @ 10/01/00)
(AMBAC Insd)................................................ 6.000 10/01/16 424,100
5,000 Saint John's River Wtr Mgmt Dist FL Land Acquisition Rev
Rfdg (FSA Insd)............................................. 5.125 07/01/16 5,129,500
4,140 Sarasota Cnty, FL Hlth Fac Auth Rev Hlthcare
Kobernick/Meadow Pk (Prerefunded @ 07/01/02) (b)............ 10.000 07/01/22 5,063,758
5,000 Sarasota Cnty, FL Public Hosp Brd Miles Sarasota Mem Hosp
Proj Ser A (MBIA Insd) (Embedded Cap)....................... * 10/01/21 4,700,000
17,045 Sunrise, FL Util Sys Rev Rfdg (AMBAC Insd).................. 5.000 10/01/28 17,557,884
1,000 Tampa Palms, FL Open Space & Transn Cmnty Dev Dist Rev Cap
Impt Area 7 Proj............................................ 7.500 05/01/18 1,075,690
880 Tampa Palms, FL Open Space & Transn Cmnty Dev Dist Rev Cap
Impt Area 7 Proj............................................ 8.500 05/01/17 978,965
--------------
74,624,207
--------------
GEORGIA 3.6%
3,000 Atlanta, GA Arpt Fac Rev.................................... 6.250 01/01/21 3,171,600
2,000 Atlanta, GA Urban Residential Fin Auth Multi-Family Rev..... 6.750 07/01/30 2,045,340
2,000 Fulton Cnty, GA Hsg Auth Multi-Family Hsg Rev............... 6.500 02/01/28 2,038,340
2,000 George L Smith II GA Wrld Congress Cent Auth Rev Domed
Stadium Proj Rfdg (MBIA Insd) (c)........................... 5.500 07/01/20 2,012,460
25,550 Georgia Local Govt Ctfs Partn Grantor Trust Ser A (MBIA
Insd)....................................................... 4.750 06/01/28 25,235,735
1,500 Georgia Muni Elec Auth Pwr Rev Ser X (MBIA Insd)............ 6.500 01/01/20 1,854,495
--------------
36,357,970
--------------
HAWAII 2.7%
4,055 Hawaii St Arpts Sys Rev Ser 1993 (MBIA Insd)................ 6.350 07/01/07 4,528,746
14,100 Hawaii St Dept Budget & Fin Spl Purp Rev Hawaiian Elec Co
(MBIA Insd) (b)............................................. 6.550 12/01/22 15,565,695
2,350 Hawaii St Dept Tran Spl Fac Rev Continental Airls Inc....... 9.700 06/01/20 2,575,929
1,475 Hawaii St Harbor Cap Impt Rev (FGIC Insd)................... 6.350 07/01/07 1,647,324
1,560 Hawaii St Harbor Cap Impt Rev (FGIC Insd)................... 6.400 07/01/08 1,745,593
500 Hawaii St Harbor Cap Impt Rev (MBIA Insd)................... 7.000 07/01/17 534,655
--------------
26,597,942
--------------
ILLINOIS 10.0%
4,310 Bedford Park, IL Tax Increment Rev Sr Lien Bedford City Sq
Proj........................................................ 9.250 02/01/12 4,957,017
1,350 Bridgeview, IL Tax Increment Rev Rfdg....................... 9.000 01/01/11 1,576,935
6,590 Broadview, IL Tax Increment Rev Sr Lien..................... 8.250 07/01/13 7,545,748
1,000 Chicago, IL Gas Supply Rev Ser A............................ 8.100 05/01/20 1,080,940
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 474
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ILLINOIS (CONTINUED)
$ 1,000 Chicago, IL Metro Wtr Reclamation Dist Gtr Chicago.......... 7.000% 01/01/11 $ 1,241,450
4,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc... 8.500 05/01/18 4,313,360
4,765 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc
Ser B....................................................... 8.950 05/01/18 5,308,639
1,945 Chicago, IL Single Family Mtg Rev Ser A (GNMA
Collateralized)............................................. 7.000 09/01/27 2,189,662
490 Chicago, IL Tax Increment Alloc San Drain & Ship Canal Ser
A........................................................... 7.375 01/01/05 524,663
1,000 Chicago, IL Tax Increment Alloc San Drain & Ship Canal Ser
A........................................................... 7.750 01/01/14 1,104,120
1,000 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd)................................................. 8.750 01/01/07 1,310,950
2,265 Cook Cnty, IL Cons High Sch Dist No 200 Oak Park (FSA
Insd)....................................................... * 12/01/07 1,545,817
2,265 Cook Cnty, IL Cons High Sch Dist No 200 Oak Park (FSA
Insd)....................................................... * 12/01/08 1,468,037
2,265 Cook Cnty, IL Cons High Sch Dist No 200 Oak Park (FSA
Insd)....................................................... * 12/01/09 1,391,457
2,265 Cook Cnty, IL Cons High Sch Dist No 200 Oak Park (FSA
Insd)....................................................... * 12/01/10 1,316,305
2,265 Cook Cnty, IL Cons High Sch Dist No 200 Oak Park (FSA
Insd)....................................................... * 12/01/11 1,242,783
1,500 Cook Cnty, IL Ser A Rfdg.................................... 5.000 11/15/22 1,498,875
1,000 Crestwood, IL Tax Increment Rev Rfdg........................ 7.250 12/01/08 1,083,620
1,200 Hodgkins, IL Tax Increment.................................. 9.500 12/01/09 1,415,052
3,300 Hodgkins, IL Tax Increment (Prerefunded @ 12/01/01)......... 9.500 12/01/09 3,880,206
1,500 Hodgkins, IL Tax Increment Ser A Rfdg....................... 7.625 12/01/13 1,682,025
1,500 Huntley, IL Increment Alloc Rev Huntley Redev Proj Ser A.... 8.500 12/01/15 1,768,215
1,000 Illinois Dev Fin Auth Elderly Hsg Rev Libertyville Towers
Ser A....................................................... 6.500 09/01/09 1,066,910
605 Illinois Dev Fin Auth Rev Cmnty Fac Clinic Altgeld Proj..... 8.000 11/15/06 684,013
1,000 Illinois Edl Fac Auth Rev Lake Forest College (Prerefunded @
10/01/01) (FSA Insd)........................................ 6.750 10/01/21 1,105,500
2,575 Illinois Edl Fac Auth Rev Lewis Univ Rfdg................... 6.000 10/01/24 2,683,665
1,000 Illinois Edl Fac Auth Rev Northwestern Univ Ser 1985
(Prerefunded @ 12/01/01).................................... 6.900 12/01/21 1,113,950
1,000 Illinois Edl Fac Auth Rev Peace Mem Ministries Proj......... 7.500 08/15/26 1,112,850
1,830 Illinois Hlth Fac Auth Rev Midwest Physician Grp Ltd Rfdg... 5.500 11/15/19 1,827,603
4,100 Illinois Hlth Fac Auth Rev Fairview Oblig Group Proj A
(Prerefunded @ 10/01/02).................................... 9.500 10/01/22 5,014,423
2,000 Illinois Hlth Fac Auth Rev Fairview Oblig Group Proj B
(Prerefunded @ 10/01/02).................................... 9.000 10/01/22 2,410,580
1,500 Illinois Hlth Fac Auth Rev Fairview Oblig Group Ser A
Rfdg........................................................ 7.400 08/15/23 1,688,820
505 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D.......... 9.500 11/15/15 575,225
425 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D
(Prerefunded @ 11/15/00).................................... 9.500 11/15/15 483,352
1,000 Illinois Hlth Fac Auth Rev Mem Hosp (Prerefunded @
05/01/02)................................................... 7.250 05/01/22 1,129,370
1,000 Illinois Hlth Fac Auth Rev Northwestern Mem Hosp............ 6.750 08/15/11 1,091,200
2,600 Illinois Hlth Fac Auth Rev United Med Cent (Prerefunded @
07/01/03)................................................... 8.375 07/01/12 3,089,528
3,350 Illinois Hsg Dev Auth Residential Mtg Rev (Inverse Fltg).... 9.714 02/13/18 3,802,250
1,450 Mc Lean & Woodford Cntys, IL Cmty Unit Sch Dist No 005
Normal...................................................... 4.500 01/01/16 1,396,785
1,135 Mill Creek Wtr Reclamation Dist IL Sewage Rev............... 8.000 03/01/10 1,315,624
685 Mill Creek Wtr Reclamation Dist IL Wtrwrks Rev.............. 8.000 03/01/10 794,011
1,000 Palatine, IL Tax Increment Rev Rand/Dundee Cent Proj
(Prerefunded @ 01/01/07).................................... 7.750 01/01/17 1,222,140
2,800 Regional Tran Auth IL Ser A (AMBAC Insd) (b)................ 8.000 06/01/17 3,942,008
7,500 Robbins, IL Res Recovery Rev................................ 8.375 10/15/16 6,000,000
3,000 Robbins, IL Res Recovery Rev Recreation Robbins Res Partn
Ser B....................................................... 8.375 10/15/16 2,400,000
820 Round Lake Beach, IL Tax Increment Rev Rfdg................. 7.200 12/01/04 906,166
500 Round Lake Beach, IL Tax Increment Rev Rfdg................. 7.500 12/01/13 550,185
1,575 Saint Charles, IL Indl Dev Rev Tri-City Cent Proj........... 7.500 11/01/13 1,680,997
1,240 Southern IL Univ Rev Hsg & Aux Fac Sys Ser A (MBIA Insd).... 5.800 04/01/10 1,345,995
--------------
99,879,026
--------------
INDIANA 2.5%
1,000 East Chicago, IN Exempt Fac Inland Steel Co Proj No 14...... 6.700 11/01/12 1,096,900
2,750 Elkhart Cnty, IN Hosp Auth Rev Elkhart Genl Hosp Inc........ 7.000 07/01/12 3,044,855
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 475
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDIANA (CONTINUED)
$ 1,650 Indiana Bond Bank Spl Pgm Hendricks Redev Ser B............. 6.125% 02/01/17 $ 1,831,087
3,125 Indiana Bond Bank Spl Pgm Hendricks Redev Ser B............. 6.200 02/01/23 3,463,375
1,000 Indiana Hlth Fac Fin Auth Rev Ancilla Sys Inc Oblig Grp
(MBIA Insd)................................................. 5.250 07/01/17 1,035,250
7,920 Indiana St Dev Fin Auth Environmental USX Corp Proj Rfdg &
Impt........................................................ 6.250 07/15/30 8,633,196
1,500 Indiana Univ Rev Student Fee Ser L.......................... 5.000 08/01/17 1,516,620
550 Indianapolis, IN Loc Pub Impt Bond Bank Ser D............... 6.750 02/01/14 668,668
450 Indianapolis, IN Loc Pub Impt Bond Bank Ser D............... 6.500 02/01/22 450,950
1,000 Marion Cnty, IN Hosp Auth Hosp Fac Rev...................... 6.500 09/01/13 1,055,380
140 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B.... * 06/30/11 55,082
140 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B.... * 06/30/12 51,024
135 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B.... * 06/30/13 45,619
130 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B.... * 06/30/14 40,693
130 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B.... * 06/30/15 37,729
135 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B.... * 06/30/16 36,293
225 Saint Joseph Cnty, IN Redev Dist Tax Increment Rev Ser B.... * 06/30/17 56,034
1,500 Wells Cnty, IN Hosp Auth Rev Caylor-Nickel Med Cent Inc
Rfdg........................................................ 8.500 04/15/03 1,694,610
--------------
24,813,365
--------------
IOWA 0.7%
2,045 Iowa Fin Auth Hosp Fac Rev Trinity Regl Hosp Proj (FSA
Insd)....................................................... 6.000 07/01/07 2,308,130
2,500 Iowa Fin Auth Hosp Fac Rev Trinity Regl Hosp Proj (FSA
Insd)....................................................... 5.750 07/01/17 2,720,500
2,000 Iowa Fin Auth Multi-Family Rev Hsg Hamlet Apts Proj A Rfdg
(GNMA Collateralized)....................................... 6.150 05/01/32 2,134,600
--------------
7,163,230
--------------
KANSAS 0.1%
1,000 Newton, KS Hosp Rev Newton Hlthcare Corp Ser A (Prerefunded
@ 11/15/04)................................................. 7.750 11/15/24 1,217,250
--------------
KENTUCKY 1.3%
1,000 Bowling Green, KY Indl Dev Rev Coltec Inds Inc Rfdg......... 6.550 03/01/09 1,070,270
10,950 Jefferson Cnty, KY Cap Projs Corp Rev Muni Multi-Lease Ser
A........................................................... * 08/15/14 3,691,902
4,000 Jefferson Cnty, KY Hosp Rev Alliant Hlth Sys Proj (Inverse
Fltg) (MBIA Insd)........................................... 8.699 10/09/08 4,795,000
1,250 Kentucky Econ Dev Fin Auth Med Cent Rev Ashland Hosp Corp
Ser A Rfdg & Impt (FSA Insd)................................ 6.125 02/01/12 1,373,912
1,275 Kentucky Hsg Corp Hsg Rev Ser D (FHA/VA Gtd)................ 7.450 01/01/23 1,360,527
1,000 Kentucky St Tpk Auth Toll Rd Rev Ser A...................... 5.500 07/01/07 1,003,730
--------------
13,295,341
--------------
LOUISIANA 0.7%
500 Hodge, LA Util Rev Stone Container Corp Ser 1990............ 9.000 03/01/10 533,870
1,990 Lafayette, LA Econ Dev Auth Indl Dev Rev Advanced Polymer
Proj Ser 1985............................................... 10.000 11/15/04 2,505,549
1,000 Lake Charles, LA Harbor & Terminal Dist Port Fac Rev
Trunkline Rfdg.............................................. 7.750 08/15/22 1,151,400
405 Louisiana Pub Fac Auth Rev Indl Dev Beverly Enterprises Inc
Rfdg........................................................ 8.250 09/01/08 451,041
800 Port New Orleans, LA Indl Dev Rev Avondale Inds Inc Proj
Rfdg........................................................ 8.250 06/01/04 887,472
1,400 West Feliciana Parish, LA Pollutn Ctl Rev Gulf States Util
Co Proj Ser A............................................... 7.500 05/01/15 1,564,206
--------------
7,093,538
--------------
MARYLAND 0.2%
1,500 Baltimore Cnty, MD Pollutn Ctl Rev Bethlehem Steel Corp Proj
Ser A Rfdg.................................................. 7.550 06/01/17 1,659,705
--------------
MASSACHUSETTS 2.1%
1,000 Boston, MA Rev Boston City Hosp Ser A (FHA Gtd) (Prerefunded
@ 08/15/00)................................................. 7.625 02/15/21 1,088,710
1,400 Massachusetts Edl Ln Auth Rev Edl Ln Rev Muni Forwards Issue
E Ser A (AMBAC Insd)........................................ 7.000 01/01/10 1,508,556
6,200 Massachusetts St Hlth & Edl Fac Auth Rev New England Med
Cent Hosp Ser G (Embedded Swap) (MBIA Insd)................. 3.100 07/01/13 6,175,014
1,500 Massachusetts St Indl Fin Agy Hillcrest Edl Cent Inc Proj... 8.450 07/01/18 1,747,470
5,000 Massachusetts St Indl Fin Agy Rev First Mtg Reeds Landing
Proj........................................................ 8.625 10/01/23 5,716,150
970 Massachusetts St Indl Fin Agy Rev Gtr Lynn Mental Hlth Assoc
Proj........................................................ 8.800 06/01/14 1,173,787
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 476
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MASSACHUSETTS (CONTINUED)
$ 1,000 Massachusetts St Indl Fin Agy Rev Wtr Treatment American
Hingham..................................................... 6.600% 12/01/15 $ 1,099,490
2,000 Plymouth Cnty, MA Ctfs Partn Ser A.......................... 7.000 04/01/22 2,251,260
--------------
20,760,437
--------------
MICHIGAN 5.1%
3,500 Detroit, MI Downtown Dev Auth Tax Increment Rev (Prerefunded
@ 07/01/06)................................................. 6.200 07/01/17 4,053,805
1,000 Detroit, MI Loc Dev Fin Auth Ser C.......................... 6.850 05/01/21 1,048,960
3,000 Grand Traverse Cnty, MI Hosp Munson Hlthcare Ser A Rfdg
(AMBAC Insd)................................................ 5.000 07/01/28 2,983,650
2,000 Grand Traverse Cnty, MI Hosp Fin Auth Hosp Rev Munson
Hlthcare Ser A Rfdg (AMBAC Insd)............................ 6.250 07/01/12 2,181,260
1,500 Grand Valley MI St Univ Rev Gen (FGIC Insd)................. 5.500 02/01/18 1,660,335
1,400 Hillsdale, MI Hosp Fin Auth Hosp Rev Hillsdale Cmty Hlth
Cent........................................................ 5.250 05/15/26 1,378,832
19,370 Kent Cnty, MI Bldg Auth..................................... 5.000 06/01/26 19,420,168
1,750 Michigan St Hosp Fin Auth Rev Rfdg Hosp Detroit Med Group A
(AMBAC Insd)................................................ 5.250 08/15/27 1,788,465
1,000 Michigan St Hosp Fin Auth Rev Hosp Genesys Regl Med Rfdg
(ACA Insd).................................................. 5.500 10/01/18 1,025,320
2,000 Michigan St Hosp Fin Auth Rev Hosp Genesys Regl Med Rfdg
(ACA Insd).................................................. 5.500 10/01/27 2,043,900
3,915 Michigan St House Representatives Ctfs Part (AMBAC Insd).... * 08/15/24 1,095,300
6,760 Michigan St Strategic Fd Ltd Oblig Rev Great Lakes Pulp &
Fiber Proj (e).............................................. 8.000 12/01/27 6,106,678
4,500 Michigan St Strategic Fd Solid Waste Disp Rev Genesee Pwr
Station Proj................................................ 7.500 01/01/21 4,920,435
1,000 Mount Clemens, MI Hsg Corp Multi-Family Rev Hsg Ser A Rfdg
(FHA Gtd)................................................... 6.600 06/01/13 1,069,580
--------------
50,776,688
--------------
MINNESOTA 0.4%
1,000 North Saint Paul, MN Multi-Family Rev Hsg Cottages North
Saint Paul Rfdg............................................. 9.250 02/01/22 1,078,820
2,000 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser A Rfdg...... 5.000 01/01/16 1,999,900
1,250 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser C........... 5.000 01/01/17 1,249,912
--------------
4,328,632
--------------
MISSISSIPPI 0.7%
5,000 Lowndes Cnty, MS Solid Waste Disp & Pollutn Ctl Rev
Weyerhaeuser Co Rfdg (Inverse Fltg)......................... 8.250 04/01/22 6,167,200
1,155 Ridgeland, MS Urban Renewal Rev the Orchard Ltd Proj Ser A
Rfdg........................................................ 7.750 12/01/15 1,269,622
--------------
7,436,822
--------------
MISSOURI 2.2%
1,000 Kansas City, MO Multi-Family Hsg Rev Vlg Green Apts Proj.... 6.250 04/01/30 1,019,720
2,835 Kansas City, MO Port Auth Fac Riverfront Park Proj Ser A
(b)......................................................... 5.750 10/01/06 3,116,912
2,000 Lees Summit, MO Indl Dev Auth Hlth Fac Rev John Knox Vlg
Proj Rfdg & Impt............................................ 7.125 08/15/12 2,140,320
1,330 Missouri St Econ Dev Export & Infrastructure Brd Med Office
Fac Rev (MBIA Insd) (b)..................................... 7.250 06/01/04 1,463,838
3,920 Missouri St Econ Dev Export & Infrastructure Brd Med Office
Fac Rev (Prerefunded @ 06/01/04) (MBIA Insd) (b)............ 7.250 06/01/14 4,652,609
1,000 Missouri St Hlth & Edl Fac Auth Rfdg & Impt................. 8.125 10/01/10 1,068,090
5,000 Missouri St Hlth & Edl Fac Rev Bjc Hlth Sys (c)............. 5.000 05/15/28 4,950,100
2,165 Saint Louis Cnty, MO Indl Dev Auth Nursing Home Rev Mary
Queen & Mother Proj Rfdg (GNMA Collateralized).............. 7.125 03/20/23 2,358,399
845 Saint Louis, MO Tax Increment Rev Scullin Redev Area Ser
A........................................................... 10.000 08/01/10 1,083,755
--------------
21,853,743
--------------
NEBRASKA 0.7%
700 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg)
(GNMA Collateralized)....................................... 9.413 09/15/24 791,875
1,000 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg)
(GNMA Collateralized)....................................... 11.429 09/10/30 1,229,250
4,100 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg)
(GNMA Collateralized)....................................... 10.065 10/17/23 4,612,500
--------------
6,633,625
--------------
NEVADA 0.7%
4,000 Clark Cnty, NV Indl Dev Rev NV Pwr Co Proj Ser A
(FGIC Insd)................................................. 6.700 06/01/22 4,384,360
2,080 Henderson, NV Loc Impt Dist No T-4 Ser A.................... 8.500 11/01/12 2,169,232
--------------
6,553,592
--------------
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 477
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEW HAMPSHIRE 0.7%
$ 1,555 New Hampshire Higher Edl & Hlth Fac Auth Rev................ 8.800% 06/01/09 $ 1,905,481
2,000 New Hampshire Higher Edl & Hlth Fac Auth Rev Daniel Webster
College Issue Rfdg.......................................... 7.625 07/01/16 2,221,000
1,000 New Hampshire Higher Edl & Hlth Fac Auth Rev New London Hosp
Assn Proj................................................... 7.500 06/01/05 1,143,560
980 New Hampshire St Business Fin Auth Elec Fac Rev Plymouth
Cogeneration................................................ 7.750 06/01/14 1,066,054
1,000 New Hampshire St Tpk Sys Rev Ser A Rfdg (FGIC Insd)......... 6.750 11/01/11 1,184,130
--------------
7,520,225
--------------
NEW JERSEY 3.3%
400 Atlantic City, NJ Brd Edl Sch (Prerefunded @ 12/01/02)
(AMBAC Insd)................................................ 6.125 12/01/11 443,624
250 Camden Cnty, NJ Impt Auth Lease Rev Cnty Gtd (Prerefunded @
10/01/04) (MBIA Insd)....................................... 6.150 10/01/14 284,605
2,000 Camden Cnty, NJ Impt Auth Lease Rev Dockside Refrigerated... 8.400 04/01/24 2,269,540
500 Essex Cnty, NJ Impt Auth Lease Cnty Jail Proj A (MBIA
Insd)....................................................... 5.600 12/01/16 543,845
250 Essex Cnty, NJ Impt Auth Lease Jail & Youth House Proj
(Prerefunded @ 12/01/04) (AMBAC Insd)....................... 6.600 12/01/07 291,445
370 Essex Cnty, NJ Ser A1 Rfdg (AMBAC Insd)..................... 5.375 09/01/10 400,595
250 Hudson Cnty, NJ Ctfs Partn Correctional Fac Rfdg
(MBIA Insd)................................................. 6.600 12/01/21 273,008
250 Lacey Muni Util Auth NJ Wtr Rev (Prerefunded @ 12/01/04)
(MBIA Insd)................................................. 6.250 12/01/24 286,680
250 Mercer Cnty, NJ Impt Auth Rev Cap Apprec.................... * 04/01/11 143,320
6,130 Middlesex Cnty, NJ Util Auth Swr Rev Ser A Rfdg
(MBIA Insd) (b)............................................. 6.250 08/15/10 7,266,747
500 Millburn Twp, NJ Brd Ed..................................... 5.350 07/15/12 551,140
1,000 New Jersey Bldg Auth St Bldg Rev............................ 5.000 06/15/18 1,004,170
500 New Jersey Econ Dev Auth Dist Heating & Cooling Rev Trigen
Trenton Ser A............................................... 6.200 12/01/10 535,690
2,000 New Jersey Econ Dev Auth Holt Hauling & Warehsg Rev Ser G
Rfdg........................................................ 8.400 12/15/15 2,198,520
300 New Jersey Econ Dev Auth Mkt Transition Fac Rev Sr Lien
Ser A (MBIA Insd)........................................... 5.800 07/01/09 330,957
210 New Jersey Econ Dev Auth Pollutn Ctl Rev Pub Svcs Elec & Gas
Co Proj A (MBIA Insd)....................................... 6.400 05/01/32 233,940
1,900 New Jersey Econ Dev Auth Rev First Mtg Winchester Gardens
Ser A....................................................... 8.500 11/01/16 2,156,633
350 New Jersey Econ Dev Auth Rev RWJ Hlthcare Corp
(FSA Insd).................................................. 6.250 07/01/14 390,957
1,000 New Jersey Econ Dev Auth Rev United Methodist Homes......... 7.500 07/01/20 1,124,080
1,000 New Jersey Econ Dev Auth Rev United Methodist Homes Oblig
Ser A....................................................... 7.500 07/01/25 1,124,080
300 New Jersey Econ Dev Auth Wtr Fac Rev Hackensack Wtr Co Proj
B Rfdg (MBIA Insd).......................................... 5.900 03/01/24 321,624
490 New Jersey Hlthcare Fac Fin Auth Rev Atlantic City Med Cent
Ser C Rfdg.................................................. 6.800 07/01/11 543,508
700 New Jersey Hlthcare Fac Fin Auth Rev Christ Hosp Group Issue
(Connie Lee Insd)........................................... 7.000 07/01/04 806,323
400 New Jersey Hlthcare Fac Fin Auth Rev Christ Hosp Group Issue
(Connie Lee Insd)........................................... 7.000 07/01/06 473,860
250 New Jersey Hlthcare Fac Fin Auth Rev Englewood Hosp & Med
Cent........................................................ 6.700 07/01/15 276,880
250 New Jersey Hlthcare Fac Fin Auth Rev Genl Hosp Cent at
Passaic (FSA Insd).......................................... 6.000 07/01/06 284,010
250 New Jersey Hlthcare Fac Fin Auth Rev Genl Hosp Cent at
Passaic (FSA Insd).......................................... 6.750 07/01/19 309,047
400 New Jersey Hlthcare Fac Fin Auth Rev Jersey Shore Med Cent
Rfdg (AMBAC Insd)........................................... 6.250 07/01/21 446,808
500 New Jersey Hlthcare Fac Fin Auth Rev Southern Ocean Cnty
Hosp Ser A.................................................. 6.125 07/01/13 531,945
400 New Jersey Sports & Exposition Auth Convention Cent Luxury
Tax Rev Ser A Rfdg (MBIA Insd).............................. 6.250 07/01/20 438,012
200 New Jersey St Edl Fac Auth Rev Caldwell College Ser A....... 7.250 07/01/25 219,946
250 New Jersey St Edl Fac Auth Rev Glassboro St College Ser A
(Prerefunded @ 07/01/01) (MBIA Insd)........................ 6.700 07/01/21 274,480
270 New Jersey St Hsg & Mtg Fin Agy Rev Home Buyer Ser K (MBIA
Insd)....................................................... 6.375 10/01/26 291,414
500 New Jersey St Hsg & Mtg Fin Agy Rev Home Buyer Ser O (MBIA
Insd)....................................................... 6.300 10/01/23 539,925
500 New Jersey St Hsg & Mtg Fin Agy Rev Home Buyer Ser S
(MBIA Insd)................................................. 6.000 10/01/21 534,905
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 478
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEW JERSEY (CONTINUED)
$ 3,480 New Jersey St Tpk Auth Tpk Rev Ser C Rfdg (MBIA Insd) (b)... 6.500% 01/01/16 $ 4,263,557
300 Union City, NJ (FSA Insd)................................... 6.375 11/01/10 359,913
--------------
32,769,733
--------------
NEW MEXICO 0.3%
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 2,808,000
--------------
NEW YORK 9.3%
2,805 Clifton Springs, NY Hosp & Clinic Hosp Rev Rfdg............. 8.000 01/01/20 3,153,409
3,640 Metropolitan Tran Auth NY Commuter Fac Rev Svcs Contract Ser
R Rfdg...................................................... 5.500 07/01/17 3,851,921
5,000 Metropolitan Tran Auth NY Svcs Contract Tran Fac
Ser 5 Rfdg (b).............................................. 7.000 07/01/12 5,474,500
1,000 New York City Indl Dev Agy Field Hotel Assoc Lp Jfk Rfdg
(c)......................................................... 6.000 11/01/28 1,015,320
1,000 New York City Indl Dev Agy Laguardia Assoc Lp Proj Rfdg
(c)......................................................... 6.000 11/01/28 1,015,320
1,000 New York City Indl Dev Agy Civic Fac Marymount Manhattan
College Proj................................................ 7.000 07/01/23 1,084,550
4,100 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev Ser B
(b)......................................................... 5.000 06/15/17 4,107,421
5,000 New York City Ser A (b)..................................... 7.000 08/01/07 5,960,000
2,500 New York City Ser B (b)..................................... 7.500 02/01/07 2,799,225
945 New York City Ser C (Prerefunded @ 08/01/02)................ 6.500 08/01/04 1,051,549
4,055 New York City Ser C......................................... 6.500 08/01/04 4,456,283
640 New York City Ser C Subser C1............................... 7.500 08/01/20 723,584
2,000 New York City Ser D Rfdg (b)................................ 8.000 02/01/05 2,426,840
2,200 New York City Ser E (b)..................................... 5.700 08/01/08 2,380,114
2,500 New York St Dorm Auth Rev Secd Hosp Bronx Lebanon Rfdg...... 5.200 02/15/14 2,585,625
5,000 New York St Dorm Auth Rev City Univ Ser F (b)............... 5.500 07/01/12 5,262,750
2,750 New York St Dorm Auth Rev Court Fac Lease Ser A (b)......... 5.500 05/15/10 2,891,212
2,295 New York St Dorm Auth Rev Mental Hlth Svcs Fac Ser A........ 5.750 02/15/11 2,527,369
2,285 New York St Dorm Auth Rev Mental Hlth Svcs Fac Ser A........ 5.750 02/15/12 2,504,565
2,500 New York St Energy Resh & Dev Auth Gas Fac Rev
(Inverse Fltg).............................................. 9.055 04/01/20 3,278,125
3,000 New York St Energy Resh & Dev Auth Gas Fac Rev Brooklyn
Union Gas Co Ser B (Inverse Fltg)........................... 10.203 07/01/26 4,057,500
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 2,318,940
185 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Ser A....................................................... 7.750 08/15/11 203,859
175 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Ser C....................................................... 7.300 02/15/21 193,524
2,400 New York St Urban Dev Corp Rev Correctional Cap Fac Rfdg
(b)......................................................... 5.625 01/01/07 2,571,504
20,500 New York St Urban Dev Corp Rev Correctional Cap Fac Ser A
Rfdg (FSA Insd) (b)......................................... 5.250 01/01/14 22,052,670
1,200 Port Auth NY & NJ Cons 95th Ser............................. 6.125 07/15/22 1,313,088
500 Port Auth NY & NJ Spl Oblig Rev Spl Proj JFK Intl Arpt
Terminal 6 (MBIA Insd)...................................... 5.750 12/01/25 537,745
1,500 Suffolk Cnty, NY Indl Dev Agy Indl Dev Rev Spellman High
Voltage Fac Ser A........................................... 6.375 12/01/17 1,535,835
--------------
93,334,347
--------------
NORTH CAROLINA 0.3%
2,500 Martin Cnty, NC Indl Fac & Pollutn Ctl Fin Auth Rev Solid
Waste Weyerhaeuser Co....................................... 5.650 12/01/23 2,566,425
--------------
OHIO 2.7%
1,250 Cleveland Cuyahoga Cnty, OH Port Auth Rev Dev Port Cleveland
Bond Fund Ser A............................................. 5.750 05/15/20 1,276,150
755 Cleveland Cuyahoga Cnty, OH Port Auth Rev Dev Port Cleveland
Bond Fund Ser A............................................. 5.800 05/15/27 769,496
500 Cleveland, OH Pkg Fac Rev Impt (Prerefunded @ 09/15/02)..... 8.000 09/15/12 584,925
1,000 Cuyahoga Cnty, OH Hlthcare Fac Rev Jennings Hall............ 7.300 11/15/23 1,102,520
370 Fairfield, OH Econ Dev Rev Beverly Enterprises Inc Proj
Rfdg........................................................ 8.500 01/01/03 400,466
1,750 Franklin Cnty, OH Hlthcare Friendship Vlg Dublin, OH Rfdg... 5.625 11/01/22 1,771,735
1,000 Madison Cnty, OH Hosp Impt Rev Madison Cnty Hosp
Proj Rfdg................................................... 6.400 08/01/28 1,018,270
</TABLE>
See Notes to Financial Statements
F-9
<PAGE> 479
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
OHIO (CONTINUED)
$ 6,190 Ohio Hsg Fin Agy Single Family Mtg Rev Ser B (Inverse Fltg)
(GNMA Collateralized)....................................... 9.770% 03/31/31 $ 6,963,750
1,000 Ohio St Air Quality Dev Auth Rev JMG Funding Ltd Partn Proj
Rfdg (AMBAC Insd)........................................... 6.375 04/01/29 1,119,450
2,000 Ohio St Solid Waste Rev CSC Ltd Poj......................... 8.500 08/01/22 2,120,340
4,000 Ohio St Solid Waste Rev Republic Engineered Steels Proj..... 8.250 10/01/14 4,161,040
2,000 Ohio St Solid Waste Rev Republic Engineered Steels Proj..... 9.000 06/01/21 2,174,180
3,000 Ohio St Tpk Comm Tpk Rev Ser A Rfdg......................... 5.500 02/15/26 3,354,870
--------------
26,817,192
--------------
OKLAHOMA 0.6%
1,980 McAlester, OK Pub Wks Auth Rev Rfdg & Impt (FSA Insd)....... 5.250 12/01/22 2,053,359
2,360 Oklahoma Hsg Fin Agy Single Family Rev Mtg Class B
(GNMA Collateralized)....................................... 7.997 08/01/18 2,794,830
1,000 Tulsa, OK Muni Arpt Tran Rev American Airls Inc............. 7.600 12/01/30 1,091,120
--------------
5,939,309
--------------
OREGON 0.5%
2,000 Oregon St Econ Dev Rev Georgia Pacific Corp................. 6.350 08/01/25 2,150,580
2,000 Oregon St Hlth Hsg Edl & Cultural Facs Auth................. 7.250 06/01/28 2,037,540
475 Salem, OR Hosp Fac Auth Rev Cap Manor Inc................... 7.500 12/01/24 522,870
--------------
4,710,990
--------------
PENNSYLVANIA 3.7%
500 Chartiers Vly, PA Indl & Commercial Dev Auth First Mtg
Rev......................................................... 7.250 12/01/11 517,785
5,000 Chester Cnty, PA Hlth & Edl Fac Auth Hlth Sys Rev
(AMBAC Insd) (b)............................................ 5.650 05/15/20 5,261,500
5,000 Dauphin Cnty, PA Genl Auth Rev Hotel & Conference Cent Hyatt
Regency..................................................... 6.200 01/01/29 5,047,500
2,500 Emmaus, PA Genl Auth Rev Ser C (BIGI Insd) (b).............. 7.900 05/15/18 2,548,350
1,400 Erie, PA Sch Dist Cap Apprec Rfdg (FSA Insd)................ * 09/01/25 376,460
2,500 Harrisburg, PA Auth Wtr Rev (Inverse Fltg) (FGIC Insd)...... 7.770 06/18/15 2,884,375
1,320 Harrisburg, PA Cap Apprec Nts Ser D Rfdg.................... * 09/15/16 554,347
1,535 Harrisburg, PA Cap Apprec Nts Ser D Rfdg.................... * 09/15/19 550,865
1,000 Lebanon Cnty, PA Hlth Fac Auth Hlth Cent Rev United Church
of Christ Homes Rfdg........................................ 6.750 10/01/10 1,013,380
1,000 Lehigh Cnty, PA Indl Dev Auth Lifepath Inc Proj............. 6.100 06/01/18 989,740
905 Lehigh Cnty, PA Indl Dev Auth Rev Rfdg...................... 8.000 08/01/12 979,020
1,275 Luzerne Cnty, PA Indl Dev Auth First Mtg Gross Rev Rfdg..... 7.875 12/01/13 1,412,050
1,500 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp Proj
(Crossover Rfdg @ 10/01/00)................................. 8.875 10/01/20 1,670,970
3,000 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp Rev
(Embedded Swap) (AMBAC Insd)................................ 7.630 06/01/12 3,413,670
1,000 Montgomery Cnty, PA Indl Dev Auth Retirement Cmnty Rev...... 6.300 01/01/13 1,023,810
1,000 Montgomery Cnty, PA Indl Dev Auth Rev Res Recov
(LOC - Banque Paribas)...................................... 7.500 01/01/12 1,098,090
3,150 Philadelphia, PA Auth For Indl Dev Rev Coml Dev RMK Rfdg.... 7.750 12/01/17 3,579,030
685 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp Rev........ 7.250 03/01/24 730,895
1,450 Ridley Park, PA Hosp Auth Rev Taylor Hosp Ser A Rfdg Hosp
Auth Rev Ser 1993A.......................................... 6.000 12/01/13 1,668,965
1,000 Scranton Lackawanna, PA Hlth & Welfare Auth Rev Allied Svcs
Rehab Hosp Ser A............................................ 7.375 07/15/08 1,118,580
500 Scranton Lackawanna, PA Hlth & Welfare Auth Rev Moses Taylor
Hosp Proj (Prerefunded @ 07/01/01).......................... 8.250 07/01/09 567,945
--------------
37,007,327
--------------
RHODE ISLAND 0.5%
1,975 Providence, RI Redev Agy Ctfs Partn Ser A................... 8.000 09/01/24 2,191,006
2,345 Rhode Island Hsg & Mtg Fin Corp Rental Hsg Pgm Ser B (FHA
Gtd)........................................................ 7.950 10/01/30 2,452,471
600 West Warwick, RI Ser A...................................... 7.300 07/15/08 674,268
--------------
5,317,745
--------------
</TABLE>
See Notes to Financial Statements
F-10
<PAGE> 480
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOUTH CAROLINA 0.4%
$ 3,000 Charleston Cnty, SC Arpt Dist Rfdg (MBIA Insd).............. 4.750% 07/01/15 $ 3,000,300
1,070 Piedmont Muni Pwr Agy SC Elec Rev........................... 5.000 01/01/25 1,046,203
--------------
4,046,503
--------------
SOUTH DAKOTA 0.1%
1,000 South Dakota St Hlth & Edl Fac Auth Rev Huron Regl Med
Cent........................................................ 7.250 04/01/20 1,127,110
--------------
TENNESSEE 0.3%
2,000 Springfield, TN Hlth & Edl Jesse Holman Jones Hosp Proj
(Prerefunded @ 04/01/06).................................... 8.500 04/01/24 2,609,640
--------------
TEXAS 6.7%
1,000 Austin, TX Arpt Sys Rev Prior Lien Ser A (MBIA Insd)........ 6.125 11/15/25 1,108,410
500 Baytown, TX Pptys Mgmt & Dev Corp Ser A (FNMA
Collateralized)............................................. 6.100 08/15/21 518,470
140 Bell Cnty, TX Hlth Fac Dev Corp Rev Hosp Proj............... 9.250 07/01/08 148,173
2,000 Bell Cnty, TX Indl Dev Corp Solid Waste Disposal Rev........ 7.600 12/01/17 2,045,140
500 Bexar Cnty, TX Hlth Fac Dev Corp Hosp Rev Saint Luke's
Lutheran Hosp............................................... 7.000 05/01/21 650,965
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 1,744,530
307 Bexar Cnty, TX Hsg Fin Corp Rev Ser A (GNMA
Collateralized)............................................. 8.200 04/01/22 319,830
130 Bexar Cnty, TX Hsg Fin Corp Rev Ser B (GNMA
Collateralized)............................................. 9.250 04/01/16 132,752
12,000 Brazos River Auth TX Pollutn Ctl Rev Adj Collateral Util
Elec Co Rfdg................................................ 5.550 06/01/30 12,157,800
6,850 Brazos River Auth TX Rev Houston Inds Inc Proj D Rfdg....... 4.900 10/01/15 7,037,553
1,675 Cedar Hill, TX Indpt Sch Dist Cap Apprec Rfdg............... * 08/15/15 688,425
625 Clear Creek, TX Indpt Sch Dist (Prerefunded @ 02/01/01)
(b)......................................................... 6.250 02/01/11 661,350
250 Coastal Wtr Auth TX Conveyance Sys Rev (AMBAC Insd)......... 6.250 12/15/17 270,855
940 Dallas-Fort Worth, TX Intl Arpt Fac Impt Corp Rev American
Airls Inc................................................... 7.500 11/01/25 1,011,656
1,500 Deer Park, TX Indpt Sch Dist................................ 4.250 02/15/17 1,402,560
250 El Paso, TX Hsg Auth Multi-Family Rev Ser A................. 6.250 12/01/09 267,270
90 Galveston, TX Ppty Fin Auth Single Family Mtg Rev Ser A..... 8.500 09/01/11 97,496
250 Guadalupe Blanco River Auth TX Indl Dev Corp Pollutn Ctl
Rev......................................................... 6.350 07/01/22 272,705
1,250 Harris Cnty, TX Hlth Fac Dev Corp Mem Hosp Sys Proj Rfdg.... 7.125 06/01/15 1,412,250
250 Harris Cnty, TX Muni Util Dist No 120 (Prerefunded @
08/01/01)................................................... 8.000 08/01/14 278,473
375 Harris Cnty, TX Sch Hlthcare Corp Sys Rev
(Prerefunded @ 07/01/01).................................... 7.100 07/01/21 415,256
1,250 Irving, TX Indpt Sch Dist................................... * 02/15/17 516,337
1,000 Irving, TX Indpt Sch Dist Cap Apprec Ser A Rfdg............. * 02/15/18 392,180
5,045 Leander, TX Indpt Sch Dist Cap Apprec Rfdg.................. * 08/15/19 1,678,371
2,755 Leander, TX Indpt Sch Dist Rfdg............................. 4.750 08/15/11 2,786,517
250 Lockhart, TX Correctional Fac Fin Corp Rev (Prerefunded @
04/01/01) (MBIA Insd)....................................... 6.625 04/01/12 267,728
3,500 North Central TX Hlth Fac Dev Corp Rev Presbyterian Hlthcare
Sys Ser C (Inverse Fltg) (Prerefunded @ 06/19/01) (MBIA
Insd)....................................................... 9.346 06/22/21 4,134,375
750 Northwest Harris Cnty, TX Muni Util Dist No 23 (Prerefunded
@ 04/01/01)................................................. 8.100 10/01/15 828,285
2,600 Rockwall, TX Ind Sch Dist Cap Apprec Rfdg (c)............... * 08/15/24 655,850
3,560 Rockwall, TX Ind Sch Dist Cap Apprec Rfdg (c)............... * 08/15/20 1,135,782
250 San Antonio, TX Hlth Fac Dev Corp Rev Encore Nursing
Cent Partn.................................................. 8.250 12/01/19 279,860
250 Tarrant Cnty, TX Hlth Fac Dev Corp Hosp Rev Rfdg & Impt..... 7.000 05/15/28 274,978
250 Tarrant Cnty, TX Hlth Fac Dev Corp Hosp Rev Rfdg & Impt
(Prerefunded @ 05/15/03).................................... 7.000 05/15/28 286,503
2,000 Tarrant Cnty, TX Hlth Facs Dev Corp Rev (MBIA Insd)......... 6.000 01/01/37 2,236,260
243 Texas Genl Svcs Cmnty Partn Interests Office Bldg & Land
Acquisition Proj............................................ 7.000 08/01/09 249,515
500 Texas Genl Svcs Cmnty Partn Interests Office Bldg & Land
Acquisition Proj............................................ 7.000 08/01/19 513,690
500 Texas Genl Svcs Cmnty Partn Interests Office Bldg & Land
Acquisition Proj............................................ 7.000 08/01/24 513,690
894 Texas Genl Svcs Commn Partn Interests....................... 7.500 02/01/13 921,229
</TABLE>
See Notes to Financial Statements
F-11
<PAGE> 481
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEXAS (CONTINUED)
$ 105 Texas Hsg Agy Single Family Mtg Rev Ser A Rfdg.............. 7.150% 09/01/12 $ 112,853
5,250 Texas St Dept Hsg & Cmnty Affairs Home Mtg Rev Coll Ser C
Rfdg (Inverse Fltg) (GNMA Collateralized)................... 9.663 07/02/24 6,811,875
235 Texas St Higher Edl Brd College Sr Lien..................... 7.700 10/01/25 253,295
4,025 Texas St Higher Edl Coordinating Brd College Student Ln..... * 10/01/25 4,467,911
1,000 Texas St Veterans Hsg Assist................................ 6.800 12/01/10 1,084,180
1,245 Texas St Veterans Hsg Assist (MBIA Insd).................... 6.800 12/01/23 1,352,082
2,250 West Side Calhoun Cnty, TX Navig Dist Solid Waste Disp Union
Carbide Chem & Plastics (b)................................. 8.200 03/15/21 2,480,017
3,245 Wylie, TX Indt Sch Dist Cap Apprec Rfdg..................... * 08/15/26 751,964
--------------
67,627,246
--------------
UTAH 2.7%
3,075 Bountiful, UT Hosp Rev South Davis Cmnty Hosp Proj.......... 9.500 12/15/18 3,760,018
1,340 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 7.800 09/01/15 1,435,046
1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 8.000 09/01/20 1,083,960
1,000 Hildale, UT Elec Rev Gas Turbine Elec Fac Proj.............. 7.800 09/01/25 1,069,700
3,650 Intermountain Pwr Agy UT Pwr Supply Rev Rfdg Ser B
(Prerefunded @ 10/29/98).................................... 7.750 07/01/20 3,735,739
1,850 Intermountain Pwr Agy UT Pwr Supply Rev Ser 86B............. 5.000 07/01/16 1,849,963
11,000 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg (Embedded
Swap)....................................................... 7.150 02/15/12 12,631,080
700 Utah St Hsg Fin Agy Single Family Mtg Sr Ser A1 (FHA Gtd)... 7.100 07/01/14 759,941
945 Utah St Hsg Fin Agy Single Family Mtg Sr Ser A2 (FHA Gtd)... 7.200 01/01/27 1,025,108
--------------
27,350,555
--------------
VIRGINIA 2.7%
4,000 Alexandria, VA Redev & Hsg Auth 3001 Park Cent Apts
Ser A Rfdg.................................................. 6.375 04/01/34 4,039,600
5,000 Chesapeake Bay Brdg & Tunl VA Gen Resolution Rfdg (MBIA Insd
(c)......................................................... 5.500 07/01/25 5,584,600
2,000 Fairfax Cnty, VA Park Auth Park Fac Rev (b)................. 6.625 07/15/14 2,181,320
3,500 Fredericksburg, VA Indl Dev Auth Hosp Fac Rev (Prerefunded @
08/15/01) (FGIC Insd) (b)................................... 6.600 08/15/23 3,828,965
2,080 Loudoun Cnty, VA Ctfs Partn (FSA Insd) (b).................. 6.800 03/01/14 2,362,485
1,000 Loudoun Cnty, VA Ctfs Partn (FSA Insd) (b).................. 6.900 03/01/19 1,140,600
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 5,311,450
2,650 Virginia St Pub Bldg Auth Ser A............................. 5.500 08/01/16 2,824,211
--------------
27,273,231
--------------
WASHINGTON 1.5%
2,000 King Cnty, WA Ser D......................................... 5.700 12/01/10 2,254,380
4,000 Washington St Hlth Care Facs Auth Rev Multicare Hlth Sys
(MBIA Insd)................................................. 5.000 08/15/18 4,012,200
1,250 Washington St Pub Pwr Supply Sys Nuclear Proj No 1 Rev (FGIC
Insd)....................................................... 7.125 07/01/16 1,604,150
3,555 Washington St Pub Pwr Supply Sys Nuclear Proj No 1 Rev Ser C
Rfdg (FSA Insd)............................................. 5.375 07/01/15 3,689,059
3,750 Washington St Pub Pwr Supply Sys Nuclear Proj No 3 Rev Ser C
Rfdg (FSA Insd)............................................. 5.375 07/01/15 3,891,413
--------------
15,451,202
--------------
WEST VIRGINIA 0.7%
6,750 South Charleston, WV Indl Dev Rev Union Carbide Chem &
Plastics Ser A (b).......................................... 8.000 08/01/20 7,240,050
--------------
WISCONSIN 1.1%
750 Jefferson, WI Swr Sys Wtrwrks & Elec Sys Mtg Rev
(Prerefunded @ 07/01/01).................................... 7.400 07/01/16 822,862
1,000 Oconto Falls, WI Cmnty Dev Oconto Falls Tissue Inc Proj..... 7.750 12/01/22 1,075,230
1,250 Southeast WI Professional Baseball Pk Dist Sales Tax Rev
(MBIA Insd)................................................. * 12/15/21 404,225
1,250 Southeast WI Professional Baseball Pk Dist Sales Tax Rev
(MBIA Insd)................................................. * 12/15/22 384,663
1,250 Southeast WI Professional Baseball Pk Dist Sales Tax Rev
(MBIA Insd)................................................. * 12/15/23 366,025
1,000 Southeast WI Professional Baseball Pk Dist Sales Tax Rev
(MBIA Insd)................................................. * 12/15/26 252,450
3,500 Southeast WI Professional Baseball Pk Dist Sales Tax Rev
(MBIA Insd)................................................. * 12/15/27 841,225
3,500 Southeast WI Professional Baseball Pk Dist Sales Tax Rev
(MBIA Insd)................................................. * 12/15/28 801,150
</TABLE>
See Notes to Financial Statements
F-12
<PAGE> 482
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WISCONSIN (CONTINUED)
$ 3,500 Southeast WI Professional Baseball Pk Dist Sales Tax Rev
(MBIA Insd)................................................. * 12/15/29 $ 762,755
1,650 Wisconsin Hsg & Econ Dev Auth Home Ownership Rev Rfdg
(Inverse Fltg).............................................. 10.108% 10/25/22 1,862,437
600 Wisconsin St Hlth & Edl Fac Auth Rev Hess Mem Hosp Assn..... 7.200 11/01/05 645,318
1,000 Wisconsin St Hlth & Edl Fac Auth Rev United Lutheran Proj
Aging Inc (Prerefunded @ 03/01/99).......................... 8.500 03/01/19 1,041,170
2,000 Wisconsin St Hlth & Edl Milwaukee Catholic Home Proj........ 7.500 07/01/26 2,226,680
--------------
11,486,190
--------------
GUAM 0.4%
3,500 Guam Arpt Auth Rev Ser B.................................... 6.700 10/01/23 3,866,800
250 Guam Govt Ser A............................................. 5.750 09/01/04 251,650
--------------
4,118,450
--------------
PUERTO RICO 3.7%
200 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev Ser V Rfdg...... 6.625 07/01/12 220,292
36,105 Puerto Rico Comwlth Hwy & Tran Auth Tran Rev Ser A.......... 4.750 07/01/38 35,437,419
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser T (Prerefunded @
07/01/04)................................................... 6.375 07/01/24 287,062
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser U Rfdg................ 6.000 07/01/14 275,420
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser Z Rfdg................ 5.500 07/01/14 264,658
320 Puerto Rico Hsg Bank & Fin Agy Single Family Mtg Rev (GNMA
Collateralized)............................................. 6.250 04/01/29 342,400
300 Puerto Rico Pub Bldgs Auth Gtd Pub Edl & Hlth Fac Ser M Rfdg
(FSA Insd).................................................. 5.750 07/01/15 321,705
--------------
37,148,956
--------------
TOTAL INVESTMENTS 104.0%
(Cost $951,139,270).................................................................... 1,042,279,757
LIABILITIES IN EXCESS OF OTHER ASSETS (4.0%)............................................ (40,104,540)
--------------
NET ASSETS 100.0%....................................................................... $1,002,175,217
==============
</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, open option and futures transactions.
(c) Securities purchased on a when issued or delayed delivery basis.
(d) Market value is determined in accordance with procedures established in good
faith by the Board of Trustees.
(e) Currently is a payment-in-kind security which will convert to a cash paying
security at a predetermined date.
(f) Non-Income Producing Security
ACA--American Capital Access
AMBAC--AMBAC Indemnity Corporation
BIGI--Bond Investor Guaranty Inc.
Connie Lee--Connie Lee Insurance Company
FGIC--Financial Guaranty Insurance Company
FHA/VA--Federal Housing Administration/Department of Veterans Affairs
FNMA--Federal National Mortgage Association
FSA--Financial Security Assurance Inc.
GNMA--Government National Mortgage Association
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements
F-13
<PAGE> 483
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $951,139,270)....................... $1,042,279,757
Receivables:
Interest.................................................. 16,026,696
Investments Sold.......................................... 4,520,433
Fund Shares Sold.......................................... 948,799
Variation Margin on Futures............................... 169,572
Other....................................................... 18,002
--------------
Total Assets.......................................... 1,063,963,259
--------------
LIABILITIES:
Payables:
Bank Borrowings........................................... 37,519,378
Investments Purchased..................................... 19,611,246
Income Distributions...................................... 2,107,791
Distributor and Affiliates................................ 945,275
Fund Shares Repurchased................................... 519,311
Investment Advisory Fee................................... 388,217
Accrued Expenses............................................ 258,338
Options at Market Value (Net premiums received of $6,775)... 242,187
Trustees' Deferred Compensation and Retirement Plans........ 196,299
--------------
Total Liabilities..................................... 61,788,042
--------------
NET ASSETS.................................................. $1,002,175,217
==============
NET ASSETS CONSIST OF:
Capital..................................................... $ 920,238,087
Net Unrealized Appreciation................................. 90,902,720
Accumulated Undistributed Net Investment Income............. 2,282,049
Accumulated Net Realized Loss............................... (11,247,639)
--------------
NET ASSETS.................................................. $1,002,175,217
==============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $788,717,387 and 49,321,491 shares of
beneficial interest issued and outstanding)............ $ 15.99
Maximum sales charge (4.75%* of offering price)......... .80
--------------
Maximum offering price to public........................ $ 16.79
==============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $197,947,399 and 12,385,888 shares of
beneficial interest issued and outstanding)............ $ 15.98
==============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $15,510,431 and 971,576 shares of
beneficial interest issued and outstanding)............ $ 15.96
==============
* On sales of $100,000 or more, the sales charge will be
reduced.
</TABLE>
See Notes to Financial Statements
F-14
<PAGE> 484
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998 and
the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest.................................................... $48,555,300 $63,871,998
----------- -----------
EXPENSES:
Investment Advisory Fee..................................... 3,545,745 4,721,648
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $1,315,469, $1,544,736 and $111,076,
respectively for the nine months ended 9/30/98 and
$1,886,256, $2,047,073 and $125,940, respectively, for the
year ended 12/31/97)...................................... 2,971,281 4,059,269
Shareholder Services........................................ 585,520 991,321
Trustees' Fees and Expenses................................. 59,123 25,979
Legal....................................................... 48,678 106,117
Custody..................................................... 23,020 71,024
Other....................................................... 315,697 483,245
----------- -----------
Total Operating Expenses................................ 7,549,064 10,458,603
----------- -----------
Interest Expense........................................ 252,574 -0-
----------- -----------
NET INVESTMENT INCOME....................................... $40,753,662 $53,413,395
=========== ===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... 10,$218,111 17,322,192
Options................................................... (453,531) (575,046)
Futures................................................... (3,211,181) (6,420,032)
----------- -----------
Net Realized Gain........................................... 6,553,399 10,327,114
----------- -----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 84,570,511 60,847,273
----------- -----------
End of the Period:
Investments............................................. 91,140,487 84,688,844
Options................................................. (235,412) -0-
Futures................................................. (2,355) (118,333)
----------- -----------
90,902,720 84,570,511
----------- -----------
Net Unrealized Appreciation During the Period............... 6,332,209 23,723,238
----------- -----------
NET REALIZED AND UNREALIZED GAIN............................ $12,885,608 $34,050,352
=========== ===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $53,639,270 $87,463,747
=========== ===========
</TABLE>
See Notes to Financial Statements
F-15
<PAGE> 485
STATEMENT OF CHANGES IN NET ASSETS
For the Nine Months Ended September 30, 1998 and
the Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Year Ended
September 30, 1998 December 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.......................................$ 40,753,662 $ 53,413,395 $ 58,599,526
Net Realized Gain........................................... 6,553,399 10,327,114 15,529,569
Net Unrealized Appreciation/Depreciation During the
Period.................................................... 6,332,209 23,723,238 (34,930,300)
-------------- -------------- --------------
Change in Net Assets from Operations........................ 53,639,270 87,463,747 39,198,795
-------------- -------------- --------------
Distributions from Net Investment Income:
Class A Shares............................................ (31,284,803) (43,085,857) (46,362,424)
Class B Shares............................................ (7,203,055) (9,834,294) (10,564,184)
Class C Shares............................................ (518,861) (604,662) (607,911)
-------------- -------------- --------------
Total Distributions..................................... (39,006,719) (53,524,813) (57,534,519)
-------------- -------------- --------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES......... 14,632,551 33,938,934 18,335,724
-------------- -------------- --------------
FROM CAPITAL TRANSACTIONS
Proceeds from Shares Sold................................... 531,715,930 535,028,913 448,529,529
Net Asset Value of Shares Issued Through Dividend
Reinvestment.............................................. 19,893,086 27,237,798 29,896,737
Cost of Shares Repurchased.................................. (556,676,605) (619,837,342) (511,329,514)
-------------- -------------- --------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.......... (5,067,589) (57,570,631) (32,903,248)
-------------- -------------- --------------
TOTAL INCREASE/DECREASE IN NET ASSETS....................... 9,564,962 (23,631,697) (51,238,972)
NET ASSETS:
Beginning of the Period..................................... 992,610,255 1,016,241,952 1,067,480,924
-------------- -------------- --------------
End of the Period (Including accumulated undistributed net
investment income of $2,282,049, $535,106 and $662,245,
respectively)............................................. $1,002,175,217 $ 992,610,255 $1,016,241,952
============== ============== ==============
</TABLE>
See Notes to Financial Statements
F-16
<PAGE> 486
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended December 31,
September 30, -----------------------------------------------
Class A Shares 1998 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period............. $15.767 $15.267 $15.549 $14.261 $16.164 $15.310
------- ------- ------- ------- ------- -------
Net Investment Income.............................. .664 .852 .898 .874 .886 .964
Net Realized and Unrealized Gain/Loss.............. .195 .500 (.298) 1.296 (1.907) .862
------- ------- ------- ------- ------- -------
Total from Investment Operations..................... .859 1.352 .600 2.170 (1.021) 1.826
Less Distributions from Net Investment Income........ .635 .852 .882 .882 .882 .972
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period................... $15.991 $15.767 $15.267 $15.549 $14.261 $16.164
======= ======= ======= ======= ======= =======
Total Return (a)..................................... 5.62%* 9.14% 4.07% 15.61% (6.37%) 12.20%
Net Assets at End of the Period (In millions)........ $788.7 $766.2 $792.3 $839.7 $495.8 $597.6
Ratio of Expenses to Average Net Assets (b).......... .87% .89% .94% .99% .99% .87%
Ratio of Net Investment Income to Average Net Assets
(b)................................................ 5.63% 5.54% 5.93% 5.86% 5.93% 6.08%
Portfolio Turnover................................... 89%* 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 Van Kampen's
reimbursement of certain expenses was less than 0.01%. For the year ended
December 31, 1993, if certain expenses had not been assumed by Van Kampen,
the Ratios of Expenses to Average Net Assets and Net Investment Income to
Average Net Assets would have been .98% and 5.97%, respectively.
* Non-Annualized
See Notes to Financial Statements
F-17
<PAGE> 487
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one common share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended December 31,
September 30, -----------------------------------------------
Class B Shares 1998 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period............. $15.764 $15.267 $15.549 $14.261 $16.139 $15.308
------- ------- ------- ------- ------- -------
Net Investment Income.............................. .572 .734 .783 .762 .780 .852
Net Realized and Unrealized Gain/Loss.............. .195 .501 (.297) 1.294 (1.890) .845
------- ------- ------- ------- ------- -------
Total from Investment Operations..................... .767 1.235 .486 2.056 (1.110) 1.697
Less Distributions from Net Investment Income........ .549 .738 .768 .768 .768 .866
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period................... $15.982 $15.764 $15.267 $15.549 $14.261 $16.139
======= ======= ======= ======= ======= =======
Total Return (a)..................................... 5.05%* 8.27% 3.29% 14.74% (6.96%) 11.33%
Net Assets at End of the Period (In millions)........ $197.9 $211.2 $211.0 $216.6 $158.7 $168.2
Ratio of Expenses to Average Net Assets (b).......... 1.65% 1.65% 1.70% 1.73% 1.70% 1.65%
Ratio of Net Investment Income to Average Net Assets
(b)................................................ 4.85% 4.78% 5.17% 5.09% 5.22% 5.19%
Portfolio Turnover................................... 89%* 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 Van Kampen's
reimbursement of certain expenses was less than 0.01%. For the year ended
December 31, 1993, if certain expenses had not been assumed by Van Kampen,
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.
* Non-Annualized
See Notes to Financial Statements
F-18
<PAGE> 488
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
Nine Months (Commencement
Ended Year Ended December 31, of Distribution) to
September 30, ------------------------------------- December 31,
Class C Shares 1998 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period........ $15.747 $15.254 $15.545 $14.262 $16.141 $15.990
------- ------- ------- ------- ------- -------
Net Investment Income......................... .570 .730 .782 .771 .783 .300
Net Realized and Unrealized Gain/Loss......... .196 .501 (.305) 1.280 (1.894) .171
------- ------- ------- ------- ------- -------
Total from Investment Operations................ .766 1.231 .477 2.051 (1.111) .471
Less Distributions from Net Investment Income... .549 .738 .768 .768 .768 .320
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period.............. $15.964 $15.747 $15.254 $15.545 $14.262 $16.141
======= ======= ======= ======= ======= =======
Total Return (a)................................ 4.99%* 8.34% 3.16% 14.74% (6.97%) 2.96%*
Net Assets at End of the Period (In millions)... $ 15.5 $ 15.3 $ 12.9 $ 11.2 $ 3.9 $ 4.1
Ratio of Expenses to Average Net Assets (b)..... 1.65% 1.66% 1.70% 1.72% 1.74% 1.85%
Ratio of Net Investment Income to Average Net
Assets (b).................................... 4.86% 4.75% 5.17% 5.24% 5.19% 3.95%
Portfolio Turnover.............................. 89%* 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 Van Kampen's
reimbursement of certain expenses was less than 0.01%.
* Non-Annualized
See Notes to Financial Statements
F-19
<PAGE> 489
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Municipal Income Fund (the "Fund") is organized as a series of the
Van Kampen 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. In July, 1998, the Fund's
Board of Trustees approved a change in the Fund's fiscal year end from December
31 to September 30. As a result, this financial report reflects the nine-month
period commencing on January 1, 1998, and ending on September 30, 1998.
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 September 30, 1998, the Fund had an accumulated capital loss
carryforward for tax purposes of $11,480,037 which will expire on September 30,
2003. Net realized gains or losses may differ for financial reporting and tax
purposes primarily as a result of the deferral of losses for tax purposes
resulting from wash sales and gains or losses recognized for tax purposes on
open option and futures positions at September 30, 1998.
F-20
<PAGE> 490
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
At September 30, 1998, for federal income tax purposes, cost of long-term
investments is $951,144,635; the aggregate gross unrealized appreciation is
$97,996,513 and the aggregate gross unrealized depreciation is $6,861,391,
resulting in net unrealized appreciation of $91,135,122.
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 the nine months ended September 30, 1998, 99.3% of the income
distributions made by the Fund were exempt from federal income taxes. In
January, 1999 the Fund will provide tax information to shareholders for the 1998
calendar year.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
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 nine months ended September 30, 1998 and the year ended December
31, 1997, the Fund recognized expenses of approximately $22,000 and $32,500,
respectively, 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 nine months ended September 30, 1998 and the year ended December
31, 1997, the Fund recognized expenses of approximately $245,900 and $232,300,
respectively, representing Van Kampen Funds Inc.'s or its affiliates'
(collectively "Van Kampen") cost of providing accounting and legal services to
the Fund.
Van Kampen Investor Services Inc. ("VKIS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the nine months ended
September 30, 1998 and the year ended December 31, 1997, the Fund recognized
expenses of approximately $447,400 and $649,000 respectively. Beginning in 1998,
the transfer agency fees are determined through negotiations with the Fund's
Board of Trustees and are based on competitive market benchmarks.
Certain officers and trustees of the Fund are also officers and directors
of Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. 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 $2,500.
At September 30, 1998, Van Kampen owned 7,025 Class A shares and 98
shares each of Classes B and C.
F-21
<PAGE> 491
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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 September 30, 1998, capital aggregated $718,935,008, $186,604,874 and
$14,698,205 for Classes A, B and C, respectively. For the nine months ended
September 30, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A................................................... 32,662,126 $ 513,944,856
Class B................................................... 929,950 14,649,977
Class C................................................... 198,389 3,121,097
----------- -------------
Total Sales................................................. 33,790,465 $ 531,715,930
=========== =============
Dividend Reinvestment:
Class A................................................... 1,003,395 $ 15,819,172
Class B................................................... 239,468 3,773,374
Class C................................................... 19,090 300,540
----------- -------------
Total Dividend Reinvestment................................. 1,261,953 $ 19,893,086
=========== =============
Repurchases:
Class A................................................... (32,937,857) $(518,889,151)
Class B................................................... (2,179,386) (34,392,429)
Class C................................................... (216,155) (3,395,025)
----------- -------------
Total Repurchases........................................... (35,333,398) $(556,676,605)
=========== =============
</TABLE>
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
=========== =============
</TABLE>
F-22
<PAGE> 492
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C>
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>
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). Class B shares will
automatically convert to Class A shares after the eighth year following
purchase. 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>
F-23
<PAGE> 493
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
For the nine months ended September 30, 1998 and the year ended December
31, 1997, Van Kampen as Distributor for the Fund, received commissions on sales
of the Fund's Class A shares of approximately $76,200 and $112,900, respectively
and CDSC on redeemed shares of approximately $252,200 and $435,200,
respectively. Sales charges do not represent expenses of the Fund.
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 year ended December 31, 1997. Combined
net assets on the day of acquisition were $1,013,024,339.
4. INVESTMENT TRANSACTIONS
For the nine months ended September 30, 1998, the cost of purchases and proceeds
from sales of investments, excluding short-term investments were $908,003,482
and $914,128,444, respectively. For the year ended December 31, 1997, 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.
F-24
<PAGE> 494
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
Transactions in options for the year ended December 31, 1997 and the nine
months ended September 30, 1998, 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-
Options Written and Purchased (Net)......................... 11,800 295,281
Options Terminated in Closing Transactions (Net)............ (4,650) (949,156)
Options Expired (Net)....................................... (4,900) 660,650
------- -----------
Outstanding at September 30, 1998........................... 2,250 $ 6,775
======= ===========
</TABLE>
The related futures contracts of the outstanding option transactions as
of September 30, 1998, and the description and market value are as follows:
<TABLE>
<CAPTION>
MARKET
EXP. MONTH/ VALUE
DESCRIPTION CONTRACTS STRIKE PRICE OF OPTIONS
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. TREASURY BOND FUTURES
November 1998 -- Written Call..................... 500 Nov./132 $(492,188)
November 1998 -- Purchased Call................... 250 Nov./131 289,063
December 1998 -- Written Call..................... 1,000 Dec./136 (484,375)
December 1998 -- Purchased Calls.................. 500 Dec./134 445,313
------- ---------
2,250 $(242,187)
------- ---------
</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). The potential risk of loss associated
with a futures contract could be in excess of the variation margin reflected on
the Statement of Assets and Liabilities.
F-25
<PAGE> 495
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
Transactions in futures contracts for the year ended December 31, 1997
and nine months ended September 30, 1998, 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
Futures Opened.............................................. 21,217
Futures Closed.............................................. (19,668)
-------
Outstanding at September 30, 1998........................... 1,660
=======
</TABLE>
The futures contracts outstanding at September 30, 1998, and the
descriptions and unrealized appreciation/ depreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION/
DESCRIPTION CONTRACTS (DEPRECIATION)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Long Contracts -- U.S. Treasury Bond Futures
December 1998
(Current notional value $131,469 per contract)............ 650 $ 1,886,141
Short Contracts -- Municipal Bond Index Futures
December 1998
(Current notional value $128,375 per contract)............ 1,010 (1,888,496)
----- -----------
1,660 $ (2,355)
===== ===========
</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.
An Embedded Cap security includes a cap strike level such that the coupon
payment may be supplemented by cap payments if the floating rate index upon
which the cap is based rises above the strike level. The Trust invests in these
instruments as a hedge against a rise in the short-term interest rates which it
pays on its preferred shares.
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.
F-26
<PAGE> 496
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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 nine months ended September 30, 1998 and the year ended
December 31, 1997, are payments retained by Van Kampen of approximately
$1,222,100 and $1,464,900 respectively.
7. BORROWINGS
In accordance with its investment policies, the Fund may borrow money from banks
in an amount up to 5% of its net assets. The Fund, in combination with two other
funds in the fund complex, has entered into a $100 million revolving credit
agreement which expires September 27, 1999. The maximum amount available to any
single fund is $75 million. Interest is charged under the agreement at a rate of
.45% above the federal funds rate. The interest rate in effect at September 30,
1998 was 6.20%. An annual facility fee of .06% is charged on the unused portion
of the credit facility.
The average daily balance of bank borrowings for the nine months ended
September 30, 1998 was approximately $5,707,000 with an average interest rate of
5.98%. At September 30, 1998, borrowings under this agreement represented 3.7%
of the Fund's net assets.
8. YEAR 2000 COMPLIANCE (UNAUDITED)
Van Kampen utilizes a number of computer programs across its entire operation
relying on both internal software systems as well as external software systems
provided by third parties. In 1996 Van Kampen initiated a CountDown 2000 Project
to review both the internal systems and external vendor connections. The goal of
this project is to position its business to continue unaffected as a result of
the century change. At this time, there can be no assurance that the steps taken
will be sufficient to avoid any adverse impact to the Fund, but Van Kampen does
not anticipate that the move to Year 2000 will have a material impact on its
ability to continue to provide the Fund with service at current levels. In
addition, it is possible that the securities markets in which the Fund invests
may be detrimentally affected by computer failures throughout the financial
services industry beginning January 1, 2000. Improperly functioning trading
systems may result in settlement problems and liquidity issues.
F-27
<PAGE> 497
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND
Van Kampen Intermediate Term Municipal Income Fund (the "Fund") is a mutual
fund with an investment objective to provide investors with a high level of
current income exempt from federal income tax, consistent with preservation of
capital. The Fund's management seeks to achieve the investment objective by
investing primarily in a portfolio of municipal securities that are rated
investment grade at the time of purchase, and the Fund's management seeks to
maintain the dollar-weighted average life of the portfolio between three and ten
years.
The Fund is organized as a diversified series of Van Kampen Tax Free Trust,
an open-end, management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the
Fund's Prospectus (the "Prospectus") dated as of the same date as this Statement
of Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-2833
for the hearing impaired).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... B-2
Investment Objectives and Policies.......................... B-4
Investment Restrictions..................................... B-14
Trustees and Officers....................................... B-15
Investment Advisory and Other Services...................... B-24
Distribution and Service.................................... B-25
Transfer Agent.............................................. B-28
Portfolio Transactions and Brokerage Allocation............. B-28
Shareholder Services........................................ B-30
Redemption of Shares........................................ B-32
Contingent Deferred Sales Charge-Class A.................... B-32
Waiver of Class B and Class C Contingent Deferred Sales
Charge ("CDSC-Class B and C")............................. B-32
Taxation.................................................... B-34
Fund Performance............................................ B-37
Other Information........................................... B-40
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-12
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY 28, 1999.
B-1
<PAGE> 498
GENERAL INFORMATION
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated May 10, 1995. The Declaration of Trust permits the Trustees to
create one or more separate investment portfolios and issue a series of shares
for each portfolio. The Trustees can further sub-divide each series of shares
into one or more classes of shares for each portfolio.
The Trust was originally organized in 1985 under the name Van Kampen
Merritt Tax Free Trust as a Massachusetts business trust (the "Massachusetts
Trust"). The Massachusetts Trust was reorganized into the Trust under the name
Van Kampen American Capital Tax Free Trust on July 31, 1995. The Trust was
created for the purpose of facilitating the Massachusetts Trust reorganization
into a Delaware business trust. On July 14, 1998, the Trust adopted its current
name.
The Fund was originally organized in 1993 under the name Van Kampen Merritt
Limited Term Municipal Income Fund as a sub-trust of the Massachusetts Trust.
The Fund was reorganized as a series of the Trust on July 31, 1995 under the
name Van Kampen American Capital Limited Term Municipal Income Fund and was
renamed Van Kampen American Capital Intermediate Term Municipal Income Fund on
January 26, 1996. On July 14, 1998, the Fund adopted its current name.
Van Kampen Investment Advisory Corp. (the "Adviser" or "Advisory Corp."),
Van Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley Dean Witter & Co. The principal office of the Trust, the Fund,
the Adviser, the Distributor and Van Kampen Investments is located at 1 Parkview
Plaza, P O Box 5555, Oakbrook Terrace, Illinois 60181-5555.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and securities lending.
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest, par value $0.01 per share, which can be
divided into series such as the Fund and further subdivided into classes of each
series. Each share represents an equal proportionate interest in the assets of
the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.
The Fund currently offers three classes of shares, designated Class A
Shares, Class B Shares and Class C Shares. Other classes may be established from
time to time in accordance with provisions of the Declaration of Trust. Each
class of shares of the Fund generally are identical in all respects except that
each class bears certain distribution expenses and has exclusive voting rights
with respect to its distribution fee.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution fee for a class of a series
would be voted upon by shareholders of only the class of such series involved.
Except as otherwise described in the Prospectus or herein, shares do not have
cumulative voting rights, preemptive rights or any conversion, subscription or
exchange rights.
B-2
<PAGE> 499
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
In the event of liquidation, each of the shares of the Fund is entitled to
its portion of all of the Fund's net assets after all debts and expenses of the
Fund have been paid. Since Class B Shares and Class C Shares have higher
distribution fees and transfer agency costs, the liquidation proceeds to holders
of Class B Shares and Class C Shares are likely to be lower than to holders of
Class A Shares.
The Trustees may amend the Declaration of Trust (including with respect to
any series) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any series without approval by a majority of the shares of each affected series
present at a meeting of shareholders (or such higher vote as may be required by
the 1940 Act or other applicable law) and except that the Trustees cannot amend
the Declaration of Trust to impose any liability on shareholders, make any
assessment on shares or impose liabilities on the Trustees without approval from
each affected shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
As of January 4, 1999, no person was known by the Fund to own beneficially
or to hold of record 5% or more of the outstanding Class A Shares, Class B
Shares or Class C Shares of the Fund, except as follows:
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT
NAME AND ADDRESS JANUARY 4, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OWNERSHIP
- ------------------------------------------------ ---------------- ------------ ----------
<S> <C> <C> <C>
First Union Brokerage Services.................. 147,595.45 A 7.18%
Donald H Kohnken &
Beverlee M Kohnken JTWROS
Account 4860 4894
1799 Sabal Palm Drive
Boca Raton, FL 33432-7424
First Union Brokerage Services.................. 146,786.57 A 7.14%
Robert H Beber
A/C 1422-2407
7228 Queenferry Cir
Boca Raton, FL 33496-5943
Raymond James & Assoc Inc....................... 123,667.57 A 6.02%
For Elite Acct # 50212330
FAO Ellen L Monteiro
John D Monteiro Jr
Comm/prop
200 Aspen Dr
Houma, LA 70360-6104
Stanley J. Holuba & Robert J. Holuba Tr......... 47,154.63 C 11.54%
Stanton Chemicals Trust
DTD 10/31/86 FBO Angela Holuba
2 N Hackensack Ave
Kearny, NJ 07032-4611
</TABLE>
B-3
<PAGE> 500
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT
NAME AND ADDRESS JANUARY 4, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OWNERSHIP
- ------------------------------------------------ ---------------- ------------ ----------
<S> <C> <C> <C>
Sea Gardens Beach and Tennis.................... 38,470.69 C 9.42%
Resort Condo Assoc Inc
Waterfalls
C/O Manzie/Elliott
2601 Palm-Aire Dr N
Pompano Beach, FL 33069-3466
Dean Witter for the Benefit of Stuart M Smith... 33,391.07 C 8.18%
11906 Upland Ridge Drive
Church St Station - P O Box 250
New York, NY 10013-0250
Sea Gardens Beach and Tennis.................... 31,930.30 C 7.82%
Resort Condo Assoc Inc
Ocean View
C/O Manzie/Elliott
2601 Palm-Aire Dr N
Pompano Beach, FL 33069-3466
Edward D Jones and Co........................... 30,742.31 C 7.53%
F/A/O Marian C Snapp Ttee
U/A DTD 12/30/86
EDJ # 398 03812-1-8
P O Box 2500
Maryland Heights, MO 63043-8500
Edward D Jones and Co........................... 30,742.30 C 7.53%
F/A/O Murray A Calhoun Ttee
U/A DTD 12/30/86
EDJ # 398 03811-1-9
P O Box 2500
Maryland Heights, MO 63043-8500
King D Goff & Claudia J Goff JT Ten............. 26,885.96 C 6.58%
P O Box 323
Blackwell, OK 74631-0323
Merrill Lynch Pierce Fenner & Smith Inc......... 20,768.50 C 5.08%
For the Sole Benefit of its Customers
ATTN: Fund Administration
4800 Deer Lake Drive East
2nd Floor
Jacksonville, FL 32246-6484
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to this
caption in the Prospectus for a complete presentation of the matters disclosed
below.
MUNICIPAL SECURITIES
Municipal securities include long-term obligations, which often are called
municipal bonds, as well as shorter term municipal notes, municipal leases, and
tax exempt commercial paper. Under normal market conditions, longer term
municipal securities generally provide a higher yield than shorter term
municipal securities, and therefore the Fund generally expects to be invested
primarily in longer term municipal securities. The Fund will, however, invest in
shorter term municipal securities when yields are greater than yields available
on longer term municipal securities, for temporary defensive purposes and when
redemption requests are expected. The two principal classifications of municipal
securities are "general obligation" and "revenue" or "special obligation"
securities, which include "industrial revenue bonds." General obligation
securities are secured by the issuer's pledge of its faith, credit, and taxing
power for the payment of principal and interest. Revenue or special obligation
securities are payable only from the revenues derived from
B-4
<PAGE> 501
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source, such as from
the user of the facility being financed. The Fund may also invest in "moral
obligation" bonds which are normally issued by special purpose public
authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of state and local
governments or authorities used to finance the acquisition of equipment and
facilities. Lease obligations generally do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged. A lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. In addition to the "non-appropriation" risk, these securities represent
a relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. Additionally,
use of the leased property may be limited by state or local law to a specified
use thereby further limiting ability to rent. There is no limitation on the
percentage of the Fund's assets that may be invested in "non-appropriation"
lease obligations. In evaluating such lease obligations, the Adviser will
consider such factors as it deems appropriate, which factors may include (a)
whether the lease can be cancelled, (b) the ability of the lease obligee to
direct the sale of the underlying assets, (c) the general creditworthiness of
the lease obligor, (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality, (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding and (f) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services than those covered by the lease obligation.
Also included in the term municipal securities are participation
certificates issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participations in a
lease, an installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 15% of its total assets in derivative
variable rate municipal securities such as inverse floaters whose rates vary
inversely with changes in market rates of interest or range floaters or capped
floaters whose rates are subject to periodic or lifetime caps. Derivative
variable rate securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative variable rate securities in response to changes in market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity.
The Fund also may acquire custodial receipts or certificates underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain municipal securities. The
underwriter of these certificates or receipts typically purchases municipal
securities and deposits the securities in an irrevocable trust or custodial
account with a custodian bank, which then issues
B-5
<PAGE> 502
receipts or certificates that evidence ownership of the periodic unmatured
coupon payments and the final principal payment on the obligations. Although
under the terms of a custodial receipt, the Fund typically would be authorized
to assert its rights directly against the issuer of the underlying obligation,
the Fund could be required to assert through the custodian bank those rights as
may exist against the underlying issuer. Thus, in the event the underlying
issuer fails to pay principal or interest when due, the Fund may be subject to
delays, expenses and risks that are greater than those that would have been
involved if the Fund had purchased a direct obligation of the issuer. In
addition, in the event that the trust or custodial account in which the
underlying security has been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, the yield on the
underlying security would be reduced in recognition of any taxes paid.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantor
of such payment obligations, of the municipal securities.
Municipal securities, like other debt obligations, are subject to the risk
of non-payment. The ability of issuers of municipal securities to make timely
payments of interest and principal may be adversely impacted in general economic
downturns and as relative governmental cost burdens are allocated and
reallocated among federal, state and local governmental units. Such non-payment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal security experiencing non-payment and a
potential decrease in the net asset value of the Fund. Issuers of municipal
securities might seek protection under the bankruptcy laws. In the event of
bankruptcy of such an issuer, the Fund could experience delays and limitations
with respect to the collection of principal and interest on such municipal
securities and the Fund may not, in all circumstances, be able to collect all
principal and interest to which it is entitled. To enforce its rights in the
event of a default in the payment of interest or repayment of principal, or
both, the Fund may take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase the Fund's operating
expenses and adversely affect the net asset value of the Fund. Any income
derived from the Fund's ownership or operation of such assets may not be
tax-exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the extent to which the Fund may exercise its rights by
taking possession of such assets, because as a regulated investment company the
Fund is subject to certain limitations on its investments and on the nature of
its income. Further, in connection with the working out or restructuring of a
defaulted security, the Fund may acquire additional securities of the issuer,
the acquisition of which may be deemed to be a loan of money or property. Such
additional securities should be considered speculative with respect to the
capacity to pay interest or repay principal in accordance with their terms.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell derivative instruments such as exchange-listed and
over-the-counter put and call options on securities, financial futures, interest
rate indices and other financial instruments, purchase and sell financial
futures contracts and options thereon, or enter into various interest rate
transactions such as swaps, caps, floors or collars (collectively, all the above
are called "Strategic Transactions"). Strategic Transactions may be used to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities.
B-6
<PAGE> 503
Any or all of these investment techniques may be used at any time and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of futures and options transactions should tend to minimize the
risk of loss due to a decline in the value of the hedged position, at the same
time they tend to limit any potential gain which might result from an increase
in value of such position. Finally, the daily variation margin requirements for
futures contracts would create a greater ongoing potential financial risk than
would purchases of options, where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Strategic Transactions would
reduce net asset value, and possibly income, and such losses can be greater than
if the Strategic Transactions had not been utilized. Income earned or deemed to
be earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
B-7
<PAGE> 504
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only enter into OTC options that have a buy-back provision permitting
the Fund to require the Counterparty to close the option at a formula price
within seven days. The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other NRSRO. The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on illiquid securities
described herein.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities that are traded on securities
B-8
<PAGE> 505
exchanges and in the over-the-counter markets and related futures on such
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold. In the event of exercise of a
call option sold by the Fund with respect to securities not owned by the Fund,
the Fund may be required to acquire the underlying security at a disadvantageous
price in order to satisfy its obligation with respect to the call option.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and corporate debt securities (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate or fixed-income market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The purchase of a futures
contract creates a firm obligation by the Fund, as purchaser, to take delivery
from the seller the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission and will be
entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except
for closing transactions) for other than bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other
B-9
<PAGE> 506
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which the Fund may enter are interest rate and index swaps and the purchase or
sale of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
B-10
<PAGE> 507
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions,
in addition to other requirements, require that the Fund segregate cash and
liquid securities with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid securities at least
equal to the current amount of the obligation must be segregated with the
custodian. The segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. For example, a call option written by the Fund will require the Fund to
hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate cash and
liquid securities sufficient to purchase and deliver the securities if the call
is exercised. A call option sold by the Fund on an index will require the Fund
to own portfolio securities which correlate with the index or to segregate cash
and liquid securities equal to the excess of the index value over the exercise
price on a current basis. A put option written by the Fund requires the Fund to
segregate cash and liquid securities equal to the exercise price.
OTC options entered into by the Fund, including those on securities,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of cash and liquid
securities equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out cash and liquid securities equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, and the Fund will segregate
an amount of cash and liquid securities equal to the full value of the option.
OTC options settling with physical delivery, or with an election of either
physical delivery or cash settlement, will be treated the same as other options
settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash and liquid securities sufficient to meet its obligation to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract.
With respect to swaps, the Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of cash and liquid securities with a value equal to the Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash and
liquid securities, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating cash and liquid
securities if the Fund held a futures or forward contract, it could purchase a
put option on the same futures or forward contract with a strike price as high
or higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction no segregation is required, but if it
terminates prior to such time, cash and liquid securities equal to any remaining
obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by
the requirements of the Code for qualification as a regulated investment
company.
B-11
<PAGE> 508
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may also purchase and sell municipal securities on a "when-issued"
and "delayed delivery" basis. No income accrues to the Fund on municipal
securities in connection with such transactions prior to the date the Fund
actually takes delivery of such securities. These transactions are subject to
market fluctuation; the value of the municipal securities at delivery may be
more or less than their purchase price, and yields generally available on
municipal securities when delivery occurs may be higher or lower than yields on
the municipal securities obtained pursuant to such transactions. Because the
Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. When the Fund is the buyer in such a transaction, however, it
will maintain, in a segregated account with its custodian, cash or liquid
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. The Fund will make commitments to purchase
municipal securities on such basis only with the intention of actually acquiring
these securities, but the Fund may sell such securities prior to the settlement
date if such sale is considered to be advisable. To the extent the Fund engages
in "when-issued" and "delayed delivery" transactions, it will do so for the
purpose of acquiring securities for the Fund's portfolio consistent with the
Fund's investment objectives and policies and not for the purposes of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when-issued" or "delayed
delivery" basis.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The Fund's portfolio turnover rate (the lesser of
the value of the securities purchased or securities sold divided by the average
value of the securities held in the Fund's portfolio excluding all securities
whose maturities at acquisition were one year or less) is shown in the table of
"Financial Highlights" in the Prospectus. A high portfolio turnover rate (100%
or more) increases the Fund's transaction costs, including brokerage
commissions, and may result in the realization of more short-term capital gains
than if the Fund had a lower portfolio turnover. The turnover rate will not be a
limiting factor, however, if the Adviser deems portfolio changes appropriate.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities,
which includes securities that are not readily marketable, repurchase agreements
which have a maturity of longer than seven days and generally includes
securities that are restricted from sale to the public without registration
under the Securities Act of 1933, as amended (the "1933 Act"). The sale of such
securities often requires more time and results in higher brokerage charges or
dealer discounts and other selling expenses than does the sale of liquid
securities trading on national securities exchanges or in the over-the-counter
markets. Restricted securities are often purchased at a discount from the market
price of unrestricted securities of the same issuer reflecting the fact that
such securities may not be readily marketable without some time delay.
Investments in securities which have no ready market are valued at fair value as
determined in good faith by the Adviser in accordance with procedures approved
by the Fund's Trustees. Ordinarily, the Fund would invest in restricted
securities only when it receives the issuer's commitment to register the
securities without expense to the Fund. However, registration and underwriting
expenses (which may range from 7% to 15% of the gross proceeds of the securities
sold) may be paid by the Fund. Restricted securities which can be offered and
sold to qualified institutional buyers under Rule 144A under the 1933 Act ("144A
Securities") and are determined to be liquid under guidelines adopted by and
subject to the supervision of the Fund's Board of Trustees are not subject to
the limitation on illiquid securities. Such 144A Securities are subject to
monitoring and may become illiquid to the extent qualified institutional buyers
become, for a time, uninterested in purchasing such securities. Factors used to
determine whether 144A Securities are liquid include, among other things, a
security's trading
B-12
<PAGE> 509
history, the availability of reliable pricing information, the number of dealers
making quotes or making a market in such security and the number of potential
purchasers in the market for such security. For purposes hereof, investments by
the Fund in securities of other investment companies will not be considered
investments in restricted securities to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption
or other relief from the provisions of the 1940 Act.
B-13
<PAGE> 510
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without approval by the vote of a majority of its
outstanding voting shares, which is defined by the 1940 Act as the lesser of (i)
67% or more of the voting securities present in person or by proxy at the
meeting, if the holders of more than 50% of the outstanding voting securities
are present in person or by proxy; or (ii) more than 50% of the outstanding
voting securities. The Fund may not:
1. With respect to 75% of its total assets, purchase any securities (other
than obligations guaranteed by the United States Government or by its
agencies or instrumentalities), if, as a result, more than 5% of the
Fund's total assets (determined at the time of investment) would then be
invested in securities of a single issuer or, if, as a result, the Fund
would hold more than 10% of the outstanding voting securities of an
issuer, except that the Fund may purchase securities of other investment
companies to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC
under the 1940 Act, as amended from time to time, or (iii) an exemption
or other relief from the provisions of the 1940 Act.
2. Invest more than 25% of its assets in a single industry; however, the
Fund may from time to time invest more than 25% of its assets in a
particular segment of the municipal securities market; however, the Fund
will not invest more than 25% of its assets in industrial development
bonds in a single industry; and except that the Fund may purchase
securities of other investment companies to the extent permitted by (i)
the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions
of the 1940 Act.
3. Borrow money, except from banks for temporary purposes and then in
amounts not in excess of 5% of the total asset value of the Fund, or
mortgage, pledge, or hypothecate any assets except in connection with a
borrowing and in amounts not in excess of 10% of the total asset value
of the Fund. Borrowings may not be made for investment leverage, but
only to enable the Fund to satisfy redemption requests where liquidation
of portfolio securities is considered disadvantageous or inconvenient.
In this connection, the Fund will not purchase portfolio securities
during any period that such borrowings exceed 5% of the total asset
value of the Fund. Notwithstanding this investment restriction, the Fund
may enter into when issued and delayed delivery transactions.
4. Make loans of money or property, except to the extent the obligations
the Fund may invest in are considered to be loans and except to the
extent that the Fund may lend money or property in connection with
maintenance of the value of or the Fund's interest with respect to the
securities owned by the Fund.
5. Buy any securities "on margin." Neither the deposit of initial or
maintenance margin in connection with Strategic Transactions nor short
term credits as may be necessary for the clearance of transactions is
considered the purchase of a security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other
financial futures or index contracts or related options, except in
connection with Strategic Transactions in accordance with the
requirements of the SEC and the Commodity Futures Trading Commission.
7. Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of securities
held in its portfolio.
8. Make investments for the purpose of exercising control or participation
in management, except to the extent that exercise by the Fund of its
rights under agreements related to municipal securities would be deemed
to constitute such control or participation and except that the Fund may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
B-14
<PAGE> 511
9. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except that the
Fund may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
10. Invest in oil, gas or mineral leases or in equity interests in oil,
gas, or other mineral exploration or development programs except
pursuant to the exercise by the Fund of its rights under agreements
relating to municipal securities.
11. Purchase or sell real estate, commodities or commodity contracts,
except to the extent that the securities that the Fund may invest in
are considered to be interests in real estate, commodities or commodity
contracts or to the extent the Fund exercises its rights under
agreements relating to such municipal securities (in which case the
Fund may liquidate real estate acquired as a result of a default on a
mortgage), and except to the extent that Strategic Transactions the
Fund may engage in are considered to be commodities or commodities
contracts.
As long as the percentage restrictions described above are satisfied at the
time of the investment or borrowing, the Fund will be considered to have abided
by those restrictions even if, at a later time, a change in values or net assets
causes an increase or decrease in percentage beyond that allowed.
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and officers of the Fund and
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with Van
Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment
Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Management
Inc., Van Kampen Advisors Inc., Van Kampen Insurance Agency of Illinois Inc.,
Van Kampen Insurance Agency of Texas Inc., Van Kampen System Inc., Van Kampen
Recordkeeping Services Inc., American Capital Contractual Services, Inc., Van
Kampen Trust Company, Van Kampen Exchange Corp. and Van Kampen Investor Services
Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are
referred to herein collectively as the "Advisers". For purposes hereof, the term
"Fund Complex" includes each of the open-end investment companies advised by the
Advisers (excluding Van Kampen Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee/Director of each of the
funds in the Fund Complex.
</TABLE>
B-15
<PAGE> 512
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Richard M. DeMartini*..................... Chairman and Chief Executive Officer of International
Two World Trade Center Private Client Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Chairman of Dean Witter Futures & Currency
New York, NY 10048 Management Inc. and Demeter Management Corporation.
Date of Birth: 10/12/52 Director of Dean Witter Reynolds Inc. Chairman and
Director of Dean Witter Capital Corporation. Chairman,
Chief Executive Officer, President and a Director of Dean
Witter Alliance Capital Corporation, Director of the
National Healthcare Resources, Inc., Morgan Stanley Dean
Witter Distributors, Inc., Dean Witter Realty Inc., Dean
Witter Reynolds Venture Equities Inc., DW Window Covering
Holding, Inc., and is a member of the Morgan Stanley Dean
Witter Management Committee. Prior to December of 1998,
Mr. DeMartini was President and Chief Operating Officer
of Morgan Stanley Dean Witter Individual Asset Management
and a Director of Morgan Stanley Dean Witter Trust FSB.
Formerly Vice Chairman of the Board of the National
Association of Securities Dealers, Inc. and Chairman of
the Board of the Nasdaq Stock Market, Inc. Trustee of the
TCW/DW Funds, Director of the Morgan Stanley Dean Witter
Funds and Trustee/Director of each of the funds in the
Fund Complex.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board,
Vice Chair of the Board of The YMCA of Metropolitan
Chicago and a member of the Women's Board of the
University of Chicago. Prior to 1996, Trustee of The
International House Board. Trustee/Director of each of
the funds in the Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and Member of the Investment Committee
of the Joyce Foundation, a private foundation.
Trustee/Director of each of the funds in the Fund
Complex.
</TABLE>
B-16
<PAGE> 513
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee/Director of each of
the funds in the Fund Complex.
Don G. Powell*............................ Currently a member of the board of governors and
3 Wexford Court executive committee for the Investment Company Institute,
Houston, TX 77024 and a member of the Board of Trustees of the Houston
Date of Birth: 10/19/39 Museum of Natural Science. Immediate past Chairman of the
Investment Company Institute. Prior to January 1999,
Chairman and a Director of Van Kampen Investments, the
Advisers, the Distributor and Investor Services and
Director or officer of certain other subsidiaries of Van
Kampen Investments. Prior to July of 1998, Director and
Chairman of VK/AC Holding, Inc. Prior to November 1996,
President, Chief Executive Officer and a Director of
VK/AC Holding, Inc. Trustee/Director of each of the funds
in the Fund Complex and Trustee of other funds advised by
the Advisers or Van Kampen Management Inc.
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer services company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company and
Date of Birth: 07/08/44 the Urban Shopping Centers Inc., a retail mall management
company. Trustee, University of Notre Dame. Prior to
1998, Director of Stone Smurfit Container Corp., a paper
manufacturing company. Formerly, President, Chief
Executive Officer and Chief Operating Officer of Waste
Management, Inc., an environmental services company.
Trustee/Director of each of the funds in the Fund
Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen Management Inc.
Trustee/Director of each of the funds in the Fund
Complex, and Trustee/Managing General Partner of other
open-end and closed-end funds advised by the Advisers or
Van Kampen Management Inc.
Paul G. Yovovich.......................... Private investor. Prior to April 1996, President of
Sears Tower Advance Ross Corporation. Director of 3Com Corporation,
233 South Wacker Drive APAC Teleservices, Inc., and COMARCO, Inc.
Suite 9700 Trustee/Director of each of the Funds in the Fund
Chicago, IL 60606 Complex.
Date of Birth: 10/29/53
</TABLE>
- ------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
current or former positions with Morgan Stanley Dean Witter & Co. or its
affiliates.
B-17
<PAGE> 514
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Sullivan, Wood, Dalmaso, Martin,
Wetherell and Hill are located at 1 Parkview Plaza, PO Box 5555, Oakbrook
Terrace, IL 60181-5555. The Fund's other officers are located at 2800 Post Oak
Blvd., Houston, TX 77056.
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Dennis J. McDonnell.................. Executive Vice President and a Director of Van Kampen
Date of Birth: 05/20/42 Investments. President, Chief Operating Officer and a
President Director of the Advisers, Van Kampen Advisors Inc., and Van
Kampen Management Inc. Prior to July of 1998, Director and
Executive Vice President of VK/AC Holding, Inc. Prior to
April of 1998, President and a Director of Van Kampen
Merritt Equity Advisors Corp. Prior to April of 1997, Mr.
McDonnell was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996, Mr. McDonnell was
Chief Executive Officer and Director of MCM Group, Inc.,
McCarthy, Crisanti & Maffei, Inc. and Chairman and Director
of MCM Asia Pacific Company, Limited and MCM (Europe)
Limited. Prior to July of 1996, Mr. McDonnell was President,
Chief Operating Officer and Trustee of VSM Inc. and VCJ Inc.
President of each of the funds in the Fund Complex.
President, Chairman of the Board and Trustee/Managing
General Partner of other investment companies advised by the
Advisers or their affiliates.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Prior to July
Vice President of 1996, Mr. Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of McCarthy, Crisanti &
Maffei, Inc. Vice President of each of the funds in the Fund
Complex and certain other investment companies advised by
the Advisers or their affiliates.
John L. Sullivan..................... First Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Treasurer, Vice President and Chief Financial
Treasurer, Vice President and Chief Officer of each of the funds in the Fund Complex and certain
Financial Officer other investment companies advised by the Advisers or their
affiliates.
Curtis W. Morell..................... Senior Vice President of the Advisers, Vice President and
Date of Birth: 08/04/46 Chief Accounting Officer of each of the funds in the Fund
Vice President and Chief Accounting Complex and certain other investment companies advised by
Officer the Advisers or their affiliates.
</TABLE>
B-18
<PAGE> 515
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Ronald A. Nyberg..................... Executive Vice President, General Counsel, Secretary and
Date of Birth: 07/29/53 Director of Van Kampen Investments. Mr. Nyberg is Executive
Vice President and Secretary Vice President, General Counsel, Assistant Secretary and a
Director of the Advisers and the Distributor, Van Kampen
Advisors Inc., Van Kampen Management Inc., Van Kampen
Exchange Corp., American Capital Contractual Services, Inc.
and Van Kampen Trust Company. Executive Vice President,
General Counsel and Assistant Secretary of Investor Services
and River View International Inc. Director or officer of
certain other subsidiaries of Van Kampen Investments.
Director of ICI Mutual Insurance Co., a provider of
insurance to members of the Investment Company Institute.
Prior to July of 1998, Director and Executive Vice
President, General Counsel and Secretary of VK/AC Holding,
Inc. Prior to April of 1998, Executive Vice President,
General Counsel and Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he was Executive Vice
President, General Counsel and a Director of Van Kampen
Merritt Equity Holdings Corp. Prior to September of 1996, he
was General Counsel of McCarthy, Crisanti & Maffei, Inc.
Prior to July of 1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc. and Executive Vice
President and General Counsel of VCJ Inc. Vice President and
Secretary of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Paul R. Wolkenberg................... Executive Vice President and Director of Van Kampen
Date of Birth: 11/10/44 Investments. Executive Vice President of Asset Management
Vice President and the Distributor. President and a Director of Investor
Services. President and Chief Operating Officer of Van
Kampen Recordkeeping Services Inc. Prior to July of 1998,
Director and Executive Vice President of VK/AC Holding, Inc.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Edward C. Wood III................... Senior Vice President of the Advisers, Van Kampen
Date of Birth: 01/11/56 Investments and Van Kampen Management Inc. Senior Vice
Vice President President and Chief Operating Officer of the Distributor.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Tanya M. Loden....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 11/19/59 Controller of each of the funds in the Fund Complex and
Controller other investment companies advised by the Advisers or their
affiliates.
Nicholas Dalmaso..................... Associate General Counsel and Assistant Secretary of Van
Date of Birth: 03/01/65 Kampen Investments. Vice President, Associate General
Assistant Secretary Counsel and Assistant Secretary of the Advisers, the
Distributor, Van Kampen Advisors Inc. and Van Kampen
Management Inc. Assistant Secretary of each of the funds in
the Fund Complex and other investment companies advised by
the Advisers or their affiliates.
</TABLE>
B-19
<PAGE> 516
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Scott E. Martin...................... Senior Vice President, Deputy General Counsel and Assistant
Date of Birth: 08/20/56 Secretary of Van Kampen Investments. Senior Vice President,
Assistant Secretary Deputy General Counsel and Secretary of the Advisers, the
Distributor, Investor Services, American Capital Contractual
Services, Inc., Van Kampen Management Inc., Van Kampen
Exchange Corp., Van Kampen Advisors Inc., Van Kampen
Insurance Agency of Illinois Inc., Van Kampen System Inc.
and Van Kampen Recordkeeping Services Inc. Prior to July of
1998, Senior Vice President, Deputy General Counsel and
Assistant Secretary of VK/AC Holding, Inc. Prior to April of
1998, Van Kampen Merritt Equity Advisors Corp. Prior to
April of 1997, Senior Vice President, Deputy General Counsel
and Secretary of Van Kampen American Capital Services, Inc.
and Van Kampen Merritt Holdings Corp. Prior to September of
1996, Mr. Martin was Deputy General Counsel and Secretary of
McCarthy, Crisanti & Maffei, Inc., and prior to July of
1996, he was Senior Vice President, Deputy General Counsel
and Secretary of VSM Inc. and VCJ Inc. Assistant Secretary
of each of the funds in the Fund Complex and other
investment companies advised by the Advisers or their
affiliates.
Weston B. Wetherell.................. Vice President, Associate General Counsel and Assistant
Date of Birth: 06/15/56 Secretary of Van Kampen Investments, the Advisers, the
Assistant Secretary Distributor, Van Kampen Management Inc. and Van Kampen
Advisors Inc. Prior to September of 1996, Mr. Wetherell was
Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.
Assistant Secretary of each of the funds in the Fund Complex
and other investment companies advised by the Advisers or
their affiliates.
Steven M. Hill....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 10/16/64 Assistant Treasurer of each of the funds in the Fund Complex
Assistant Treasurer and other investment companies advised by the Advisers or
their affiliates.
Michael Robert Sullivan.............. Assistant Vice President of the Advisers. Assistant
Date of Birth: 03/30/33 Controller of each of the funds in the Fund Complex and
Assistant Controller other investment companies advised by the Advisers or their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 65 operating funds in the Fund Complex. Each trustee/director who is not an
affiliated person of Van Kampen Investments, the Advisers or the Distributor
(each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex (except the money market series of the Van Kampen Series Fund,
Inc.) provides a deferred compensation plan to its Non-Affiliated Trustees that
allows trustees/directors to defer receipt of their compensation and earn a
return on such deferred amounts. Deferring compensation has the economic effect
as if the Non-Affiliated Trustee reinvested his or her compensation into the
funds. Each fund in the Fund Complex (except the money market series of the Van
Kampen Series Fund, Inc.) provides a retirement plan to its Non-Affiliated
Trustees that provides Non-Affiliated Trustees with compensation after
retirement, provided that certain eligibility requirements are met as more fully
described below.
Effective January 1, 1998, the trustees adopted a standardized compensation
and benefits program for each fund in the Fund Complex. The compensation of each
Non-Affiliated Trustee includes an annual retainer in an amount equal to $50,000
per calendar year, due in four quarterly installments on the first business day
of each quarter. Payment of the annual retainer is allocated among the funds in
the Fund Complex (except the money market series of the Van Kampen Series Fund,
Inc.) on the basis of the relative
B-20
<PAGE> 517
net assets of each fund as of the last business day of the preceding calendar
quarter. The compensation of each Non-Affiliated Trustee includes a per meeting
fee from each fund in the Fund Complex (except the money market series of the
Van Kampen Series Fund, Inc.) in the amount of $200 per quarterly or special
meeting attended by the Non-Affiliated Trustee, due on the date of the meeting,
plus reasonable expenses incurred by the Non-Affiliated Trustee in connection
with his or her services as a trustee, provided that no compensation will be
paid in connection with certain telephonic special meetings.
Under the deferred compensation plan, each Non-Affiliated Trustee generally
can elect to defer receipt of all or a portion of the compensation earned by
such Non-Affiliated Trustee until retirement. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to the return on the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
----------------------------------------------------------
AGGREGATE AGGREGATE TOTAL
PENSION OR ESTIMATED MAXIMUM COMPENSATION
AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan $9,790 $35,691 $60,000 $125,200
Linda Hutton Heagy 8,390 3,861 60,000 112,800
R. Craig Kennedy 9,790 2,652 60,000 125,200
Jack E. Nelson 9,790 18,385 60,000 125,200
Phillip B. Rooney 9,790 6,002 60,000 125,200
Dr. Fernando Sisto 9,790 68,615 60,000 125,200
Wayne W. Whalen 9,790 12,658 60,000 125,200
Paul G. Yovovich(1) 0 0 60,000 25,300
</TABLE>
- ---------------
(1) Mr. Paul G. Yovovich became a member of the Board of Trustees effective
October 22, 1998 and thus does not have a full fiscal year of information to
report. Trustees not eligible for compensation or retirement benefits are
not shown in the table.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Trust's fiscal period ended September 30, 1998.
The detail of aggregate compensation before deferral for each series,
including the Fund, is shown in Table A below. The detail of amounts
deferred for each series, including the Fund, is shown in Table B below.
Amounts deferred are retained by the Fund and earn a rate of return
determined by reference to either the return on the common shares of the
Fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic
B-21
<PAGE> 518
effect as if such Non-Affiliated Trustee had invested in one or more funds
in the Fund Complex. To the extent permitted by the 1940 Act, each Fund may
invest in securities of those funds selected by the Non-Affiliated Trustees
in order to match the deferred compensation obligation. The detail of
cumulative deferred compensation (including interest) owed to current
Trustees by each series, including the Fund, is shown in Table C below. The
deferred compensation plan is described above the Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for their respective fiscal years ended in 1998. The retirement
plan is described above the Compensation Table.
(4) This is the sum of the estimated maximum annual benefits payable by the
operating investment companies in the Fund Complex for each year of the
10-year period commencing in the year of such trustee's anticipated
retirement. The Retirement Plan is described above the Compensation Table.
Each Non-Affiliated Trustee of the Board of Trustees has served as a member
of the Board of Trustees since he or she was first appointed or elected in
the year set forth in Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1998 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1998. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
trustees were not trustees of such investment companies. Combining the Fund
Complex with other investment companies advised by the Advisers and their
affiliates, Mr. Whalen received Total Compensation of $285,825 during the
calendar year ended December 31, 1998.
As of January 4, 1999, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
B-22
<PAGE> 519
TABLE A
1998 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL --------------------------------------------------------------------------
FUND NAME YEAR-END* BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............. 9/30 $2,352 $2,152 $2,352 $2,352 $2,352 $2,352 $2,352 $0
Tax Free High Income Fund................ 9/30 1,961 1,761 1,961 1,961 1,961 1,961 1,961 0
California Insured Tax Free Fund......... 9/30 1,005 805 1,005 1,005 1,005 1,005 1,005 0
Municipal Income Fund.................... 9/30 1,931 1,731 1,931 1,931 1,931 1,931 1,931 0
Intermediate Term Municipal Income
Fund................................... 9/30 841 641 841 841 841 841 841 0
Florida Insured Tax Free Income Fund..... 9/30 858 658 858 858 858 858 858 0
New York Tax Free Income Fund............ 9/30 842 642 842 842 842 842 842 0
------ ------ ------ ------ ------ ------ ------ --
Trust Total............................ $9,790 $8,390 $9,790 $9,790 $9,790 $9,790 $9,790 $0
====== ====== ====== ====== ====== ====== ====== ==
</TABLE>
*In 1998, the Fund changed its fiscal year-end from December 31 to September
30. Accordingly, the information reported in this column represents information
for the nine-month fiscal period ended September 30, 1998.
TABLE B
1998 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL --------------------------------------------------------------------------
FUND NAME YEAR-END* BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............. 9/30 $2,352 $2,152 $1,176 $2,352 $2,352 $1,176 $2,352 $0
Tax Free High Income Fund................ 9/30 1,961 1,761 981 1,961 1,961 981 1,961 0
California Insured Tax Free Fund......... 9/30 1,005 805 503 1,005 1,005 503 1,005 0
Municipal Income Fund.................... 9/30 1,931 1,731 966 1,931 1,931 966 1,931 0
Intermediate Term Municipal Income
Fund................................... 9/30 841 641 421 841 841 421 841 0
Florida Insured Tax Free Income Fund..... 9/30 858 658 429 858 858 429 858 0
New York Tax Free Income Fund............ 9/30 842 642 421 842 842 421 842 0
------ ------ ------ ------ ------ ------ ------ --
Trust Total............................ $9,790 $8,390 $4,897 $9,790 $9,790 $4,897 $9,790 $0
====== ====== ====== ====== ====== ====== ====== ==
</TABLE>
*In 1998, the Fund changed its fiscal year-end from December 31 to September
30. Accordingly, the information reported in this column represents information
for the nine-month fiscal period ended September 30, 1998.
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEES
FISCAL --------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- -------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund..................... 9/30 $ 6,579 $ 8,672 $12,057 $ 17,744 $ 3,758 $ 4,177 $15,328 $0
Tax Free High Income
Fund..................... 9/30 6,211 8,299 11,879 17,384 3,388 2,473 14,960 0
California Insured Tax Free
Fund..................... 9/30 5,320 7,393 11,446 16,513 2,492 2,035 14,067 0
Municipal Income Fund...... 9/30 7,043 9,700 15,366 22,215 3,622 8,799 19,040 0
Intermediate Term Municipal
Income Fund.............. 9/30 5,166 7,238 11,372 16,363 2,337 1,959 13,913 0
Florida Insured Tax Free
Income Fund.............. 9/30 5,183 7,254 7,093 11,846 2,354 1,967 10,870 0
New York Tax Free Income
Fund..................... 9/30 2,288 1,814 3,430 5,111 1,700 958 4,413 0
------- ------- ------- -------- ------- ------- ------- --
Trust Total............ $37,790 $50,370 $72,643 $107,176 $19,651 $22,368 $92,591 $0
======= ======= ======= ======== ======= ======= ======= ==
<CAPTION>
FORMER TRUSTEES
-----------------------------------------------------------------
FUND NAME CARUSO GAUGHAN LIPSHIE MILLER REES ROBINSON VERNON
--------- ------ ------- ------- ------ ---- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund..................... $2,695 $1,985 $ 212 $ 9,164 $ 0 $13,380 $ 327
Tax Free High Income
Fund..................... 0 1,985 0 9,164 0 13,380 0
California Insured Tax Free
Fund..................... 0 1,985 0 9,164 0 13,380 0
Municipal Income Fund...... 5,804 2,455 961 12,382 7,502 17,483 1,287
Intermediate Term Municipal
Income Fund.............. 0 1,985 0 9,164 0 13,380 0
Florida Insured Tax Free
Income Fund.............. 0 927 0 5,817 0 9,599 0
New York Tax Free Income
Fund..................... 0 295 0 2,344 0 3,740 0
------ ------- ------ ------- ------ ------- ------
Trust Total............ $8,499 $11,617 $1,173 $57,199 $7,502 $84,342 $1,614
====== ======= ====== ======= ====== ======= ======
</TABLE>
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------
FUND NAME BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......................... 1995 1995 1993 1984 1997 1995 1984 1998
Tax Free High Income Fund............................ 1995 1995 1993 1985 1997 1995 1985 1998
California Insured Tax Free Fund..................... 1995 1995 1993 1985 1997 1995 1985 1998
Municipal Income Fund................................ 1995 1995 1993 1990 1997 1995 1990 1998
Intermediate Term Municipal Income Fund.............. 1995 1995 1993 1993 1997 1995 1993 1998
Florida Insured Tax Free Income Fund................. 1995 1995 1994 1994 1997 1995 1994 1998
New York Tax Free Income Fund........................ 1995 1995 1994 1994 1997 1995 1994 1998
</TABLE>
B-23
<PAGE> 520
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate and
implement the Fund's investment objectives. The Adviser also furnishes the
services of the Fund's President and such other executive and clerical personnel
as are necessary to prepare the various reports and statements and conduct the
Fund's day-to-day operations. The Fund, however, bears the cost of its
accounting services, which include maintaining its financial books and records
and calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of the Fund's Treasurer and the
personnel operating under his direction. Charges are allocated among the
investment companies advised or subadvised by the Adviser or its affiliates. A
portion of these amounts is paid to the Adviser or its affiliates in
reimbursement of personnel, office space, facilities and equipment costs
attributable to the provision of accounting services to the Fund. See
"Accounting Services Agreement" below. The Fund also pays distribution fees,
service fees, custodian fees, legal and auditing fees, the costs of reports to
shareholders, and all other ordinary business expenses not specifically assumed
by the Adviser. The Advisory Agreement also provides that the Adviser shall not
be liable to the Fund for any error of judgment or of law, or for any loss
suffered by the Fund in connection with the matters to which the agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence on the part of the Adviser in the performance of its obligations and
duties, or by reason of its reckless disregard of its obligations and duties
under the agreement.
Under the Advisory Agreement, the Fund pays to the Adviser, as compensation
for the services rendered, facilities furnished, and expenses paid by it, a
monthly fee payable computed based upon an annual rate applied to the average
daily net assets of the Fund as follows: 0.50% on the first $500 million of
average daily net assets and 0.45% on the average daily net assets over $500
million.
The Fund's average net assets are determined by taking the average of all
of the determinations of the net assets during a given calendar month. Such fee
is payable for each calendar month as soon as practicable after the end of that
month.
The Advisory Agreement also provides that, in the event the annual expenses
of the Fund for any fiscal year exceed the most stringent limit in any state in
which the Fund's shares are offered for sale, the compensation due the Adviser
will be reduced by the amount of such excess and that, if a reduction in and
refund of the advisory fee is insufficient, the Adviser will pay the Fund
monthly an amount sufficient to make up the deficiency, subject to readjustment
during the year.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on 60 days' written notice.
During the fiscal period ended September 30, 1998 and the fiscal years
ended December 31, 1997 and 1996, the Adviser received $139,295, $164,970 and
$176,896, respectively, in advisory fees from the Fund.
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which Advisory Corp. provides accounting services
to the Fund. The Fund shares together with the other Van Kampen funds in the
cost of providing such services, with 25% of such costs shared proportionately
based on the respective number of classes of securities issued per fund and the
remaining 75% of such cost based proportionally on their respective net assets
per fund.
B-24
<PAGE> 521
During the fiscal period ended September 30, 1998 and the fiscal years
ended December 31, 1997 and 1996, Advisory Corp. received approximately $45,400,
$36,000 and $8,900, respectively, in accounting services fees from the Fund.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen funds
advised by the Adviser and distributed by the Distributor have entered into
Legal Services Agreements pursuant to which Van Kampen Investments provides
legal services, including without limitation: accurate maintenance of the fund's
minute books and records, preparation and oversight of the fund's regulatory
reports, and other information provided to shareholders, as well as responding
to day-to-day legal issues on behalf of the funds. Payment by the Fund for such
services is made on a cost basis for the salary and salary related benefits,
including but not limited to bonuses, group insurance and other regular wages
for the employment of personnel, as well as overhead and the expenses related to
the office space and the equipment necessary to render the legal services. Other
funds distributed by the Distributor also receive legal services from Van Kampen
Investments. Of the total costs for legal services provided to funds distributed
by the Distributor, one half of such costs are allocated equally to each fund
and the remaining one half of such costs are allocated to specific funds based
on monthly time records.
During the fiscal period ended September 30, 1998 and the fiscal years
ended December 31, 1997 and 1996, Van Kampen Investments received approximately
$1,700, $7,200 and $7,800, respectively, in legal services fees from the Fund.
DISTRIBUTION AND SERVICE
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Fund through
authorized dealers on a continuous basis. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required to
take and pay for only such shares of the Fund as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and certain other costs including the cost of
supplemental sales literature and advertising. The Distribution and Service
Agreement is renewable from year to year if approved (a)(i) by the Fund's
Trustees or (ii) by the affirmative vote of a majority of the Fund's outstanding
voting securities and (b) by the affirmative vote of a majority of Trustees who
are not parties to the Distribution and Service Agreement or interested persons
of any party, by votes cast in person at a meeting called for such purpose. The
Distribution and Service Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on 90 days'
written notice. Total underwriting commissions on the sale of shares of the Fund
for the last three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
TOTAL UNDER- AMOUNTS
WRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------ --------------
<S> <C> <C>
Fiscal Period Ended September 30, 1998...................... $100,892 $ 3,044
Fiscal Year Ended December 31, 1997......................... $ 10,982 $ 636
Fiscal Year Ended December 31, 1996......................... $ 15,585 $ 1,844
</TABLE>
B-25
<PAGE> 522
With respect to sales of Class A Shares of the Fund, the total sales
charges and concessions reallowed to authorized dealers at the time of purchase
are as follows:
CLASS A SHARES SALES CHARGE TABLE
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-------------------------------------------------
REALLOWED TO
AS % OF NET DEALERS AS
AS % OF AMOUNT A % OF
SIZE OF INVESTMENT OFFERING PRICE INVESTED OFFERING PRICE
------------------ ------------------ ----------- --------------
<S> <C> <C> <C>
Less than $25,000...................................... 3.25% 3.36% 3.00%
$25,000 but less than $250,000......................... 2.75% 2.83% 2.50%
$250,000 but less than $500,000........................ 1.75% 1.78% 1.50%
$500,000 but less than $1,000,000...................... 1.50% 1.52% 1.25%
$1,000,000 or more..................................... * * *
</TABLE>
- ---------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a deferred
sales charge of 1.00% on certain redemptions made within one year of the
purchase. A commission or transaction fee will be paid by the Distributor at
the time of purchase directly out of the Distributor's assets (and not out of
the Fund's assets) to authorized dealers who initiate and are responsible for
purchases of $1 million or more computed based on a percentage of the dollar
value of such shares sold as follows: 1.00% on sales to $2 million, plus 0.80%
on the next $1 million and 0.50% on the excess over $3 million.
With respect to sales of Class B Shares and Class C Shares of the Fund, a
commission or transaction fee generally will be paid by the Distributor at the
time of purchase directly out of the Distributor's assets (and not out of the
Fund's assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 3.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any deferred sales charge and any distribution fees on Class
B Shares and Class C Shares of the Fund are paid to the Distributor and are used
by the Distributor to defray its distribution related expenses in connection
with the sale of the Fund's shares, such as the payment to authorized dealers
for selling such shares. With respect to Class C Shares, the authorized dealers
generally are paid the ongoing commission and transaction fees of up to 0.75% of
the average daily net assets of the Fund's Class C Shares annually commencing in
the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any authorized dealer that sponsors
sales contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the authorized dealer at the public offering price during such programs.
Other programs provide, among other things and subject to certain conditions,
for certain favorable distribution arrangements for shares of the Fund. Also,
the Distributor in its discretion may from time to time, pursuant to objective
criteria established by the Distributor, pay fees to, and sponsor business
seminars for, qualifying authorized dealers for certain services or activities
which are primarily intended to result in sales of shares of the Fund. Fees may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives for meetings or seminars
of a business nature. In some instances additional compensation or promotional
incentives may be offered to brokers, dealers or financial intermediaries that
have sold or may sell significant amounts of shares during specified periods of
time. The Distributor may provide additional compensation to Edward D. Jones &
Co. or an affiliate thereof based on a combination of its sales of shares and
increases in assets under management. All of the foregoing payments are made by
the Distributor out of its own assets. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of the Fund on an annual basis. These
programs will not change the price an investor will pay for shares or the amount
that a Fund will receive from such sale.
B-26
<PAGE> 523
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. State securities
laws regarding registration of banks and other financial institutions may differ
from the interpretations of federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to
certain state laws.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans". The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Distribution Plan and the Service Plan are being implemented
through an agreement (the "Distribution and Service Agreement") with the
Distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance, which may include, but not
be limited to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
The Distributor must submit quarterly reports to the Board of Trustees of
the Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Distribution Plan and the purposes for which
such expenditures were made, together with such other information as from time
to time is reasonably requested by the Trustees. The Plans provide that they
will continue in full force and effect from year to year so long as such
continuance is specifically approved by a vote of the Trustees, and also by a
vote of the disinterested Trustees, cast in person at a meeting called for the
purpose of voting on the Plans. Each of the Plans may not be amended to increase
materially the amount to be spent for the services described therein with
respect to any class of shares without approval by a vote of a majority of the
outstanding voting shares of such class, and all material amendments to either
of the Plans must be approved by the Trustees and also by the disinterested
Trustees. Each of the Plans may be terminated with respect to any class of
shares at any time by a vote of a majority of the disinterested Trustees or by a
vote of a majority of the outstanding voting shares of such class.
The Plans generally provide for the Fund to reimburse the lesser of (i) the
distribution and service fees at the rates specified in the prospectus or (ii)
the amount of the Distributor's actual expenses incurred less any deferred sales
charges it received. For Class A Shares, to the extent the Distributor is not
fully reimbursed in a given year, there is no carryover of such unreimbursed
amounts to succeeding years. For each of the Class B Shares and Class C Shares,
to the extent the Distributor is not fully reimbursed in a given year, any
unreimbursed expenses for such class will be carried forward and paid by the
Fund in future years so long as such Plans are in effect. Except as mandated by
applicable law, the Fund does not impose any limit with respect to the number of
years into the future that such unreimbursed expenses may be carried forward (on
a Fund level basis). Because such expenses are accounted on a Fund level basis,
in periods of extreme net asset value fluctuation such amounts with respect to a
particular Class B Share of Class C Share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such share. In such circumstances, a shareholder of a share may be
deemed to incur expenses attributable to other shareholders of such class. As of
September 30, 1998, there were $6,333 and $2,850 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 0.04% and 0.09% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Plan were terminated
or not continued, the Fund would not be contractually obligated to
B-27
<PAGE> 524
pay the Distributor for any expenses not previously reimbursed by the Fund or
recovered through deferred sales charge.
Because the Fund is a series of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one series of the Trust may indirectly benefit
the other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution-related expenses
attributable to any other class of shares.
For the fiscal period ended September 30, 1998, the Fund's aggregate
expenses under the Plans for Class A Shares were $31,089 or 0.25% of the Class A
Shares' average daily net assets. Such expenses were paid to reimburse the
Distributor for payments made to financial intermediaries for servicing Fund
shareholders and for administering the Plans. For the fiscal period ended
September 30, 1998, the Fund's aggregate expenses under the Class B Plan were
$119,822 or 1.00% of the Class B Shares' average net assets. Such expenses were
paid to reimburse the Distributor for the following payments: $89,611 for
commissions and transaction fees paid to financial intermediaries in respect of
sales of Class B Shares of the Fund and $30,211 for fees paid to financial
intermediaries for servicing Class B shareholders and administering the Plans.
For the fiscal period ended September 30, 1998, the Fund's aggregate expenses
under the Plans for Class C Shares were $22,783 or 1.00% of the Class C Shares'
average net assets. Such expenses were paid to reimburse the Distributor for the
following payments; $8,847 for commissions and transaction fees paid to
financial intermediaries in respect of sales of Class C Shares of the Fund and
$13,936 for fees paid to financial intermediaries for servicing Class C
shareholders and administering the Class C Plan.
TRANSFER AGENT
The Fund's transfer agent is Van Kampen Investor Services Inc., PO Box
418256, Kansas City, MO 64141-9256. During the fiscal period ended September 30,
1998 and the fiscal years ended December 31, 1997 and 1996, Investor Services,
shareholder service agent and dividend disbursing agent for the Fund, received
fees aggregating approximately $14,400, $28,200 and $35,600, respectively for
these services. Prior to 1998, these services were provided at cost plus a
profit. Beginning in 1998, the transfer agency prices are determined through
negotiations with the Fund's Board of Trustees and are based on competitive
benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of the Fund's
portfolio business, the policies and practices in this regard will at all times
be subject to review by the trustees of the Fund.
As most transactions made by the Fund are principal transactions at net
prices, the Fund generally incurs little or no brokerage costs. The portfolio
securities in which the Fund invests are normally purchased directly from the
issuer or in the over-the-counter market from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include a spread or markup to the dealer
between the bid and asked price. Sales to dealers are effected at bid prices.
The Fund may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid, or may purchase and
sell listed bonds on a exchange, which are effected through brokers who charge a
commission for their services.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker/dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size
B-28
<PAGE> 525
and breadth of the market for the security, the size of and difficulty in
executing the order, and the best net price. There are many instances when, in
the judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser to the Fund and still must be analyzed
and reviewed by its staff, the receipt of research information is not expected
to reduce its expenses materially. The investment advisory fee is not reduced as
a result of the Adviser's receipt of such research services. Services provided
may include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or pur-chasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Fund.
The Adviser also may place portfolio transactions, to the extent permitted
by law, with brokerage firms affiliated with the Fund, the Adviser or the
Distributor and with brokerage firms participating in the distribution of the
Fund's shares if it reasonably believes that the quality of execution and the
commission are comparable to that available from other qualified firms.
Similarly, to the extent permitted by law and subject to the same considerations
on quality of execution and comparable commission rates, the Adviser may direct
an executing broker to pay a portion or all of any commissions, concessions or
discounts to a firm supplying research or other services or to a firm
participating in the distribution of the Fund's shares.
The Adviser may place portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for the Fund and another advisory account.
In some cases, this procedure could have an adverse effect on the price or the
amount of securities available to the Fund. In making such allocations among the
Fund and other advisory accounts, the main factors considered by the Adviser are
the respective sizes of the Fund and other advisory accounts, the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
Effective October 31, 1996, Morgan Stanley Group Inc. ("Morgan Stanley")
became an affiliate of the Adviser. Effective May 31, 1997, Dean Witter Discover
& Co. ("Dean Witter") became an affiliate of the Adviser. The trustees have
adopted certain policies incorporating the standards of Rule 17e-1 issued by the
SEC under the 1940 Act which requires that the commissions paid to affiliates of
the Fund must be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time. The rule and procedures also contain review requirements and require
the Adviser to furnish reports to the trustees and to maintain records in
connection with such reviews. After consideration of all factors deemed
relevant, the trustees will consider from time to time whether the advisory fee
for the Fund will be reduced by all or a portion of the brokerage commission
given to affiliated brokers.
B-29
<PAGE> 526
The Fund paid the following commissions to all brokers and affiliated
brokers during the periods shown:
<TABLE>
<CAPTION>
AFFILIATED BROKERS
-------------------
MORGAN DEAN
BROKERS STANLEY WITTER
------- -------- --------
<S> <C> <C> <C>
Commission paid:
Fiscal period ended September 30, 1998.................... $1,600 -- --
Fiscal year ended December 31, 1997....................... -- -- --
Fiscal year ended December 31, 1996....................... -- -- --
Fiscal period 1998 Percentages:
Commissions with affiliate to total commissions........... -- --
Value of brokerage transactions with affiliate to total
transactions........................................... -- --
</TABLE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's
shares of the Fund are held by Investor Services, the Fund's transfer agent.
Investor Services performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. Except as described
in the Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in any of the
Participating Funds will receive statements quarterly from Investor Services
showing any reinvestments of dividends and capital gains distributions and any
other activity in the account since the preceding statement. Such shareholders
also will receive separate confirmations for each purchase or sale transaction
other than reinvestment of dividends and capital gains distributions and
systematic purchases or redemptions. Additions to an investment account may be
made at any time by purchasing shares through authorized dealers or by mailing a
check directly to Investor Services.
SHARE CERTIFICATES
Generally, the Fund will not issue share certificates. However, upon
written or telephone request to the Fund, a share certificate will be issued
representing shares (with the exception of fractional shares) of the Fund. A
shareholder will be required to surrender such certificates upon redemption
thereof. In addition, if such certificates are lost the shareholder must write
to Van Kampen Funds, c/o Investor Services, PO Box 418256, Kansas City, MO
64141-9256, requesting an "affidavit of loss" and obtain a Surety Bond in a form
acceptable to Investor Services. On the date the letter is received, Investor
Services will calculate a fee for replacing the lost certificate equal to no
more than 2.00% of the net asset value of the issued shares, and bill the party
to whom the replacement certificate was mailed.
RETIREMENT PLANS
Eligible investors may establish individual retirement accounts ("IRAs");
SEP; 401(k) plans; Section 403(b)(7) plans in the case of employees of public
school systems and certain non-profit organizations; or other pension or profit
sharing plans. Documents and forms containing detailed information regarding
these plans are available from the Distributor. Van Kampen Trust Company serves
as custodian under the IRA, 403(b)(7) and Keogh plans. Details regarding fees,
as well as full plan administration for profit sharing, pension and 401(k)
plans, are available from the Distributor.
B-30
<PAGE> 527
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS
Holders of Class A Shares can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemptions transferred to a bank
account via the ACH plan are available to be credited to the account on the
second business day following normal payment. In order to utilize this option,
the shareholder's bank must be a member of ACH. In addition, the shareholder
must fill out the appropriate section of the account application. The
shareholder must also include a voided check or deposit slip from the bank
account into which redemptions are to be deposited together with the completed
application. Once Investor Services has received the application and the voided
check or deposit slip, such shareholder's designated bank account, following any
redemption, will be credited with the proceeds of such redemption.
DIVIDEND DIVERSIFICATION
A shareholder may, upon written request or by completing the appropriate
section of the application form accompanying the Prospectus or by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired), elect to have all dividends
and other distributions paid on a class of shares of the Fund invested into
shares of the same class of any Participating Fund so long as the investor has a
pre-existing account for such class of shares of the other fund. Both accounts
must be of the same type, either non-retirement or retirement. If the accounts
are retirement accounts, they must both be for the same class and of the same
type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for the benefit
of the same individual. If a qualified, pre-existing account does not exist, the
shareholder must establish a new account subject to minimum investment and other
requirements of the fund into which distributions would be invested.
Distributions are invested into the selected fund at its net asset value per
share as of the payable date of the distribution.
SYSTEMATIC WITHDRAWAL PLAN
Any investor whose shares in a single account total $10,000 or more at the
offering price next computed after receipt of instructions may establish a
monthly, quarterly, semi-annual or annual withdrawal plan. Any investor whose
shares in a single account total $5,000 or more at the offering price next
computed after receipt of instructions may establish a quarterly, semiannual or
annual withdrawal plan. This plan provides for the orderly use of the entire
account, not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which any capital gain or loss will be
recognized. The planholder may arrange for monthly, quarterly, semi-annual or
annual checks in any amount, not less than $25. Such a systematic withdrawal
plan may also be maintained by an investor purchasing shares for a retirement
plan established on a form made available by the Fund.
Class B shareholders and Class C shareholders who establish a withdrawal
plan may redeem up to 12% annually of the shareholder's initial account balance
without incurring a CDSC. Initial account balance means the amount of the
shareholder's investment at the time the election to participate in the plan is
made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plans are reinvested in additional shares
at the next determined net asset value per share. If periodic withdrawals
continuously exceed reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Withdrawals made concurrently with the purchase of additional shares
ordinarily will be disadvantageous to the shareholder because of the duplication
of sales charges. Any gain or loss realized by the shareholder upon redemption
of shares is a taxable event. The Fund reserves the right to amend or terminate
the systematic withdrawal program on 30 days' notice to its shareholders.
REINSTATEMENT PRIVILEGE
A Class A shareholder or Class B shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class A Shares of the Fund. A Class C shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class C Shares of the Fund with credit given for any CDSC paid upon such
redemption. Such reinstatement is made at the net asset value per share (without
sales charge) next determined after the order is received, which must be within
180 days after the date of the redemption. Reinstatement at net asset value
B-31
<PAGE> 528
per share is also offered to participants in those eligible retirement plans
held or administered by Van Kampen Trust Company for repayment of principal (and
interest) on their borrowings on such plans.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed. The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
Additionally, if the Board of Trustees determines that payment wholly or
partly in cash would be detrimental to the best interests of the remaining
shareholders of the Fund, the Fund may pay the redemption proceeds in whole or
in part by a distribution-in-kind of portfolio securities held by the Fund in
lieu of cash in conformity with applicable rules of the SEC. Shareholders may
incur brokerage charges upon the sale of portfolio securities so received in
payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
For purposes of the CDSC-Class A, when shares of one fund are exchanged for
shares of another fund, the purchase date for the shares of the fund exchanged
into will be assumed to be the date on which shares were purchased in the fund
from which the exchange was made. If the exchanged shares themselves are
acquired through an exchange, the purchase date is assumed to carry over from
the date of the original election to purchase shares subject to a CDSC-Class A
rather than a front-end load sales charge. In determining whether a CDSC-Class A
is payable, it is assumed that shares held the longest are the first to be
redeemed.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED
SALES CHARGE ("CDSC-CLASS B AND C")
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a CDSC. The CDSC-Class B
and C is waived on redemptions of Class B Shares and Class C Shares in the
circumstances described below:
REDEMPTION UPON DEATH OR DISABILITY
The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B shareholder and Class C shareholder. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Code, which in pertinent part
defines a person as disabled if such person "is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of
long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of death or disability before it determines to
waive the CDSC-Class B and C.
In cases of death or disability, the CDSC-Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC-Class B and C applies to a total or partial redemption,
but only to redemptions of shares held at the time of the death or initial
determination of disability.
B-32
<PAGE> 529
REDEMPTION IN CONNECTION WITH CERTAIN DISTRIBUTIONS FROM RETIREMENT PLANS
The Fund will waive the CDSC-Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more Participating Funds;
in such event, as described below, the Fund will "tack" the period for which the
original shares were held on to the holding period of the shares acquired in the
transfer or rollover for purposes of determining what, if any, CDSC-Class B and
C is applicable in the event that such acquired shares are redeemed following
the transfer or rollover. The charge also will be waived on any redemption which
results from the return of an excess contribution pursuant to Section 408(d)(4)
or (5) of the Code, the return of excess deferral amounts pursuant to Code
Section 401(k)(8) or 402(g)(2), or from the death or disability of the employee
(see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition, the charge will be
waived on any minimum distribution required to be distributed in accordance with
Code Section 401(a)(9).
The Fund does not intend to waive the CDSC-Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
REDEMPTION PURSUANT TO A FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC-Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from the Fund without the imposition of a CDSC-Class B
and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
The Fund will waive the CDSC-Class B and C in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase of shares.
INVOLUNTARY REDEMPTIONS OF SHARES
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC-Class B and C upon
such involuntary redemption.
REINVESTMENT OF REDEMPTION PROCEEDS
A shareholder who has redeemed Class C Shares of a Fund may reinvest at net
asset value, with credit for any CDSC-Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C Shares of the Fund, provided that the reinvestment is effected
within 180 days after such redemption and the shareholder has not previously
exercised this reinvestment privilege with respect to Class C Shares of the
Fund. Shares acquired in this manner will be deemed to have the original cost
and purchase date of the redeemed shares for purposes of applying the CDSC-Class
C to subsequent redemptions.
B-33
<PAGE> 530
REDEMPTION BY ADVISER
The Fund may waive the CDSC-Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
TAXATION
FEDERAL INCOME TAXATION. The Trust and each of its series, including the
Fund, will be treated as separate corporations for federal income tax purposes.
The Fund has elected and qualified, and intends to continue to qualify each
year, to be treated as a regulated investment company under Subchapter M of the
Code. To qualify as a regulated investment company, the Fund must comply with
certain requirements of the Code relating to, among other things, the source of
its income and diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gain, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses), it
will not be required to pay federal income taxes on any income distributed to
shareholders. The Fund intends to distribute at least the minimum amount of net
investment income necessary to satisfy the 90% distribution requirement. The
Fund will not be subject to federal income tax on any net capital gains
distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute,
by December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income (not including tax-exempt income) for such year and (ii) 98%
of its capital gain net income (the latter of which generally is computed on the
basis of the one-year period ending on October 31st of such year), plus any
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.
If the Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Fund would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions
of the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have
B-34
<PAGE> 531
continued to hold. A portion of the discount relating to certain stripped
tax-exempt obligations may constitute taxable income when distributed to
shareholders.
DISTRIBUTIONS. The Fund intends to invest in sufficient tax-exempt
municipal securities to permit payment of "exempt-interest dividends" (as
defined in the Code). Dividends paid by the Fund from the net tax-exempt
interest earned from municipal securities qualify as exempt-interest dividends
if, at the close of each quarter of its taxable year, at least 50% of the value
of the total assets of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
Exempt-interest dividends are included in determining what portion, if any,
of a person's social security and railroad retirement benefits will be
includable in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund. "Substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses in his trade or business a part
of any facilities financed with the tax-exempt obligations and whose gross
revenues derived from such facilities exceed 5% of the total revenues derived
from the facilities by all users, or who occupies more than 5% of the useable
area of the facilities or for whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
While the Fund expects that a major portion of its net investment income
will constitute tax-exempt interest, a significant portion may consist of
investment company taxable income. Distributions of the Fund's net investment
company taxable income are taxable to shareholders as ordinary income to the
extent of the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains ("capital gain
dividends"), if any, are taxable to shareholders as long-term capital gains
regardless of the length of time shares of the Fund have been held by such
shareholders. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming such shares are held as a capital asset). For a summary of the
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates" below. Interest on indebtedness which is incurred to
purchase or carry shares of a mutual fund which distributes exempt interest
dividends during the year is not deductible for
B-35
<PAGE> 532
federal income tax purposes. Tax-exempt shareholders not subject to federal
income tax on their income generally will not be taxed on distributions from the
Fund.
Shareholders receiving distributions in the form of additional shares
issued by the Fund will be treated for federal income tax purposes as receiving
a distribution in an amount equal to the fair market value of the shares
received, determined as of the distribution date. The basis of such shares will
equal the fair market value on the distribution date.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt-interest dividends cannot exceed excess
of the amount of interest exempt from tax under Section 103 of the Code received
by the Fund during the year over any amounts disallowed as deductions under
Sections 265 and 171(a)(2) of the Code. Since the percentage of dividends which
are exempt-interest dividends is determined on an average annual method for the
taxable year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax exempt during the period covered by the dividend.
Fund distributions generally will not qualify for the dividends received
deduction for corporations.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
SALE OF SHARES. The sale of shares (including transfers in connection with
a redemption or repurchase of shares) will be a taxable transaction for federal
income tax purposes. Selling shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
shares and the amount received. If such shares are held as a capital asset, the
gain or loss will be a capital gain or loss. For a summary of the tax rates
applicable to capital gains (including capital gain dividends), see "Capital
Gains Rates" below. Any loss recognized upon a taxable disposition of shares
held for six months or less will be treated as a long-term capital loss to the
extent of any capital gain dividends received with respect to such shares. For
purposes of determining whether shares have been held for six months or less,
the holding period is suspended for any periods during which the shareholder's
risk of loss is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES. The maximum tax rate applicable to net capital gains
recognized by individuals and other non-corporate taxpayers is (i) the same as
the maximum ordinary income tax rate for capital assets held for one year or
less or (ii) 20% for capital assets held for more than one year. A special 28%
tax rate may apply to a portion of the capital gain dividends paid by the Fund
with respect to its taxable year ended September 30, 1998. The maximum long-term
capital gains rate for corporations is 35%.
BACKUP WITHHOLDING. The Fund may be required to withhold federal income tax
at a rate of 31% ("backup withholding") from dividends and redemption proceeds
paid to non-corporate shareholders. This tax may be withheld from dividends if
(i) the shareholder fails to furnish the Fund with its correct taxpayer
identification number, (ii) the IRS notifies the Fund that the shareholder has
failed to properly report certain interest and dividend income to the IRS and to
respond to notices to that effect or (iii) when required to do so, the
shareholder fails to certify that he or she is not subject to backup
withholding. Redemption proceeds may be subject to withholding under the
circumstances described in (i) above.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's United States federal income tax liability,
if any, provided that the required information is furnished to the IRS.
B-36
<PAGE> 533
GENERAL. The federal, income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal tax consequences of purchasing, holding and disposing of
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one year, five year and ten year periods. Other total
return quotations, aggregate or average, over other time periods may also be
included.
The total return of the Fund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the Fund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the current maximum public
offering price (which includes the maximum sales charge for Class A Shares);
that all income dividends or capital gains distributions during the period are
reinvested in Fund shares at net asset value; and that any applicable CDSC has
been paid. The Fund's total return will vary depending on market conditions, the
securities comprising the Fund's portfolio, the Fund's operating expenses and
unrealized net capital gains or losses during the period. Total return is based
on historical earnings and asset value fluctuations and is not intended to
indicate future performance. No adjustments are made to reflect any income taxes
payable by shareholders on dividends and distributions paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares.
Non-standardized total return calculations do not reflect the imposition of
a contingent deferred sales charge, and if any such contingent deferred sales
charge with respect to the CDSC imposed at the time of redemption were
reflected, it would reduce the performance quoted.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and
B-37
<PAGE> 534
principal value of an investment in the Fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
Yield and total return are calculated separately for Class A Shares, Class
B Shares and Class C Shares. Class A Shares total return figures include the
maximum sales charge; Class B Shares and Class C Shares total return figures
include any applicable CDSC. Because of the differences in sales charges and
distribution fees, the total returns for each of the classes will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield, which is a measure of
the income actually earned by the Fund's investments, and from total return
which is a measure of the income actually earned by the Fund's investments plus
the effect of any realized and unrealized appreciation or depreciation of such
investments during a stated period. Distribution rate is, therefore, not
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
From time to time marketing materials may provide a portfolio manager
update, an adviser update or discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top five sectors, ten largest holdings and other Fund asset
structures, such as duration, maturity, coupon, NAV, rating breakdown, AMT
exposure and number of issues in the portfolio. Materials may also mention how
the Distributor believes the Fund compares relative to other Van Kampen funds.
Materials may also discuss the Dalbar Financial Services study from 1984 to 1994
which studied investor cash flow into and out of all types of mutual funds. The
ten year study found that investors who bought mutual fund shares and held such
shares outperformed investors who bought and sold. The Dalbar study conclusions
were consistent regardless of if shareholders purchased their funds in direct or
sales force distribution channels. The study showed that investors working with
a professional representative have tended over time to earn higher returns than
those who invested directly. The Fund will also be marketed on the internet.
In reports or other communications to shareholders or in advertising
material, the Fund may compare its performance with that of other mutual funds
as listed in the rankings or ratings prepared by Lipper Analytical Services,
Inc., CDA, Morningstar Mutual Funds or similar independent services which
monitor the performance of mutual funds with the Consumer Price Index, other
appropriate indices of investment securities, or with investment or savings
vehicles. The performance information may also include evaluations of the Fund
published by nationally recognized ranking services and by nationally recognized
financial publications. Such comparative performance information will be stated
in the same terms in which the comparative data or indices are stated. Such
advertisements and sales material may also include a yield quotation as of a
current period. In each case, such total return and yield information, if any,
will be calculated pursuant to rules established by the SEC and will be computed
separately for each class of the Fund's shares. For these purposes, the
performance of the Fund, as well as the performance of other mutual funds or
indices, do not reflect sales charges, the inclusion of which would reduce Fund
performance. The Fund will include performance data for each class of shares of
the Fund in any advertisement or information including performance data of the
Fund.
The Fund may also utilize performance information in hypothetical
illustrations. For example, the Fund may, from time to time: (1) illustrate the
benefits of tax-deferral by comparing taxable investments to investments made
through tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
of different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return.
B-38
<PAGE> 535
Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
computed by dividing that portion of the yield of the Fund (as computed above)
which is tax-exempt by a percentage equal to 100% minus a stated percentage
income tax rate and adding the result to that portion of the Fund's yield, if
any, that is not tax-exempt.
The Fund's Annual Report and Semi-Annual Report contain additional
performance information. A copy of the Annual Report or Semi-Annual Report may
be obtained without charge by calling or writing the Fund at the telephone
number and address printed on the back cover of the Prospectus.
CLASS A SHARES
The average annualized total return, including payment of the sales charge,
with respect to the Class A Shares for (i) the one year period ended September
30, 1998 was 4.38%, (ii) the five year period ended September 30, 1998 was 5.40%
and (iii) the approximately five year, four month period from May 28, 1993 (the
commencement of investment operations of the Fund) through September 30, 1998
was 6.21%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.69%. The Fund's current distribution
rate with respect to the Class A Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.38%. The Fund's taxable equivalent distribution rate with
respect to the Class A Shares for the month ending September 30, 1998 was 6.84%.
The Class A Shares cumulative non-standardized total return, including
payment of the maximum sales charge, with respect to the Class A Shares from its
inception to September 30, 1998 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 37.96%.
The Fund's cumulative non-standardized total return, excluding payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to September 30, 1998 was 42.65%.
CLASS B SHARES
The average annualized total return, including payment of the CDSC, with
respect to the Class B Shares for (i) the one year period ended September 30,
1998 was 4.06%, (ii) the five year period ended September 30, 1998 was 5.34% and
(iii) the approximately five year, four month period of May 28, 1993
(commencement of investment operations of the Fund) through September 30, 1998
was 6.09%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.10%. The Fund's current distribution
rate with respect to the Class B Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 3.87%. The Fund's taxable equivalent distribution rate with
respect to the Class B Shares for the month ending September 30, 1998 was 6.05%.
The Fund's cumulative non-standardized total return, including payment of
the CDSC, with respect to the Class B Shares from its inception to September 30,
1998 (as calculated in the manner described in the Prospectus under the heading
"Fund Performance") was 37.15%.
The Fund's cumulative non-standardized total return, excluding payment of
the CDSC, with respect to the Class B Shares from its inception to September 30,
1998 was 37.15%.
CLASS C SHARES
The average annualized total return, including payment of the CDSC, with
respect to the Class C Shares for (i) the one year period ended September 30,
1998 was 6.06% and (ii) the approximately four year, eleven month period from
October 19, 1993 (the commencement of investment operations of the Fund) through
September 30, 1998 was 5.10%%.
B-39
<PAGE> 536
The Fund's yield with respect to the Class C Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.06%. The Fund's current distribution
rate with respect to the Class C Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 3.87%. The Fund's taxable equivalent distribution rate with
respect to the Class C Shares for the month ending September 30, 1998 was 6.05%.
The Fund's cumulative non-standardized total return, including payment of
the CDSC, with respect to the Class C Shares from its inception to September 30,
1998 (as calculated in the manner described in the Prospectus under the heading
"Fund Performance") was 27.90%.
The Fund's cumulative non-standardized total return, excluding payment of
the CDSC, with respect to the Class C Shares from its inception to September 30,
1998 was 27.90%.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash,
including proceeds from the sale of shares of the Fund and of securities in the
Fund's investment portfolio, are held by State Street Bank and Trust Company,
225 West Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual statements are furnished to
shareholders, and annually such statements are audited by the independent
accountants.
INDEPENDENT ACCOUNTANTS -- KPMG LLP, 303 East Wacker Drive, Chicago,
Illinois 60601, the independent accountants for the Fund, performs an annual
audit of the Fund's financial statements.
LEGAL COUNSEL -- Counsel to the Fund is Skadden, Arps, Slate, Meagher &
Flom (Illinois).
B-40
<PAGE> 537
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen Intermediate Term Municipal Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Intermediate Term Municipal Income Fund (the "Fund"), including the
portfolio of investments, as of September 30, 1998, and the related statement of
operations for the nine-month period ended September 30, 1998 and the year ended
December 31, 1997, the statement of changes in net assets for the nine-month
period ended September 30, 1998 and for each of the two years in the period
ended December 31, 1997, 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
September 30, 1998, 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 Intermediate Term Municipal Income Fund as of September 30, 1998, the
results of its operations for the nine-month period ended September 30, 1998 and
the year ended December 31, 1997, the changes in its net assets for the
nine-month period ended September 30, 1998 and for each of the two years in the
period ended December 31, 1997, and the financial highlights for each of the
periods presented, in conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
November 5, 1998
F-1
<PAGE> 538
PORTFOLIO OF INVESTMENTS
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 102.5%
ALABAMA 1.4%
$ 500 West Jefferson Cnty, AL Amusement & Pub Pk
Auth............................................. 7.500% 12/01/08 $ 539,150
-----------
ALASKA 0.7%
250 Seward, AK Rev AK Sealife Cent Proj.............. 7.100 10/01/05 267,435
-----------
ARIZONA 4.7%
500 Maricopa Cnty, AZ Indl Dev Auth Senior Living Fac
Rev.............................................. 7.250 04/01/05 530,210
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 1,297,576
-----------
1,827,786
-----------
CALIFORNIA 6.0%
360 California Edl Fac Auth Rev Pacific Grad
School........................................... 6.950 11/01/07 379,077
1,000 California St (AMBAC Insd)....................... 6.400 09/01/08 1,203,530
240 Del Mar, CA Race Track Auth Rev Rfdg............. 6.000 08/15/06 258,115
500 Stockton, CA Comnty Fac Dist Spl Tax No One Mello
Roos Weston Ranch Ser A.......................... 5.500 09/01/09 512,070
-----------
2,352,792
-----------
COLORADO 4.4%
330 Colorado Hlth Fac Auth Rev Sr Living Fac Eaton
Terrace Ser A.................................... 6.800 07/01/09 350,387
174 Colorado Hsg Fin Auth Access Pgm Single Family
Pgm Ser E........................................ 8.125 12/01/24 192,995
1,000 Denver, CO City & Cnty Arpt Rev Ser A............ 7.400 11/15/04 1,159,590
-----------
1,702,972
-----------
CONNECTICUT 2.1%
145 Mashantucket Western Pequot Tribe CT Spl Rev Ser
A (Escrowed to Maturity), 144A -- Private
Placement (a).................................... 6.500 09/01/06 169,050
155 Mashantucket Western Pequot Tribe CT Spl Rev Ser
A, 144A -- Private Placement (a)................. 6.500 09/01/06 177,788
475 New Haven, CT Indl Fac Rev Adj Govt Cent Thermal
Energies......................................... 7.250 07/01/09 478,909
-----------
825,747
-----------
FLORIDA 9.3%
1,000 Boca Raton, FL Cmnty Redev Agy Rfdg Mizner Pk
Proj (b)......................................... 4.375 03/01/11 999,020
1,150 Florida Hsg Fin Agy Hsg Maitland Club Apts Ser B1
(AMBAC Insd)..................................... 6.750 08/01/14 1,270,232
190 Lee Cnty, FL Indl Dev Auth Econ Rev Encore
Nursing Cent Partner Rfdg........................ 8.125 12/01/07 211,544
250 Orange Cnty, FL Hlth Fac Auth Rev First Mtg
Orlando Lutheran Twr Rfdg........................ 8.125 07/01/06 280,868
300 Volusia Cnty, FL Indl Dev Auth Bishops Glen Proj
Rfdg............................................. 7.125 11/01/06 325,851
535 Westchase East Cmnty Dev Dist FL Cap Impt Rev.... 7.250 05/01/03 557,973
-----------
3,645,488
-----------
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 539
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
GEORGIA 6.8%
$1,460 De Kalb Cnty, GA Hsg Auth Multi-Family Hsg Rev
North Hill Apts Proj Rfdg (FNMA Collateralized)
(c).............................................. 6.625% 01/01/25 $ 1,608,949
1,000 George L Smith II GA World Congress Ctr Auth Rev
Rfdg Domed Stadium Proj (MBIA Insd) (b).......... 6.000 07/01/04 1,051,640
-----------
2,660,589
-----------
ILLINOIS 12.3%
450 Bedford Park, IL Tax Increment 71st & Cicero Proj
Rfdg............................................. 7.000 01/01/06 489,339
500 Carol Stream, IL First Mtg Rev Windsor Pk Mnr
Proj............................................. 6.500 12/01/07 540,935
490 Chicago, IL Tax Increment Allocation San Drainage
& Ship Canal A................................... 7.375 01/01/05 524,663
545 Clay Cnty, IL Hosp Rev........................... 5.500 12/01/10 549,529
150 Danville, IL Single Family Mtg Rev Rfdg.......... 7.300 11/01/10 161,135
1,335 Illinois Dev Fin Auth Elderly Hsg Rev
Libertyville Towers Ser A........................ 6.500 09/01/09 1,424,325
750 Illinois Hlth Fac Auth Rev Holy Cross Hosp Proj
Ser 94-A......................................... 6.250 03/01/04 801,502
300 Peoria, IL Spl Tax Weaverridge Spl Svc Area...... 7.625 02/01/08 330,750
-----------
4,822,178
-----------
INDIANA 0.9%
350 Indiana Hlth Fac Fing Auth Hosp Rev Rfdg Floyd
Mem Hosp & Hlth Svcs............................. 4.800 02/15/07 359,086
-----------
KENTUCKY 1.4%
500 Kenton Cnty, KY Arpt Brd Rev (MBIA Insd)......... 5.900 03/01/05 550,770
-----------
LOUISIANA 2.0%
240 Iberia Parish, LA Hosp Svc Dist No 1 Hosp Rev.... 7.500 05/26/06 260,892
500 Louisiana Hsg Fin Agy Rev Multi-Family Hsg
Plantation Ser A................................. 7.200 01/01/06 505,900
-----------
766,792
-----------
MASSACHUSETTS 4.6%
500 Massachusetts St Hlth & Edl Fac Auth Rev Cent New
England Hlth Sys Ser A........................... 6.125 08/01/13 523,500
500 Massachusetts St Hlth & Edl North Adams Regl Hosp
Ser C............................................ 6.250 07/01/04 545,990
210 Massachusetts St Indl Fin Agy East Boston
Neighborhood Proj................................ 7.250 07/01/06 222,060
500 Massachusetts St Indl Fin Agy Rev Grtr Lynn
Mental Hlth...................................... 6.200 06/01/08 508,525
-----------
1,800,075
-----------
MINNESOTA 2.2%
500 Crow Fin Auth MN Tribal Purp Rev 144A -- Private
Placement (a).................................... 5.400 10/01/07 535,305
315 Minneapolis, MN Multi-Family Rev Hsg Belmont Apts
Proj............................................. 7.000 11/01/06 330,407
-----------
865,712
-----------
MISSOURI 4.4%
1,500 Kansas City, MO Arpt Rev Genl Impt Ser A (FSA
Insd)............................................ 7.000 09/01/12 1,725,930
-----------
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 540
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW JERSEY 7.3%
$ 500 Camden Cnty, NJ Impt Auth Lease Rev Kaighn Pt
Marine Terminal A................................ 7.375% 06/01/07 $ 538,885
1,000 East Orange, NJ Brd Ed Ctfs Partn Cap Apprec (FSA
Insd)............................................ * 02/01/16 446,170
250 New Jersey Econ Dev Auth Rev Sr Mtg Arbor Glen
Proj Ser A....................................... 8.000 05/15/04 274,045
1,000 New Jersey Hlthcare Fac Fin Auth Rev Christ Hosp
Group Issue (Connie Lee Insd).................... 7.000 07/01/06 1,184,650
375 New Jersey Hlthcare Fac Fin Auth Rev Palisades
Med Cent......................................... 7.500 07/01/06 404,070
-----------
2,847,820
-----------
NEW YORK 11.4%
500 New York City Ser A.............................. 7.000 08/01/07 596,000
500 New York St Dorm Auth Rev Rfdg Secd Hosp North
Gen Hosp Ser G................................... 5.125 02/15/08 531,330
1,000 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg
Ser A (Prerefunded @ 02/15/05) (AMBAC Insd)...... 6.200 08/15/05 1,143,990
1,000 New York St Twy Auth Svc Contract Loc Hwy &
Brdg............................................. 5.800 04/01/00 1,030,350
1,000 Niagara Falls, NY Pub Impt (MBIA Insd)........... 6.900 03/01/20 1,151,110
-----------
4,452,780
-----------
OHIO 6.9%
500 Cuyahoga Cnty, OH Hlthcare Fac Rev Judson
Retirement Cmnty Ser A Rfdg...................... 7.000 11/15/10 547,235
250 Marion Cnty, OH Hosp Impt Rev Cmnty Hosp Rfdg.... 6.375 05/15/11 277,090
1,000 Ohio St Air Quality Dev Auth Rev Owens Corning
Fiberglass Proj Rfdg (c)......................... 6.250 06/01/04 1,071,300
775 Sandusky County, OH Hosp Fac Rev Rfdg Mem Hosp... 5.000 01/01/06 797,971
-----------
2,693,596
-----------
OKLAHOMA 1.4%
520 Shawnee, OK Hosp Auth Hosp Rev Midamerica
Hlthcare Inc Rfdg................................ 5.750 10/01/03 540,498
-----------
PENNSYLVANIA 1.9%
225 Erie, PA Higher Edl Bldg Auth College Rev
Mercyhurst College Proj A Rfdg................... 5.300 03/15/03 236,315
490 Philadelphia, PA Auth For Indl Dev Hlthcare Fac
Rev Baptist Home of Phil Ser A................... 5.200 11/15/04 495,748
-----------
732,063
-----------
TEXAS 3.4%
500 Austin, TX Util Sys Rev Rfdg (AMBAC Insd)........ 6.500 11/15/05 578,315
405 Mesquite, TX Hlth Fac Dev Retirement Fac
Christian Ser A.................................. 6.100 02/15/08 436,412
300 San Antonio, TX Hsg Fin Corp Multi-Family Hsg Rev
Beverly Oaks Arpt Proj Ser A..................... 7.500 02/01/10 318,564
-----------
1,333,291
-----------
UTAH 3.9%
1,400 Utah St Hsg Fin Agy Single Family Mtg Mezz Ser
A-1 (FHA Gtd).................................... 7.150 07/01/12 1,518,888
-----------
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 541
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
VIRGINIA 1.4%
$ 500 Pittsylvania Cnty, VA Indl Dev Auth Rev Exempt
Fac Ser A........................................ 7.450% 01/01/09 $ 556,990
-----------
U. S. VIRGIN ISLANDS 1.7%
600 Virgin Islands Pub Fin Auth Rev Sr Lien Fd Ln Nts
Ser C............................................ 5.500 10/01/07 646,776
-----------
TOTAL LONG-TERM INVESTMENTS 102.5%
(Cost $36,950,751)......................................................... 40,035,204
SHORT-TERM INVESTMENTS 1.8%
(Cost $700,000)............................................................ 700,000
-----------
TOTAL INVESTMENTS 104.3%
(Cost $37,650,751)......................................................... 40,735,204
LIABILITIES IN EXCESS OF OTHER ASSETS (4.3%)................................ (1,674,989)
-----------
NET ASSETS 100.0%........................................................... $39,060,215
----------
</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 be resold only in
transactions exempt from registration which are normally those transactions
with qualified institutional buyers.
(b) Securities purchased on a when issued or delayed delivery basis.
(c) Assets segregated as collateral for when issued or delayed delivery purchase
commitments.
See Notes to Financial Statements
F-5
<PAGE> 542
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $37,650,751)........................ $40,735,204
Cash........................................................ 113,303
Receivables:
Interest.................................................. 569,026
Investments Sold.......................................... 10,271
Fund Shares Sold.......................................... 4,185
Other....................................................... 164
-----------
Total Assets.......................................... 41,432,153
-----------
LIABILITIES:
Payables:
Investments Purchased..................................... 2,026,300
Income Distributions...................................... 44,838
Distributor and Affiliates................................ 41,459
Fund Shares Repurchased................................... 17,158
Investment Advisory Fee................................... 15,885
Trustees' Deferred Compensation and Retirement Plans........ 114,525
Accrued Expenses............................................ 111,773
-----------
Total Liabilities..................................... 2,371,938
-----------
NET ASSETS.................................................. $39,060,215
===========
NET ASSETS CONSIST OF:
Capital..................................................... $36,242,880
Net Unrealized Appreciation................................. 3,084,453
Accumulated Undistributed Net Investment Income............. 32,934
Accumulated Net Realized Loss............................... (300,052)
-----------
NET ASSETS.................................................. $39,060,215
===========
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $20,581,162 and 1,918,546 shares of
beneficial interest issued and outstanding)............. $ 10.73
Maximum sales charge (3.25%* of offering price)......... .36
-----------
Maximum offering price to public........................ $ 11.09
===========
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $15,189,684 and 1,417,778 shares of
beneficial interest issued and outstanding)............. $ 10.71
===========
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $3,289,369 and 307,071 shares of
beneficial interest issued and outstanding)............. $ 10.71
===========
*On sales of $25,000 or more, the sales charge will be reduced.
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 543
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998
and the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest............................................. $ 1,654,380 $ 2,041,580
----------- -----------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to
Classes A, B and C of $34,136, $119,482 and
$22,783, respectively for the nine months ended
September 30, 1998 and $30,399, $160,699 and
$47,630, respectively for the year ended December
31, 1997).......................................... 176,401 238,728
Investment Advisory Fee.............................. 139,295 164,970
Accounting Services.................................. 45,401 36,037
Registration......................................... 32,213 51,830
Shareholder Reports.................................. 20,428 44,275
Trustees' Fees and Expenses.......................... 20,105 33,533
Shareholder Services................................. 18,728 41,433
Amortization of Organizational Costs................. 4,828 11,994
Legal................................................ 2,424 9,334
Custody.............................................. 1,919 24,290
Other................................................ 8,113 51,451
----------- -----------
Total Expenses................................... 469,855 707,875
Less Expenses Reimbursed......................... -0- 47,231
----------- -----------
Net Expenses..................................... 469,855 660,644
----------- -----------
NET INVESTMENT INCOME................................ $ 1,184,525 $ 1,380,936
=========== ===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments...................................... $ 15,771 $ 356,859
Options.......................................... 22,583 -0-
Futures.......................................... -0- (9,378)
----------- -----------
Net Realized Gain.................................... 38,354 347,481
----------- -----------
Unrealized Appreciation/Depreciation:
Beginning of the Period.......................... 2,433,733 1,782,271
End of the Period:
Investments.................................... 3,084,453 2,433,733
----------- -----------
Net Unrealized Appreciation During the Period........ 650,720 651,462
----------- -----------
NET REALIZED AND UNREALIZED GAIN..................... $ 689,074 $ 998,943
=========== ===========
NET INCREASE IN NET ASSETS FROM OPERATIONS........... $ 1,873,599 $ 2,379,879
=========== ===========
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 544
STATEMENT OF CHANGES IN NET ASSETS
For the Nine Months Ended September 30, 1998 and the
Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Year Ended
September 30, 1998 December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.............. $ 1,184,525 $ 1,380,936 $ 1,413,175
Net Realized Gain.................. 38,354 347,481 347,243
Net Unrealized
Appreciation/Depreciation During
the Period....................... 650,720 651,462 (454,405)
---------------- ----------- -----------
Change in Net Assets from
Operations....................... 1,873,599 2,379,879 1,306,013
---------------- ----------- -----------
Distributions from Net Investment
Income:
Class A Shares................... (625,738) (560,309) (656,307)
Class B Shares................... (469,656) (628,468) (666,673)
Class C Shares................... (89,521) (186,777) (184,281)
---------------- ----------- -----------
Total Distributions............ (1,184,915) (1,375,554) (1,507,261)
---------------- ----------- -----------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES............ 688,684 1,004,325 (201,248)
---------------- ----------- -----------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold.......... 13,360,043 5,579,082 4,946,191
Net Asset Value of Shares Issued
Through Dividend Reinvestment.... 800,943 883,487 972,957
Cost of Shares Repurchased......... (8,183,923) (9,753,115) (9,123,506)
---------------- ----------- -----------
NET CHANGE IN NET ASSETS FROM
CAPITAL TRANSACTIONS............. 5,977,063 (3,290,546) (3,204,358)
---------------- ----------- -----------
TOTAL INCREASE/DECREASE IN NET
ASSETS........................... 6,665,747 (2,286,221) (3,405,606)
NET ASSETS:
Beginning of the Period............ 32,394,468 34,680,689 38,086,295
---------------- ----------- -----------
End of the Period (Including
accumulated undistributed net
investment income of $32,934,
$33,324 and $27,942,
respectively).................... $ 39,060,215 $32,394,468 $34,680,689
================ =========== ===========
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 545
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
May 28, 1993
Nine Months (Commencement
Ended Year Ended December 31, of Investment
September 30, ------------------------------------ Operations) to
Class A Shares 1998 1997 1996 1995 1994 December 31, 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period................................... $10.536 $10.213 $10.264 $ 9.330 $10.145 $ 9.700
------- ------- ------- ------- ------- -------
Net Investment Income.......................... .358 .480 .455 .508 .489 .278
Net Realized and Unrealized
Gain/Loss.................................... .199 .317 (.032) .900 (.815) .462
------- ------- ------- ------- ------- -------
Total from Investment
Operations................................... .557 .797 .423 1.408 (.326) .740
------- ------- ------- ------- ------- -------
Less:
Distributions from Net
Investment Income............................ .365 .474 .474 .474 .489 .273
Distributions from Net
Realized Gain................................ -0- -0- -0- -0- -0- .022
------- ------- ------- ------- ------- -------
Total Distributions............................ .365 .474 .474 .474 .489 .295
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period....................................... $10.728 $10.536 $10.213 $10.264 $ 9.330 $10.145
======= ======= ======= ======= ======= =======
Total Return* (a).............................. 5.36%** 8.08% 4.27% 15.31% (3.32%) 7.75%**
Net Assets at End of the
Period (In millions)......................... $ 20.6 $ 12.9 $ 12.5 $ 15.6 $ 15.7 $ 14.0
Ratio of Expenses to Average
Net Assets*.................................. 1.30% 1.52% 1.56% 1.00% .67% .14%
Ratio of Net Investment
Income to Average Net
Assets*...................................... 4.61% 4.67% 4.45% 5.10% 5.07% 4.78%
Portfolio Turnover............................. 15%** 37% 45% 75% 274% 86%**
* If certain expenses had not been reimbursed Van Kampen, Total Return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to Average
Net Assets................................... n/a 1.67% 1.74% 1.61% 1.75% 2.21%
Ratio of Net Investment
Income to Average Net
Assets....................................... n/a 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.
n/a - not applicable
See Notes to Financial Statements
F-9
<PAGE> 546
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
Nine Months (Commencement
Ended Year Ended December 31, of Investment
September 30, ------------------------------------ Operations) to
Class B Shares 1998 1997 1996 1995 1994 December 31, 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period................................ $ 10.526 $ 10.209 $10.263 $ 9.319 $10.137 $ 9.700
-------- -------- ------- ------- ------- -------
Net Investment Income.......................... .308 .402 .375 .430 .417 .233
Net Realized and Unrealized
Gain/Loss.................................... .191 .317 (.027) .916 (.818) .460
-------- -------- ------- ------- ------- -------
Total from Investment
Operations................................... .499 .719 .348 1.346 (.401) .693
-------- -------- ------- ------- ------- -------
Less:
Distributions from Net
Investment Income............................ .311 .402 .402 .402 .417 .234
Distributions from Net
Realized Gain................................ -0- -0- -0- -0- -0- .022
-------- -------- ------- ------- ------- -------
Total Distributions............................ .311 .402 .402 .402 .417 .256
-------- -------- ------- ------- ------- -------
Net Asset Value, End of the
Period....................................... $ 10.714 $ 10.526 $10.209 $10.263 $ 9.319 $10.137
======== ======== ======= ======= ======= =======
Total Return* (a).............................. 4.74%** 7.23% 3.54% 14.62% (4.04%) 7.23%**
Net Assets at End of the
Period (In millions)......................... $ 15.2 $ 16.4 $ 16.4 $ 17.5 $ 17.7 $ 13.9
Ratio of Expenses to
Average Net Assets*.......................... 2.06% 2.28% 2.32% 1.75% 1.43% .92%
Ratio of Net Investment
Income to Average Net
Assets*...................................... 3.90% 3.91% 3.69% 4.33% 4.30% 3.95%
Portfolio Turnover............................. 15%** 37% 45% 75% 274% 86%**
* If certain expenses had not been reimbursed by Van Kampen, Total Return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to
Average Net Assets........................... n/a 2.42% 2.50% 2.36% 2.50% 2.98%
Ratio of Net Investment
Income to Average Net
Assets....................................... n/a 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.
n/a - not applicable
See Notes to Financial Statements
F-10
<PAGE> 547
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months October 19, 1993
Ended Year Ended December 31, (Commencement of
September 30, ------------------------------------ Distribution) to
Class C Shares 1998 1997 1996 1995 1994 December 31, 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period................................... $10.525 $10.206 $10.260 $ 9.314 $10.134 $10.250
------- ------- ------- ------- ------- -------
Net Investment Income.......................... .308 .402 .374 .430 .419 .091
Net Realized and Unrealized
Gain/Loss.................................... .190 .319 (.026) .918 (.822) (.098)
------- ------- ------- ------- ------- -------
Total from Investment
Operations................................... .498 .721 .348 1.348 (.403) (.007)
------- ------- ------- ------- ------- -------
Less:
Distributions from Net
Investment Income............................ .311 .402 .402 .402 .417 .087
Distributions from Net Realized
Gain......................................... -0- -0- -0- -0- -0- .022
------- ------- ------- ------- ------- -------
Total Distributions............................ .311 .402 .402 .402 .417 .109
------- ------- ------- ------- ------- -------
Net Asset Value, End of the
Period....................................... $10.712 $10.525 $10.206 $10.260 $ 9.314 $10.134
======= ======= ======= ======= ======= =======
Total Return* (a).............................. 4.74%** 7.23% 3.54% 14.74% (4.04%) (.10%)**
Net Assets at End of the Period
(In millions)................................ $ 3.3 $ 3.1 $ 5.8 $ 4.9 $ 4.7 $ .3
Ratio of Expenses to Average
Net Assets*.................................. 2.06% 2.29% 2.32% 1.74% 1.43% .97%
Ratio of Net Investment Income
to Average
Net Assets*.................................. 3.89% 3.88% 3.70% 4.36% 4.34% 4.05%
Portfolio Turnover............................. 15%** 37% 45% 75% 274% 86%**
*If certain expenses had not been reimbursed by Van Kampen, Total Return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets....................................... n/a 2.43% 2.50% 2.34% 2.46% 2.97%
Ratio of Net Investment Income
to Average
Net Assets................................... n/a 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.
n/a - not applicable
See Notes to Financial Statements
F-11
<PAGE> 548
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Intermediate Term Municipal Income Fund, (the "Fund") is organized as
a series of Van Kampen 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. In July, 1998, the Fund's Board of Trustees approved a change in the
Fund's fiscal year end from December 31 to September 30. As a result, this
financial report reflects the nine month period commencing on January 1, 1998,
and ending on September 30, 1998.
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
F-12
<PAGE> 549
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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. ORGANIZATIONAL COSTS--The Fund has reimbursed Van Kampen Funds Inc. or its
affiliates (collectively "Van Kampen") for costs incurred in connection with the
Fund's organization in the amount of $60,000. These costs were amortized on a
straight line basis over the 60 month period which ended May 27, 1998.
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 September 30, 1998, the Fund had an accumulated capital loss carryforward for
tax purposes of $300,052 which will expire between September 30, 2002 and
September 30, 2003. Net realized gains or losses may differ for financial
reporting and tax 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 September 30, 1998.
At September 30, 1998, for federal income tax purposes, cost of long- and
short-term investments is $37,650,751; the aggregate gross unrealized
appreciation is $3,084,453 and the aggregate gross unrealized depreciation is
$0, resulting in net unrealized appreciation on long- and short-term investments
of $3,084,453.
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 the nine months ended September 30, 1998, 100% of the income
distributions made by the Fund were exempt from federal income taxes. In
January, 1999, the Fund will provide tax information to shareholders for the
1998 calendar year.
F-13
<PAGE> 550
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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 nine months ended September 30, 1998 and the year ended December 31,
1997, the Fund recognized expenses of approximately $700 and $1,200,
respectively, 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 nine months ended September 30, 1998 and the year ended December 31,
1997, the Fund recognized expenses of approximately $47,100 and $43,200,
respectively, representing Van Kampen's cost of providing accounting and legal
services to the Fund.
Van Kampen Investor Services Inc. ("VKIS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the nine months
ended September 30, 1998 and the year ended December 31, 1997, the Fund
recognized expenses of approximately $14,400 and $28,200, respectively.
Beginning in 1998, the transfer agency fees are determined through negotiations
with the Fund's Board of Trustees and are based on competitive market
benchmarks.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. 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 $2,500.
At September 30, 1998, Van Kampen 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.
F-14
<PAGE> 551
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
At September 30, 1998, capital aggregated $19,411,810, $14,023,192 and
$2,807,878 for Classes A, B and C, respectively. For the nine months ended
September 30, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A..................................... 1,074,637 $11,350,330
Class B..................................... 130,358 1,377,259
Class C..................................... 59,963 632,454
--------- -----------
Total Sales................................... 1,264,958 $13,360,043
========= ===========
Dividend Reinvestment:
Class A..................................... 43,203 $ 457,668
Class B..................................... 25,218 266,756
Class C..................................... 7,232 76,519
--------- -----------
Total Dividend Reinvestment................... 75,653 $ 800,943
========= ===========
Repurchases:
Class A..................................... (425,765) $(4,501,920)
Class B..................................... (297,555) (3,150,507)
Class C..................................... (50,238) (531,496)
--------- -----------
Total Repurchases............................. (773,558) $(8,183,923)
========= ===========
</TABLE>
F-15
<PAGE> 552
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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>
F-16
<PAGE> 553
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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). Class B shares will
automatically convert to Class A shares after the eighth year following
purchase. 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>
F-17
<PAGE> 554
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
For the nine months ended September 30, 1998 and the year ended December 31,
1997, Van Kampen, as Distributor for the Fund, received commissions on sales of
the Fund's Class A shares of approximately $3,000 and $600, respectively and
CDSC on redeemed shares of approximately $24,800 and $19,600, respectively.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
For the nine months ended September 30, 1998, the cost of purchases and proceeds
from sales of investments, excluding short-term investments were $13,279,263 and
$5,673,728, respectively. For the year ended December 31, 1997, the cost of
purchases and proceeds from the 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 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 an 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. 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 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
F-18
<PAGE> 555
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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....................... 0
Futures Opened......................................... 6
Futures Closed......................................... (6)
--
Outstanding at December 31, 1997....................... 0
==
</TABLE>
There were no transactions in futures contracts for the nine months ended
September 30, 1998.
B. 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 nine months ended September 30, 1998, were
as follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
- -----------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1997.......... -0- $ -0-
Options Written and Purchased (Net)....... 100 24,193
Options Terminated in Closing Transactions
(Net)................................... (100) (24,193)
---- --------
Outstanding at September 30, 1998......... -0- $ -0-
==== ========
</TABLE>
There were no transactions in options for the year ended 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% 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 nine months ended September 30, 1998 and the year ended December 31,
1997, are payments retained by Van Kampen of approximately $98,700 and $152,700,
respectively.
F-19
<PAGE> 556
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
7. YEAR 2000 COMPLIANCE (UNAUDITED)
Van Kampen utilizes a number of computer programs across its entire operation
relying on both internal software systems as well as external software systems
provided by third parties. In 1996 Van Kampen initiated a CountDown 2000 Project
to review both the internal systems and external vendor connections. The goal of
this project is to position its business to continue unaffected as a result of
the century change. At this time, there can be no assurance that the steps taken
will be sufficient to avoid any adverse impact to the Fund, but Van Kampen does
not anticipate that the move to Year 2000 will have a material impact on its
ability to continue to provide the Fund with service at current levels. In
addition, it is possible that the securities markets in which the Fund invests
may be detrimentally affected by computer failures throughout the financial
services industry beginning January 1, 2000. Improperly functioning trading
systems may result in settlement problems and liquidity issues.
F-20
<PAGE> 557
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN FLORIDA INSURED TAX FREE INCOME FUND
Van Kampen Florida Insured Tax Free Income Fund (the "Fund") is a mutual fund
with an investment objective to provide investors with a high level of current
income exempt from federal income tax and Florida intangible personal property
taxes, consistent with preservation of capital. The Fund is designed for
investors who are residents of Florida for tax purposes. The Fund's management
seeks to achieve the investment objective by investing primarily in a portfolio
of Florida municipal securities that are insured at the time of investment as to
timely payment of both principal and interest by a top-rated private insurance
company.
The Fund is organized as a non-diversified series of Van Kampen Tax Free
Trust, an open-end, management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This Statement
of Additional Information should be read in conjunction with the Fund's
Prospectus (the "Prospectus") dated as of the same date as this Statement of
Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-2833
for the hearing impaired).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... B-2
Investment Objectives and Policies.......................... B-4
Investment Restrictions..................................... B-19
Description of Securities Ratings........................... B-20
Description of Insurance Company Claims Paying Ability
Ratings................................................... B-25
Trustees and Officers....................................... B-26
Investment Advisory and Other Services...................... B-34
Distribution and Service.................................... B-35
Transfer Agent.............................................. B-38
Portfolio Transactions and Brokerage Allocation............. B-38
Shareholder Services........................................ B-39
Redemption of Shares........................................ B-41
Contingent Deferred Sales Charge-Class A.................... B-41
Waiver of Class B and Class C Contingent Deferred Sales
Charge ("CDSC-Class B and C")............................. B-42
Taxation.................................................... B-43
Fund Performance............................................ B-46
Other Information........................................... B-50
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-11
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY 28, 1999.
B-1
<PAGE> 558
GENERAL INFORMATION
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated May 10, 1995. The Declaration of Trust permits the Trustees to
create one or more separate investment portfolios and issue a series of shares
for each portfolio. The Trustees can further sub-divide each series of shares
into one or more classes of shares for each portfolio.
The Trust was originally organized in 1985 under the name Van Kampen Merritt
Tax Free Trust as a Massachusetts business trust (the "Massachusetts Trust").
The Massachusetts Trust was reorganized into the Trust under the name Van Kampen
American Capital Tax Free Trust on July 31, 1995. The Trust was created for the
purpose of facilitating the Massachusetts Trust reorganization into a Delaware
business trust. On July 14, 1998, the Trust adopted its current name.
The Fund was originally organized in 1994 under the name Van Kampen Merritt
Florida Insured Tax Free Income Fund as a sub-trust of the Massachusetts Trust.
The Fund was reorganized as a series of the Trust under the name Van Kampen
American Capital Florida Insured Tax Free Income Fund on July 31, 1995. On July
14, 1998, the Fund adopted its current name.
Van Kampen Investment Advisory Corp. (the "Adviser" or "Advisory Corp."), Van
Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley Dean Witter & Co. The principal office of the Trust, the Fund,
the Adviser, the Distributor and Van Kampen Investments is located at 1 Parkview
Plaza, PO Box 5555, Oakbrook Terrace, Illinois 60181-5555.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and securities lending.
The authorized capitalization of the Trust consists of an unlimited number of
shares of beneficial interest, par value $0.01 per share, which can be divided
into series, such as the Fund, and further subdivided into classes of each
series. Each share represents an equal proportionate interest in the assets of
the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.
The Fund currently offers three classes of shares, designated Class A Shares,
Class B Shares and Class C Shares. Other classes may be established from time to
time in accordance with provisions of the Declaration of Trust. Each class of
shares of the Fund generally are identical in all respects except that each
class bears certain distribution expenses and has exclusive voting rights with
respect to its distribution fee.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution fee for a class of a series
would be voted upon by shareholders of only the class of such series involved.
Except as otherwise described in the Prospectus or herein, shares do not have
cumulative voting rights, preemptive rights or any conversion, subscription or
exchange rights.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to
B-2
<PAGE> 559
consider the removal of Trustees by a vote of two-thirds of the shares then
outstanding cast in person or by proxy at such meeting. The Fund will assist
such holders in communicating with other shareholders of the Fund to the extent
required by the Investment Company Act of 1940, as amended (the "1940 Act"), or
rules or regulations promulgated by the Securities and Exchange Commission
("SEC").
In the event of liquidation, each of the shares of the Fund is entitled to its
portion of all of the Fund's net assets after all debts and expenses of the Fund
have been paid. Since Class B Shares and Class C Shares have higher distribution
fees and transfer agency costs, the liquidation proceeds to holders of Class B
Shares and Class C Shares are likely to be lower than to holders of Class A
Shares.
The Trustees may amend the Declaration of Trust (including with respect to any
series) in any manner without shareholder approval, except that the Trustees may
not adopt any amendment adversely affecting the rights of shareholders of any
series without approval by a majority of the shares of each affected series
present at a meeting of shareholders (or such higher vote as may be required by
the 1940 Act or other applicable law) and except that the Trustees cannot amend
the Declaration of Trust to impose any liability on shareholders, make any
assessment on shares or impose liabilities on the Trustees without approval from
each affected shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
As of January 4, 1999, no person was known by the Fund to own beneficially or
to hold of record 5% or more of the outstanding Class A Shares, Class B Shares
or Class C Shares of the Fund, except as follows:
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT
NAME AND ADDRESS JANUARY 4, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OWNERSHIP
- ------------------------------------------------------------ ------------ --------- ----------
<S> <C> <C> <C>
NFSC FEBO #APX-296589....................................... 16,572.15 C 12.89%
Alfred L. Kennan TR
Alfred L. Kennan Trust
U/A 8/24/98
5887 Wyldewood Lakes Ct
Fort Myers, FL 33919-3453
First Union Brokerage Services.............................. 13,318.82 C 10.36%
William J. Grant AND
A/C 3823-5816
11111 Country River Rd
Parrish, FL 34218-9055
Marne Obernauer............................................. 158,257.77 A 7.27%
PO Box 306
Bayonne, NJ 07002-0305
NFSC FEBO #APX-298570....................................... 8,947.70 C 6.96%
Virginia R. Kennan TR
Virginia R. Kennan Trust
U/A 6/24/98
5867 Wyldewood Lakes Ct
Fort Myers, FL 33919-3453
Salomon Smith Barney Inc. .................................. 8,803.33 C 6.85%
00138101189
333 West 34th St--3rd Floor
New York, NY 10001-2483
</TABLE>
B-3
<PAGE> 560
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT
NAME AND ADDRESS JANUARY 4, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OWNERSHIP
- ------------------------------------------------------------ ------------ --------- ----------
<S> <C> <C> <C>
NFSC FEBO #APX-271500....................................... 8319.87 C 6.47%
Anna J Fridman
16795 San Carlos Blvd
Fort Myers, FL 33908-3955
John R. Reiss............................................... 6,841.87 C 5.17%
TOD DTD 04/02/98
Subject to Access TOD Rules
4700 S Barna Ave #703
Titusville, FL 32780-6837
Salomon Smith Barney Inc. .................................. 109,214.84 A 5.02%
00142437118
333 West 34th St--3rd Floor
New York, NY 10001-2483
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to this
caption in the Prospectus for a complete presentation of the matters disclosed
below.
MUNICIPAL SECURITIES
Municipal securities include long-term obligations, which often are called
municipal bonds, as well as shorter term municipal notes, municipal leases, and
tax exempt commercial paper. Under normal market conditions, longer term
municipal securities generally provide a higher yield than shorter term
municipal securities, and therefore the Fund generally expects to be invested
primarily in longer term municipal securities. The Fund will, however, invest in
shorter term municipal securities when yields are greater than yields available
on longer term municipal securities, for temporary defensive purposes and when
redemption requests are expected. The two principal classifications of municipal
securities are "general obligation" and "revenue" or "special obligation"
securities, which include "industrial revenue bonds." General obligation
securities are secured by the issuer's pledge of its faith, credit, and taxing
power for the payment of principal and interest. Revenue or special obligation
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source, such as from the user of the facility
being financed. The Fund may also invest in "moral obligation" bonds which are
normally issued by special purpose public authorities. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of such bonds
becomes a moral commitment but not a legal obligation of the state or
municipality in question.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of state and local
governments or authorities used to finance the acquisition of equipment and
facilities. Lease obligations generally do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged. A lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. In addition to the "non-appropriation" risk, these securities represent
a relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by an assignment of the
lessee's interest in
B-4
<PAGE> 561
the leased property, management and/or disposition of the property in the event
of foreclosure could be costly, time consuming and result in unsatisfactory
recoupment of the Fund's original investment. Additionally, use of the leased
property may be limited by state or local law to a specified use thereby further
limiting ability to rent. There is no limitation on the percentage of the Fund's
assets that may be invested in "non-appropriation" lease obligations. In
evaluating such lease obligations, the Adviser will consider such factors as it
deems appropriate, which factors may include (a) whether the lease can be
cancelled, (b) the ability of the lease obligee to direct the sale of the
underlying assets, (c) the general creditworthiness of the lease obligor, (d)
the likelihood that the municipality will discontinue appropriating funding for
the leased property in the event such property is no longer considered essential
by the municipality, (e) the legal recourse of the lease obligee in the event of
such a failure to appropriate funding and (f) any limitations which are imposed
on the lease obligor's ability to utilize substitute property or services than
those covered by the lease obligation.
"Non-Substitution" clauses in municipal lease transactions have recently been
held unenforceable in Florida as violative of public policy. The Fund will
invest in lease obligations which contain non-appropriation clauses only if such
obligations are rated investment grade, at the time of investment.
Also included in the term municipal securities are participation certificates
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 20% of its total assets in derivative variable
rate municipal securities such as inverse floaters whose rates vary inversely
with changes in market rates of interest or range floaters or capped floaters
whose rates are subject to periodic or lifetime caps. Derivative variable rate
securities may pay a rate of interest determined by applying a multiple to the
variable rate. The extent of increases and decreases in the value of derivative
variable rate securities in response to changes in market rates of interest
generally will be larger than comparable changes in the value of an equal
principal amount of a fixed rate municipal security having similar credit
quality, redemption provisions and maturity.
The Fund also may acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain municipal securities. The underwriter of
these certificates or receipts typically purchases municipal securities and
deposits the securities in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Although under the terms of a custodial receipt, the
Fund typically would be authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantor
of such payment obligations, of the municipal securities.
Although the municipal securities in which the Fund may invest will be insured
as to timely payment of principal and interest, municipal securities, like other
debt obligations, are subject to the risk of non-payment. The ability of issuers
of municipal securities to make timely payments of interest and principal may be
B-5
<PAGE> 562
adversely impacted in general economic downturns and as relative governmental
cost burdens are allocated and reallocated among federal, state and local
governmental units. Such non-payment would result in a reduction of income to
the Fund, and could result in a reduction in the value of the municipal security
experiencing non-payment and a potential decrease in the net asset value of the
Fund. Issuers of municipal securities might seek protection under the bankruptcy
laws. In the event of bankruptcy of such an issuer, the Fund could experience
delays and limitations with respect to the collection of principal and interest
on such municipal securities and the Fund may not, in all circumstances, be able
to collect all principal and interest to which it is entitled. To enforce its
rights in the event of a default in the payment of interest or repayment of
principal, or both, the Fund may take possession of and manage the assets
securing the issuer's obligations on such securities, which may increase the
Fund's operating expenses and adversely affect the net asset value of the Fund.
Any income derived from the Fund's ownership or operation of such assets may not
be tax-exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the extent to which the Fund may exercise its rights by
taking possession of such assets, because as a regulated investment company the
Fund is subject to certain limitations on its investments and on the nature of
its income. Further, in connection with the working out or restructuring of a
defaulted security, the Fund may acquire additional securities of the issuer,
the acquisition of which may be deemed to be a loan of money or property. Such
additional securities should be considered speculative with respect to the
capacity to pay interest or repay principal in accordance with their terms.
INSURANCE
As described in the Prospectus, the Fund invests primarily in municipal
securities which are either pre-insured under a policy obtained for such
securities prior to the purchase of such securities or will be insured under
policies obtained by the Fund to cover otherwise uninsured securities.
ORIGINAL ISSUE INSURANCE. Original Issue Insurance is purchased with respect
to a particular issue of municipal securities by the issuer thereof or a third
party in conjunction with the original issuance of such municipal securities.
Under such insurance, the insurer unconditionally guarantees to the holder of
the insured municipal security the timely payment of principal and interest on
such obligation when and as such payments shall become due but shall not be paid
by the issuer; except that in the event of any acceleration of the due date of
the principal by reason of mandatory or optional redemption (other than
acceleration by reason of a mandatory sinking fund payment), default or
otherwise, the insured payments may be made in such amounts and at such times as
payments of principal would have been due had there not been such acceleration.
The insurer is responsible for such payments less any amounts received by the
holder from any trustee for the municipal security issuers or from any other
source. Original Issue Insurance generally does not insure payment on an
accelerated basis, the payment of any redemption premium (except with respect to
certain premium payments in the case of certain small issue industrial
development and pollution control municipal securities), the value of the shares
of the Fund or the market value of municipal securities, or payments of any
tender purchase price upon the tender of the municipal securities. Original
Issue Insurance also does not insure against nonpayment of principal of or
interest on municipal securities resulting from the insolvency, negligence or
any other act or omission of the trustee or other paying agent for such
obligations.
In the event that interest on or principal of a municipal security covered by
insurance is due for payment but is unpaid by reason of nonpayment by the issuer
thereof, the applicable insurer will make payments to its fiscal agent (the
"Fiscal Agent") equal to such unpaid amounts of principal and interest not later
than one business day after the insurer has been notified that such nonpayment
has occurred (but not earlier than the date of such payment is due). The Fiscal
Agent will disburse to the Fund the amount of principal and interest which is
then due for payment but is unpaid upon receipt by the Fiscal Agent of (i)
evidence of the Fund's right to receive payment of such principal and interest
and (ii) evidence, including any appropriate instrument of assignment, that all
of the rights of payment of such principal or interest then due for payment
shall thereupon vest in the insurer. Upon payment by the insurer of any
principal or interest payments with respect to any municipal securities, the
insurer shall succeed to the rights of the Fund with respect to such payment.
Original Issue Insurance remains in effect as long as the municipal securities
covered thereby remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal securities.
Consequently, Original Issue Insurance may be considered to represent an element
of
B-6
<PAGE> 563
market value with respect to the municipal securities so insured, but the exact
effect, if any, of this insurance on such market value cannot be estimated.
SECONDARY MARKET INSURANCE. Subsequent to the time of original issuance of a
municipal security, the Fund or a third party may, upon the payment of a single
premium, purchase insurance on such municipal security. Secondary Market
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance and, as is the case with Original Issue Insurance,
Secondary Market Insurance remains in effect as long as the municipal security
covered thereby remains outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal security.
All premiums respecting municipal securities covered by Original Issue Insurance
or Secondary Market Insurance are paid in advance by the issuer or other party
obtaining the insurance.
One of the purposes of acquiring Secondary Market Insurance with respect to a
particular municipal security would be to enhance the value of such municipal
security. The Fund, for example, might seek to purchase a particular municipal
security and obtain Secondary Market Insurance with respect thereto if, in the
opinion of the Adviser, the market value of such municipal security, as insured,
would exceed the current value of the municipal security without insurance plus
the cost of the Secondary Market Insurance. Similarly, if the Fund owns but
wishes to sell a municipal security that is then covered by Portfolio Insurance,
the Fund might seek to obtain Secondary Market Insurance with respect thereto
if, in the opinion of the Adviser, the net proceeds of a sale by the Fund of
such obligation, as insured, would exceed the current value of such obligation
plus the cost of the Secondary Market Insurance.
PORTFOLIO INSURANCE. The Portfolio Insurance policies obtained by the Fund
would insure the payment of principal and interest on specified eligible
municipal securities purchased by the Fund. Except as described below, Portfolio
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance or Secondary Market Insurance. Municipal securities
insured under one Portfolio Insurance policy generally would not be insured
under any other policy purchased by the Fund. A municipal security is eligible
for coverage under a policy if it meets certain requirements of the insurer.
Portfolio Insurance is intended to reduce financial risk, but the cost thereof
and compliance with investment restrictions imposed under the policy will reduce
the yield to shareholders of the Fund. If a municipal security already is
covered by Original Issue Insurance of Secondary Market Insurance, the Fund is
not required to additionally insure any such municipal security under any policy
of Portfolio Insurance that the Fund may purchase.
Portfolio Insurance policies are effective only as to municipal securities
owned and held by the Fund, and do not cover municipal securities for which the
contract for purchase fails. A "when-issued" municipal security will be covered
under a Portfolio Insurance policy upon the settlement date of the issue of such
"when-issued" municipal security.
In determining whether to insure municipal securities held by the Fund, an
insurer will apply its own standards, which correspond generally to the
standards it has established for determining the insurability of new issues of
municipal securities. See "Original Issue Insurance" above.
Each Portfolio Insurance policy will be non-cancellable and will remain in
effect so long as the Fund is in existence, the municipal securities covered by
the policy continue to be held by the Fund, and the Fund pays the premiums for
the policy. Each insurer generally will reserve the right at any time upon 90
days written notice to the Fund to refuse to insure any additional securities
purchased by the Fund after the effective date of such notice. The Board of
Trustees of the Fund generally will reserve the right to terminate each policy
upon seven days written notice to an insurer if it determines that the cost of
such policy is not reasonable in relation to the value of the insurance to the
Fund.
Each Portfolio Insurance policy shall terminate as to any municipal security
that has been redeemed from or sold by the Fund on the date of such redemption
or the settlement date of such sale, and an insurer shall not have any liability
thereafter under a policy as to any such municipal security, except that if the
date of such redemption or the settlement date of such sale occurs after a
record date and before the related payment date with respect to any such
municipal security, the policy will terminate as to such municipal security on
the business day immediately following such payment date. Each policy will
terminate as to all municipal
B-7
<PAGE> 564
securities covered thereby on the date on which the last of the covered
municipal securities mature, are redeemed or are sold by the Fund.
One or more policies of Portfolio Insurance may provide the Fund, pursuant to
an irrevocable commitment of the insurer, with the option to exercise the right
to obtain permanent insurance ("Permanent Insurance") with respect to a
municipal security that is to be sold by the Fund. The Fund would exercise the
right to obtain Permanent Insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such municipal
security. It is expected that the Fund will exercise the right to obtain
Permanent Insurance for a municipal security only if, in the opinion of the
Adviser, upon such exercise the net proceeds from the sale by the Fund of such
obligation, as insured, would exceed the proceeds from the sale of such
obligation without insurance. The Permanent Insurance premium with respect to
each such obligation is determined based upon the insurability of each such
obligation as of the date of purchase by the Fund and will not be increased or
decreased for any change in the creditworthiness of such obligation unless such
obligation is in default as to payment of principal or interest, or both. In
such event, the Permanent Insurance premium shall be subject to an increase
predetermined at the date of purchase by the Fund.
Because each Portfolio Insurance policy will terminate as to municipal
securities sold by the Fund on the date of sale, in which event the insurer will
be liable only for those payments of principal and interest that are then due
and owing (unless Permanent Insurance is obtained by the Fund), the provision
for this insurance will not enhance the marketability of securities held by the
Fund, whether or not the securities are in default or in significant risk of
default. On the other hand, since Original Issue Insurance and Secondary Market
Insurance will remain in effect as long as municipal securities covered thereby
are outstanding, such insurance may enhance the marketability of such securities
even when such securities are in default or in significant risk of default, but
the exact effect, if any, on the marketability cannot be estimated. Accordingly,
the Fund may determine to retain or, alternatively, to sell municipal securities
covered by Original Issue Insurance or Secondary Market Insurance that are in
default or in significant risk of default.
GENERAL. It is anticipated that certain of the municipal securities to be
purchased by the Fund will be insured under policies obtained by persons other
than the Fund. In instances in which the Fund purchases municipal securities
insured under policies obtained by persons other than the Fund, the Fund does
not pay the premiums for such policies; rather the cost of such policies may be
reflected in a higher purchase price for such municipal securities. Accordingly,
the yield on such municipal securities may be lower than that on similar
uninsured municipal securities. Premiums for a Portfolio Insurance Policy
generally are paid by the Fund monthly, and are adjusted for purchases and sales
of municipal securities covered by the policy during the month. The yield on the
Fund's portfolio is reduced to the extent of the insurance premiums paid by the
Fund which, in turn, will depend upon the characteristics of the covered
municipal securities held by the Fund. In the event the Fund were to purchase
Secondary Market Insurance with respect to any municipal securities then covered
by a Portfolio Insurance policy, the coverage and the obligation of the Fund to
pay monthly premiums under such policy would cease with such purchase.
There can be no assurance that insurance of the kind described above will
continue to be available to the Fund. In the event that such insurance is no
longer available or that the cost of such insurance outweighs the benefits to
the Fund in the view of the Board of Trustees, the Board will consider whether
to modify the investment policies of the Fund, which may require the approval of
shareholders. In the event the claims-paying ability rating of an insurer of
municipal securities in the Fund's portfolio were to be lowered from AAA by
Standard and Poor's ("S&P"), Aaa by Moody's Investor Services, Inc. ("Moody's")
or an equivalent rating by another nationally recognized statistical ratings
organization ("NRSRO"), or if the Adviser anticipates such a lowering or
otherwise does not believe an insurer's claims-paying ability merits its
existing triple-A rating, the Fund could seek to obtain additional insurance
from an insurer whose claims-paying ability is rated AAA by S&P, Aaa by Moody's
or an equivalent rating by another NRSRO, or if the Adviser determines that the
cost of obtaining such additional insurance outweigh the benefits, the Fund may
elect not to obtain additional insurance. In making such determination, the
Adviser will consider the cost of the additional insurance, the new
claims-paying ability rating and financial condition of the existing insurer and
the creditworthiness of the issuer or guarantor of the underlying municipal
securities. The Adviser also may determine not to purchase additional insurance
in such circumstances if it believes that the insurer is taking steps which will
cause its triple-A claims paying ability rating to be restored promptly.
B-8
<PAGE> 565
Although the Adviser periodically reviews the financial condition of each
insurer, there can be no assurance that the insurers will be able to honour
their obligations under all circumstances. The Fund cannot predict the
consequences of a state takeover of an insurer's obligations and, in particular,
whether such an insurer (or its state regulatory agency) could or would honour
all of the insurer's contractual obligations including any outstanding insurance
contracts insuring the timely payment of principal and interest on municipal
securities. The Fund cannot predict the impact which such events might have on
the market values of such municipal security. In the event of a default by an
insurer on its obligations with respect to any municipal securities in the
Fund's portfolio, the Fund would look to the issuer or guarantor of the relevant
municipal securities for payments of principal and interest and such issuer or
guarantor may not be rated AAA by S&P, Aaa by Moody's or an equivalent rating by
another NRSRO. Accordingly, the Fund could be exposed to greater risk of
non-payment in such circumstances which could adversely affect the Fund's net
asset value. Alternatively, the Fund could elect to dispose of such municipal
securities; however, the market prices for such municipal securities may be
lower than the Fund's purchase price for them and the Fund could sustain a
capital loss as a result.
Although the insurance on municipal securities reduces financial or credit
risk in respect of the insured obligations (i.e., the possibility that owners of
the insured municipal securities will not receive timely scheduled payments of
principal or interest), insured municipal securities remain subject to market
risk
(i.e., fluctuations in market value as a result of changes in prevailing
interest rates). Accordingly, insurance on municipal securities does not insure
the market value of the Fund's assets or the net asset value.
SPECIAL CONSIDERATIONS REGARDING FLORIDA MUNICIPAL SECURITIES
GENERAL. As described in the Prospectus, except during temporary periods, the
Fund will invest substantially all of its assets in Florida municipal
securities. The Fund is therefore susceptible to political, economic, regulatory
or other factors affecting issuers of Florida municipal securities. In addition,
the specific Florida municipal securities in which the Fund will invest are
expected to change from time to time. The following information constitutes only
a brief summary of some of the complex factors which may have an impact on the
financial situation of issuers of Florida municipal securities and does not
purport to be a complete or exhaustive description of all adverse conditions to
which issuers of Florida municipal securities may be subject and is not
applicable to "conduit" obligations, such as industrial development revenue
bonds, with respect to which the public issuer itself has no financial
responsibility. Such information is derived from certain official statements of
the State of Florida published in connection with the issuance of specific State
of Florida securities, as well as from other publicly available documents. Such
information has not been independently verified by the Fund and may not apply to
all Florida municipal securities acquired by the Fund. The Fund assumes no
responsibility for the completeness or accuracy of such information.
Additionally, many factors, including national, economic, social and
environmental policies and conditions, which are not within the control of such
issuers, could have an adverse impact on the financial condition of such
issuers. The Fund cannot predict whether or to what extent such factors or other
factors may affect the issuers of Florida municipal securities, the market value
or marketability of such securities or the ability of the respective issuers of
such securities acquired by the Fund to pay interest on or principal of such
securities. The creditworthiness of obligations issued by local Florida issuers
may be unrelated to the creditworthiness of obligations issued by the State of
Florida, and there is no responsibility on the part of the State of Florida to
make payments on such local obligations. There may be specific factors that are
applicable in connection with investment in the obligations of particular
issuers located within Florida, and it is possible the Fund will invest in
obligations of particular issuers as to which such specific factors are
applicable. However, the information set forth below is intended only as a
general summary and not as a discussion of any specific factors that may affect
any particular issuer of Florida municipal securities.
Florida state and local government obligations may be adversely affected by
political and economic conditions and developments within the State of Florida
and the nation as a whole. Florida's economic outlook is generally projected to
reflect the national economic outlook, and is expected to experience steady if
unspectacular growth over the next couple of years. The Florida constitution and
statutes require a balanced budget, which may affect the ability of the State of
Florida to issue and/or repay its obligations. In addition, various limitations
on the State of Florida, its governmental agencies and its local governments,
including
B-9
<PAGE> 566
school and special districts and authorities, may inhibit the ability of these
issuers to repay existing indebtedness and issue additional indebtedness. The
ability of such issuers to repay revenue bonds may also depend on the success of
the capital projects to which they relate. The ability of such issuers to repay
general obligation bonds will also depend on the success of such issuer
maintaining its ad valorem tax base.
INVESTMENT PRACTICES AND POLICIES OF ISSUERS OF FLORIDA MUNICIPAL
ISSUERS. Florida law does provide certain restrictions on the investment of
funds for the State of Florida and its local governments; however, with respect
to all municipalities and its charter counties, such restrictions may be limited
by the constitutional home rule powers of such entities. Although the Florida
municipal securities which may be purchased by the Fund will be insured, only
those securities which are insured by Original Issuance Insurance will contain
restrictions on investments imposed by the issuer of such insurance. Because
statutory restrictions on investments and investment policies with respect to
the investment of funds is limited by constitutional home rule powers, there can
be no assurance as to whether any issuer will suffer losses as a result of
investments or the magnitude or any such losses.
POPULATION, INCOME AND EMPLOYMENT. Florida has experienced a large population
growth. As of April 1, 1997, Florida ranks fourth with an estimated population
of 14.7 million. Since the beginning of the eighties, Florida has surpassed
Ohio, Illinois and Pennsylvania in total population. Because of the national
recession, Florida's net in-migration declined to 138,000 in 1992, but migration
has since recovered and reached 255,000 in 1996. The personal income of
residents of Florida has been growing strongly the last several years and
generally has historically outperformed both the nation as a whole and the
southeast in particular. The State's economy since the early seventies has
diversified in such a way as to provide a greater insulation from national
economic downturns. The structure of income of residents of Florida differs from
that of the nation and the southeast in that, due to a proportionately greater
retirement age population, property income (dividends, interest and rent) and
transfer payments (Social Security and pension benefits, among other sources of
income) are an important source of income.
Real personal income in Florida is estimated to increase at 4.9% and 3.5% for
1998-99 and 1999-00 respectively, while real personal income per capita is
projected to grow 3.1% in 1998-99 and 1.8% in 1999-00.
Florida's economic dependence on the highly cyclical construction and
construction related industries has declined over time. The service and trade
sectors are Florida's largest employers. Presently, the State's service and
trade sectors employment constitutes approximately 60% of the total non-farm
employment. While structurally the southeast and the nation are endowed with a
greater proportion of manufacturing jobs, which tend to pay higher wages,
service jobs are less sensitive to business cycle swings.
Historically, Florida's unemployment rate has generally tracked below that of
the nation; however, beginning with the recession in the early 1990's, the trend
reversed. Since 1995, the State's unemployment rate has again been below or
about the same as the nations. The unemployment rate for Florida in 1997 was
4.8% while the nation's rate in 1997 was 4.9%. Florida's unemployment rate is
expected to be 4.5% for fiscal year 1998-99 and 4.7% in 1999-00.
TOURISM INDUSTRY. Tourism is one of Florida's most important industries.
Approximately 47 million people visited the State in 1997. By the end of fiscal
year 1998-99, 49.7 million domestic and international tourists are expected to
have visited the State. In 1999-00 tourist arrivals should approximate 50.6
million.
STATE FINANCIAL OPERATIONS. Financial operations of the State covering all
receipts and expenditures are maintained through the use of four funds--the
General Revenue Fund, Trust Funds, the Working Capital Fund, and the Budget
Stabilization Fund. In fiscal year 1996-97, the State derived an estimated 67%
of its total direct revenues to these funds from state taxes and fees. Federal
funds and other special revenues accounted for the remaining revenues. Major
sources of tax revenues to the General Revenue Fund are the sales and use tax,
corporate income tax, intangible personal property tax, beverage tax and estate
tax, which amounted to 68%, 8%, 4%, 3% and 3% respectively, of the total General
Revenue funds available. State expenditures are categorized for budget and
appropriation purposes by type of fund and spending unit, which are further
subdivided by line item. In fiscal year 1996-97, appropriations from the General
Revenue Fund for education, health and welfare, and public safety amounted to
approximately 53%, 26%, and 14%, respectively, of total General Revenues.
B-10
<PAGE> 567
The sales and use tax is the greatest single source of tax receipts in
Florida. The sales tax is 6% of the sales price of tangible personal property
sold at retail in the State. The use tax is at 6% of the cost price of tangible
personal property when the same is not sold but is used, or stored for use, in
the State. Slightly less than 10% of the sales tax is designated for local
governments and is distributed to the respective counties in which collected for
use by the county and the municipalities therein. In addition to this
distribution, local governments may (by referendum) assess certain discretionary
sales surtaxes within their county, for certain purposes, restricted as to
amount. The proceeds of these surtaxes are required to be applied to the
purposes for which such surtax is assessed.
For the State fiscal year which ended June 30, 1997, receipts from the sales
and use tax were $12,089 million, an increase of 5.5% from fiscal year 1995-96.
The second largest source of State tax receipts, including those distributed
to local governments, is the tax on motor fuels. Preliminary data show
collections from this source in the State fiscal year ending June 30, 1997 were
$2,012 million. However, these revenues are almost entirely trust funds
dedicated for specific purposes and are not included in the State General
Revenue Fund. Alcoholic beverage tax and license revenues totalled $447.2
million in the State fiscal year ended June 30, 1997. The receipts of corporate
income tax for the State fiscal year ended June 30, 1997 were $1,362.3 million,
an increase of 17.2% over the prior fiscal year. In November 1986, the voters of
the State approved a constitutional amendment to allow the State to operate a
lottery, the proceeds of which are required to be applied as follows: 50% to be
returned to the public as prizes, at least 38% to be deposited in the
Educational Enhancement Trust (for public education), and no more than 12% to be
spent on the administrative cost of operating the lottery. State fiscal year
1996-97 produced gross revenues of $2.09 billion of which education received
approximately $792.3 million.
The State Constitution does not permit a personal income tax. An amendment to
the State Constitution would be required to impose a personal income tax in the
State.
For fiscal year 1998-99, the estimated General Revenue plus Working Capital
and Budget Stabilization funds available total $19,463.7 million, 5.1% increase
over 1997-98.
For fiscal year 1999-00, the estimated General Revenue plus Working Capital
and Budget Stabilization funds available total $19,923.7 million, a 2.4%
increase over 1998-99. The $18,386.1 million in Estimated Revenues represent a
3.9% increase over the analogous figure in 1998-99.
LOCAL GOVERNMENT REVENUE SOURCES. County and municipal governments in Florida
depend primarily upon ad valorem property taxes, and sales, motor fuels and
other local excise taxes and miscellaneous revenue sources, including revenues
from utilities services. Florida school districts derive substantially all of
their revenues from local property taxes. The overall levels of revenues from
these sources is in part dependent upon the local, state and national economy.
Local government obligations held by the Fund may constitute general obligations
or may be special obligations payable solely from one or more specified revenue
sources. The ability of the local governments to repay their obligations on a
timely basis will be dependent upon the continued strength of the revenues
pledged and of the overall fiscal status of the local government.
STATE CONSTITUTIONAL AMENDMENT LIMITING STATE REVENUES. An amendment to the
Constitution of the State of Florida was approved by the voters of the State of
Florida at the November 1994 general election. This amendment limits the amount
of taxes, fees, licenses and charges imposed by the State Legislature and
collected during any fiscal year to the amount of revenues allowed for the prior
fiscal year, plus an adjustment for growth. Growth is defined as the amount
equal to the average annual rate of growth in Florida personal income over the
most recent twenty quarters times the state revenues allowed for the prior
fiscal year. The revenues allowed for any fiscal year could be increased by a
two-thirds vote of the Legislature. The limit was effective in the fiscal year
1995-1996. Excess revenues generated will initially be deposited in the budget
stabilization fund until it is fully funded; any additional excess revenues will
then be refunded to taxpayers. This amendment could limit the amount of actual
revenues from which the State of Florida could appropriate funds, including
funds appropriated to local governments. It is unclear at this point what
effect, if any, this amendment would have on local government debt obligations
payable from state revenues which may be subject to this amendment, such as
state revenue sharing moneys or other state revenues distributed to local
governments. Certain State of Florida debt obligations, which are not by their
terms subject to appropriation,
B-11
<PAGE> 568
should not be affected, depending upon the language of the legislation
authorizing the issuance of such obligations.
OTHER FACTORS. Florida will continue to face enormous spending pressures well
into the future. The large number of elderly residents will continue to demand
health services, an area where cost escalation is significant, and the constant
influx of people to Florida will continue to place sizable pressure on the State
for infrastructure needs.
The value of Florida municipal instruments may also be affected by general
conditions in the money markets or the municipal bond markets, the levels of
federal income tax rates, the supply of tax-exempt bonds, the credit quality and
rating of the issues and perceptions with respect to the level of interest
rates.
There can be no assurance that there will not be a decline in economic
conditions or that particular Florida municipal securities in the portfolio of
the Fund will not be adversely affected by any such changes.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, financial futures, interest rate indices and
other financial instruments, purchase and sell financial futures contracts and
options thereon, or enter into various interest rate transactions such as swaps,
caps, floors or collars (collectively, all the above are called "Strategic
Transactions"). Strategic Transactions may be used to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets fluctuations, to
protect the Fund's unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of the Fund's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchasing or
selling particular securities.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of futures and options transactions should tend to minimize the
risk of loss due to a decline in the value of the hedged
B-12
<PAGE> 569
position, at the same time they tend to limit any potential gain which might
result from an increase in value of such position. Finally, the daily variation
margin requirements for futures contracts would create a greater ongoing
potential financial risk than would purchases of options, where the exposure is
limited to the cost of the initial premium. Losses resulting from the use of
Strategic Transactions would reduce net asset value, and possibly income, and
such losses can be greater than if the Strategic Transactions had not been
utilized. Income earned or deemed to be earned, if any, by the Fund from its
Strategic Transactions will generally be taxable income of the Fund.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
B-13
<PAGE> 570
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only enter into OTC options that have a buy-back provision permitting
the Fund to require the Counterparty to close the option at a formula price
within seven days. The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other NRSRO. The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on illiquid securities
described herein.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities that are traded on securities exchanges
and in the over-the-counter markets and related futures on such contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold. In the event of exercise of a call option
sold by the Fund with respect to securities not owned by the Fund, the Fund may
be required to acquire the underlying security at a disadvantageous price in
order to satisfy its obligation with respect to the call option.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and corporate debt securities (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The purchase of a futures contract
creates a firm obligation by the Fund, as purchaser, to take delivery from the
seller the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of
B-14
<PAGE> 571
financial instrument called for in the contract at a specific future time for a
specified price (or, with respect to index futures and Eurodollar instruments,
the net cash amount). Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
and obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) for other than bona fide hedging purposes if, immediately
thereafter, the sum of the amount of its initial margin and premiums on open
futures contracts and options thereon would exceed 5% of the Fund's total assets
(taken at current value); however, in the case of an option that is in-the-money
at the time of the purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. The segregation requirements with respect to
futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the
B-15
<PAGE> 572
Fund anticipates purchasing at a later date. The Fund intends to use these
transactions as hedges and not as speculative investments and will not sell
interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. An index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash and liquid
securities with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash and liquid
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash and
liquid securities equal to the excess of the index value over the exercise price
on a current basis. A put option written by the Fund requires the Fund to
segregate cash and liquid securities equal to the exercise price.
OTC options entered into by the Fund, including those on securities, financial
instruments or indices and OCC issued and exchange listed index options, will
generally provide for cash settlement. As a result, when the Fund sells these
instruments it will only segregate an amount of cash and liquid securities equal
to its accrued net obligations, as there is no requirement for payment or
delivery of amounts in excess of the net amount. These amounts will equal 100%
of the exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out cash and liquid securities equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, and the Fund will segregate an
amount of cash and liquid securities equal to the full value of the option. OTC
options settling
B-16
<PAGE> 573
with physical delivery, or with an election of either physical delivery or cash
settlement, will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
cash and liquid securities sufficient to meet its obligation to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of cash and liquid securities with a value equal to the Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash and
liquid securities, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating cash and liquid
securities if the Fund held a futures or forward contract, it could purchase a
put option on the same futures or forward contract with a strike price as high
or higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction no segregation is required, but if it
terminates prior to such time, cash and liquid securities equal to any remaining
obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of the Code for qualification as a regulated investment company.
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may also purchase and sell municipal securities on a "when-issued"
and "delayed delivery" basis. No income accrues to the Fund on municipal
securities in connection with such transactions prior to the date the Fund
actually takes delivery of such securities. These transactions are subject to
market fluctuation; the value of the municipal securities at delivery may be
more or less than their purchase price, and yields generally available on
municipal securities when delivery occurs may be higher or lower than yields on
the municipal securities obtained pursuant to such transactions. Because the
Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. When the Fund is the buyer in such a transaction, however, it
will maintain, in a segregated account with its custodian, cash or liquid
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. The Fund will make commitments to purchase
municipal securities on such basis only with the intention of actually acquiring
these securities, but the Fund may sell such securities prior to the settlement
date if such sale is considered to be advisable. To the extent the Fund engages
in "when-issued" and "delayed delivery" transactions, it will do so for the
purpose of acquiring securities for the Fund's portfolio consistent with the
Fund's investment objectives and policies and not for the purposes of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when-issued" or "delayed
delivery" basis.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The Fund's portfolio turnover rate (the lesser of
the value of the securities purchased or securities sold divided by the average
value of the securities held in the Fund's portfolio excluding all securities
whose maturities at acquisition were one year or less) is shown in the table of
"Financial Highlights" in the Prospectus. A high portfolio turnover rate (100%
or more) increases the Fund's transaction costs, including brokerage
B-17
<PAGE> 574
commissions, and may result in the realization of more short-term capital gains
than if the Fund had a lower portfolio turnover. The turnover rate will not be a
limiting factor, however, if the Adviser deems portfolio changes appropriate.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities, which
includes securities that are not readily marketable, repurchase agreements which
have a maturity of longer than seven days and generally includes securities that
are restricted from sale to the public without registration under the Securities
Act of 1933, as amended (the "1933 Act"). The sale of such securities often
requires more time and results in higher brokerage charges or dealer discounts
and other selling expenses than does the sale of liquid securities trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities are often purchased at a discount from the market price of
unrestricted securities of the same issuer reflecting the fact that such
securities may not be readily marketable without some time delay. Investments in
securities which have no ready market are valued at fair value as determined in
good faith by the Adviser in accordance with procedures approved by the Fund's
Trustees. Ordinarily, the Fund would invest in restricted securities only when
it receives the issuer's commitment to register the securities without expense
to the Fund. However, registration and underwriting expenses (which may range
from 7% to 15% of the gross proceeds of the securities sold) may be paid by the
Fund. Restricted securities which can be offered and sold to qualified
institutional buyers under Rule 144A under the 1933 Act ("144A Securities") and
are determined to be liquid under guidelines adopted by and subject to the
supervision of the Fund's Board of Trustees are not subject to the limitation on
illiquid securities. Such 144A Securities are subject to monitoring and may
become illiquid to the extent qualified institutional buyers become, for a time,
uninterested in purchasing such securities. Factors used to determine whether
144A Securities are liquid include, among other things, a security's trading
history, the availability of reliable pricing information, the number of dealers
making quotes or making a market in such security and the number of potential
purchasers in the market for such security. For purposes hereof, investments by
the Fund in securities of other investment companies will not be considered
investments in restricted securities to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption
or other relief from the provisions of the 1940 Act.
B-18
<PAGE> 575
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions which
may not be changed without approval by the vote of a majority of its outstanding
voting shares, which is defined by the 1940 Act as the lesser of (i) 67% or more
of the voting securities present in person or by proxy at the meeting, if the
holders of more than 50% of the outstanding voting securities are present in
person or by proxy; or (ii) more than 50% of the outstanding voting securities.
The Fund may not:
1. Invest more than 25% of its assets in a single industry; however, the Fund
may from time to time invest more than 25% of its assets in a particular
segment of the municipal bond market; however, the Fund will not invest
more than 25% of its assets in industrial development bonds in a single
industry, and except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
2. Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the total asset value of the Fund, or mortgage,
pledge, or hypothecate any assets except in connection with a borrowing
and in amounts not in excess of 10% of the total asset value of the Fund.
Borrowings may not be made for investment leverage, but only to enable the
Fund to satisfy redemption requests where liquidation of portfolio
securities is considered disadvantageous or inconvenient. In this
connection, the Fund will not purchase portfolio securities during any
period that such borrowings exceed 5% of the total asset value of the
Fund. Notwithstanding this investment restriction, the Fund may enter into
when issued and delayed delivery transactions.
3. Make loans of money or property to any person, except to the extent the
securities in which the Fund may invest are considered to be loans and
except that the Fund may lend money or property in connection with
maintenance of the value of, or the Fund's interest with respect to, the
securities owned by the Fund.
4. Buy any securities "on margin." Neither the deposit of initial or
maintenance margin in connection with hedging transactions nor short term
credits as may be necessary for the clearance of transactions is
considered the purchase of a security on margin.
5. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except in connection with
Strategic Transactions in accordance with the requirements of the SEC and
the Commodity Futures Trading Commission.
6. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
7. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under agreements related to securities owned by the Fund would be deemed
to constitute such control or participation, and except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
8. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except that the Fund
may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
9. Invest in oil, gas or mineral leases or in equity interests in oil, gas,
or other mineral exploration or development programs, except pursuant to
the exercise by the Fund of its rights under agreements relating to
municipal securities.
B-19
<PAGE> 576
10. Purchase or sell real estate, commodities or commodity contracts, except
to the extent the securities the Fund may invest in are considered to be
interest in real estate, commodities or commodity contracts or to the
extent the Fund exercises its rights under agreements relating to such
securities (in which case the Fund may own, hold, foreclose, liquidate or
otherwise dispose of real estate acquired as a result of a default on a
mortgage), and except to the extent that Strategic Transactions the Fund
may engage in are considered to be commodities or commodities contracts.
As long as the percentage restrictions described above are satisfied at the
time of the investment or borrowing, the Fund will be considered to have abided
by those restrictions even if, at a later time, a change in values or net assets
causes an increase or decrease in percentage beyond that allowed.
DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S--A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P follows):
A S&P corporate or municipal debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment--capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the
terms of the obligation:
2. Nature of and provisions of the obligation:
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditor's rights.
LONG-TERM DEBT--INVESTMENT GRADE
<TABLE>
<S> <C>
AAA: Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to meet its financial commitment on the obligation
is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only
in small degree. Capacity to meet its financial commitment
on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions
than obligations in higher rated categories. Capacity to
meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
to meet its financial commitment on the obligation.
</TABLE>
B-20
<PAGE> 577
SPECULATIVE GRADE
BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
<TABLE>
<S> <C>
BB: Debt rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the
obligation.
B: Debt rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the
capacity to meet its financial commitment on the obligation.
Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and
economic conditions for the obligor to meet its financial
commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is
not likely to have the capacity to meet its financial
commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to
nonpayment.
C: The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being
continued.
D: Debt rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made
on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period. The "D" rating also will be used
upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
R: This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to
principal or volatility of expected returns which are not
addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment
risk--such as interest-only or principal-only mortgage
securities; and obligations with unusually risky interest
terms, such as inverse floaters.
</TABLE>
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating.
The following criteria will be used in making that assessment.
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
<TABLE>
<S> <C>
SP-1: Strong or strong capacity to pay principal and interest.
Issues determined to possess very strong characteristics are
a plus (+) designation.
</TABLE>
B-21
<PAGE> 578
<TABLE>
<S> <C>
SP-2: Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse Financial and economic changes
over the term of the notes.
SP-3: Speculative capacity to pay principal and interest.
</TABLE>
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from
'A-1' for the highest quality obligations to 'D' for the lowest. These
categories are as follows:
<TABLE>
<S> <C>
A-1: A short-term obligation rated A-1 is rated in the highest
category by S&P. The obligor's capacity to meet its
financial commitment on the obligation is strong. Within
this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is
extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is
satisfactory.
A-3: A short-term obligation rated A-3 exhibits adequate
protection parameters. However, adverse economic conditions
or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated B is regarded as having
significant speculative characteristics. The obligor
currently has the capacity to meet its financial commitment
on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C: A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent on favorable business,
financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D: A short-term obligation rated D is in payment default. The D
rating is used when payments on an obligation are not made
on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
</TABLE>
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by
the issuer or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in
or unavailability of, such information.
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option
or demand feature as part of their structure.
The first rating addresses the likelihood of repayment of principal
and interest as due, and the second rating addresses only the demand
feature. The long-term debt rating symbols are used for bonds to denote the
long-term maturity and the commercial paper rating symbols for the put
option (for example, 'AAA/ A-1+'). With short-term demand debt, S&P's note
rating symbols are used with the commercial paper rating symbols (for
example, 'SP-1+/A-1+').
B-22
<PAGE> 579
MOODY'S INVESTORS SERVICE INC.--A brief description of the applicable Moody's
Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
<TABLE>
<S> <C>
AAA: Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edged." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some
time in the future.
BAA: Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor
poorly secured). Interest payment and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may
be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
CA: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers, 1, 2, and 3 in each
generic rating classification from Aa to B. The modifier 1
indicates that the issue ranks in the higher end of its
generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
</TABLE>
Absence of Rating: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the
quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
B-23
<PAGE> 580
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date date to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term ratings, while other factors of major importance
in bond risk, long-term secular trends for example, may be less important
over the short run. A short-term rating may also be assigned on an issue
having a demand feature-variable rate demand obligation. Such ratings will
be designated as VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
SG. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity
in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933,
nor does it represent that any specific note is a valid obligation of a
rated issuer or issued in conformity with any applicable law.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Issuers rated Prime-1 (on supporting institutions) have a superior
ability for repayment of short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
B-24
<PAGE> 581
-- Well established access to a ranges of financial markets and
assured sources of alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or supported institutions) have an acceptable
ability for repayment of short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the prime rating
categories.
DESCRIPTION OF INSURANCE COMPANY CLAIMS PAYING ABILITY RATINGS
RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
The claims-paying ability of insurance companies is rated by S&P and Moody's.
Descriptions of these ratings are set forth below:
DESCRIPTION OF S&P'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
AAA. Superior financial security on an absolute and relative basis. Capacity
to meet policyholder obligations is overwhelming under a variety of economic and
underwriting conditions.
AA. Excellent financial security. Capacity to meet policyholder obligations is
strong under a variety of economic and underwriting conditions.
A. Good financial security, but capacity to meet policyholder obligations is
somewhat susceptible to adverse economic and underwriting conditions.
BBB. Adequate financial security, but capacity to meet policyholder
obligations is susceptible to adverse economic and underwriting conditions.
Note: Plus (+) and minus (-) signs indicate relative standing within a category,
and are not indications of likely upgrades or downgrades.
DESCRIPTION OF MOODY'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
AAA. Insurance companies rated Aaa offer exceptional financial security. While
the financial strength of these companies is likely to change, such changes as
can be visualized are most unlikely to impair their fundamentally strong
position.
AA. Insurance companies rated Aa offer excellent financial security. Together
with the Aaa group they constitute what are generally known as high grade
companies. They are rated lower than Aaa companies because long-term risks
appear somewhat larger.
A. Insurance companies rated A offer good financial security. However,
elements may be present which suggest a susceptibility to impairment sometime in
the future.
B-25
<PAGE> 582
BAA. Insurance companies rated Baa offer adequate financial security. However,
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time.
Note: Numeric modifiers are used to refer to the ranking within the group -- one
being the highest and three being the lowest. However, the financial strength of
companies within a generic rating symbol (Aa, for example) is broadly the same.
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and officers of the Fund and
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with Van
Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment
Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Management
Inc., Van Kampen Advisors Inc., Van Kampen Insurance Agency of Illinois Inc.,
Van Kampen Insurance Agency of Texas Inc., Van Kampen System Inc., Van Kampen
Recordkeeping Services Inc., American Capital Contractual Services, Inc., Van
Kampen Trust Company, Van Kampen Exchange Corp. and Van Kampen Investor Services
Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are
referred to herein collectively as the "Advisers". For purposes hereof, the term
"Fund Complex" includes each of the open-end investment companies advised by the
Advisers (excluding Van Kampen Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee/Director of each of the
funds in the Fund Complex.
Richard M. DeMartini*..................... Chairman and Chief Executive Officer of International
Two World Trade Center Private Client Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Chairman of Dean Witter Futures & Currency
New York, NY 10048 Management Inc. and Demeter Management Corporation.
Date of Birth: 10/12/52 Director of Dean Witter Reynolds Inc. Chairman and
Director of Dean Witter Capital Corporation. Chairman,
Chief Executive Officer, President and a Director of Dean
Witter Alliance Capital Corporation, Director of the
National Healthcare Resources, Inc., Morgan Stanley Dean
Witter Distributors, Inc., Dean Witter Realty Inc., Dean
Witter Reynolds Venture Equities Inc., DW Window Covering
Holding, Inc., and is a member of the Morgan Stanley Dean
Witter Management Committee. Prior to December of 1998,
Mr. DeMartini was President and Chief Operating Officer
of Morgan Stanley Dean Witter Individual Asset Management
and a Director of Morgan Stanley Dean Witter Trust FSB.
Formerly Vice Chairman of the Board of the National
Association of Securities Dealers, Inc. and Chairman of
the Board of the Nasdaq Stock Market, Inc. Trustee of the
TCW/DW Funds, Director of the Morgan Stanley Dean Witter
Funds and Trustee/Director of each of the funds in the
Fund Complex.
</TABLE>
B-26
<PAGE> 583
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board,
Vice Chair of the Board of The YMCA of Metropolitan
Chicago and a member of the Women's Board of the
University of Chicago. Prior to 1996, Trustee of The
International House Board. Trustee/Director of each of
the funds in the Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and Member of the Investment Committee
of the Joyce Foundation, a private foundation.
Trustee/Director of each of the funds in the Fund
Complex.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee/Director of each of
the funds in the Fund Complex.
Don G. Powell*............................ Currently a member of the board of governors and
3 Wexford Court executive committee for the Investment Company Institute,
Houston, TX 77024 and a member of the Board of Trustees of the Houston
Date of Birth: 10/19/39 Museum of Natural Science. Immediate past Chairman of the
Investment Company Institute. Prior to January 1999,
Chairman and a Director of Van Kampen Investments, the
Advisers, the Distributor and Investor Services and
Director or officer of certain other subsidiaries of Van
Kampen Investments. Prior to July of 1998, Director and
Chairman of VK/AC Holding, Inc. Prior to November 1996,
President, Chief Executive Officer and a Director of
VK/AC Holding, Inc. Trustee/Director of each of the funds
in the Fund Complex and Trustee of other funds advised by
the Advisers or Van Kampen Management Inc.
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer services company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company and
Date of Birth: 07/08/44 the Urban Shopping Centers Inc., a retail mall management
company. Trustee, University of Notre Dame. Prior to
1998, Director of Stone Smurfit Container Corp., a paper
manufacturing company. Formerly, President, Chief
Executive Officer and Chief Operating Officer of Waste
Management, Inc., an environmental services company.
Trustee/Director of each of the funds in the Fund
Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
</TABLE>
B-27
<PAGE> 584
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen Management Inc.
Trustee/Director of each of the funds in the Fund
Complex, and Trustee/Managing General Partner of other
open-end and closed-end funds advised by the Advisers or
Van Kampen Management Inc.
Paul G. Yovovich.......................... Private investor. Prior to April 1996, President of
Sears Tower Advance Ross Corporation. Director of 3Com Corporation,
233 South Wacker Drive APAC Teleservices, Inc., and COMARCO, Inc.
Suite 9700 Trustee/Director of each of the Funds in the Fund
Chicago, IL 60606 Complex.
Date of Birth: 10/29/53
</TABLE>
- ------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
current or former positions with Morgan Stanley Dean Witter & Co. or its
affiliates.
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Sullivan, Wood, Dalmaso, Martin, Wetherell
and Hill are located at 1 Parkview Plaza, PO Box 5555, Oakbrook Terrace, IL
60181-5555. The Fund's other officers are located at 2800 Post Oak Blvd.,
Houston, TX 77056.
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Dennis J. McDonnell.................. Executive Vice President and a Director of Van Kampen
Date of Birth: 05/20/42 Investments. President, Chief Operating Officer and a
President Director of the Advisers, Van Kampen Advisors Inc., and Van
Kampen Management Inc. Prior to July of 1998, Director and
Executive Vice President of VK/AC Holding, Inc. Prior to
April of 1998, President and a Director of Van Kampen
Merritt Equity Advisors Corp. Prior to April of 1997, Mr.
McDonnell was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996, Mr. McDonnell was
Chief Executive Officer and Director of MCM Group, Inc.,
McCarthy, Crisanti & Maffei, Inc. and Chairman and Director
of MCM Asia Pacific Company, Limited and MCM (Europe)
Limited. Prior to July of 1996, Mr. McDonnell was President,
Chief Operating Officer and Trustee of VSM Inc. and VCJ Inc.
President of each of the funds in the Fund Complex.
President, Chairman of the Board and Trustee/Managing
General Partner of other investment companies advised by the
Advisers or their affiliates.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Prior to July
Vice President of 1996, Mr. Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of McCarthy, Crisanti &
Maffei, Inc. Vice President of each of the funds in the Fund
Complex and certain other investment companies advised by
the Advisers or their affiliates.
</TABLE>
B-28
<PAGE> 585
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
John L. Sullivan..................... First Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Treasurer, Vice President and Chief Financial
Treasurer, Vice President and Chief Officer of each of the funds in the Fund Complex and certain
Financial Officer other investment companies advised by the Advisers or their
affiliates.
Curtis W. Morell..................... Senior Vice President of the Advisers, Vice President and
Date of Birth: 08/04/46 Chief Accounting Officer of each of the funds in the Fund
Vice President and Chief Accounting Complex and certain other investment companies advised by
Officer the Advisers or their affiliates.
Ronald A. Nyberg..................... Executive Vice President, General Counsel, Secretary and
Date of Birth: 07/29/53 Director of Van Kampen Investments. Mr. Nyberg is Executive
Vice President and Secretary Vice President, General Counsel, Assistant Secretary and a
Director of the Advisers and the Distributor, Van Kampen
Advisors Inc., Van Kampen Management Inc., Van Kampen
Exchange Corp., American Capital Contractual Services, Inc.
and Van Kampen Trust Company. Executive Vice President,
General Counsel and Assistant Secretary of Investor Services
and River View International Inc. Director or officer of
certain other subsidiaries of Van Kampen Investments.
Director of ICI Mutual Insurance Co., a provider of
insurance to members of the Investment Company Institute.
Prior to July of 1998, Director and Executive Vice
President, General Counsel and Secretary of VK/AC Holding,
Inc. Prior to April of 1998, Executive Vice President,
General Counsel and Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he was Executive Vice
President, General Counsel and a Director of Van Kampen
Merritt Equity Holdings Corp. Prior to September of 1996, he
was General Counsel of McCarthy, Crisanti & Maffei, Inc.
Prior to July of 1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc. and Executive Vice
President and General Counsel of VCJ Inc. Vice President and
Secretary of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Paul R. Wolkenberg................... Executive Vice President and Director of Van Kampen
Date of Birth: 11/10/44 Investments. Executive Vice President of Asset Management
Vice President and the Distributor. President and a Director of Investor
Services. President and Chief Operating Officer of Van
Kampen Recordkeeping Services Inc. Prior to July of 1998,
Director and Executive Vice President of VK/AC Holding, Inc.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Edward C. Wood III................... Senior Vice President of the Advisers, Van Kampen
Date of Birth: 01/11/56 Investments and Van Kampen Management Inc. Senior Vice
Vice President President and Chief Operating Officer of the Distributor.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Tanya M. Loden....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 11/19/59 Controller of each of the funds in the Fund Complex and
Controller other investment companies advised by the Advisers or their
affiliates.
</TABLE>
B-29
<PAGE> 586
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Nicholas Dalmaso..................... Associate General Counsel and Assistant Secretary of Van
Date of Birth: 03/01/65 Kampen Investments. Vice President, Associate General
Assistant Secretary Counsel and Assistant Secretary of the Advisers, the
Distributor, Van Kampen Advisors Inc. and Van Kampen
Management Inc. Assistant Secretary of each of the funds in
the Fund Complex and other investment companies advised by
the Advisers or their affiliates.
Scott E. Martin...................... Senior Vice President, Deputy General Counsel and Assistant
Date of Birth: 08/20/56 Secretary of Van Kampen Investments. Senior Vice President,
Assistant Secretary Deputy General Counsel and Secretary of the Advisers, the
Distributor, Investor Services, American Capital Contractual
Services, Inc., Van Kampen Management Inc., Van Kampen
Exchange Corp., Van Kampen Advisors Inc., Van Kampen
Insurance Agency of Illinois Inc., Van Kampen System Inc.
and Van Kampen Recordkeeping Services Inc. Prior to July of
1998, Senior Vice President, Deputy General Counsel and
Assistant Secretary of VK/AC Holding, Inc. Prior to April of
1998, Van Kampen Merritt Equity Advisors Corp. Prior to
April of 1997, Senior Vice President, Deputy General Counsel
and Secretary of Van Kampen American Capital Services, Inc.
and Van Kampen Merritt Holdings Corp. Prior to September of
1996, Mr. Martin was Deputy General Counsel and Secretary of
McCarthy, Crisanti & Maffei, Inc., and prior to July of
1996, he was Senior Vice President, Deputy General Counsel
and Secretary of VSM Inc. and VCJ Inc. Assistant Secretary
of each of the funds in the Fund Complex and other
investment companies advised by the Advisers or their
affiliates.
Weston B. Wetherell.................. Vice President, Associate General Counsel and Assistant
Date of Birth: 06/15/56 Secretary of Van Kampen Investments, the Advisers, the
Assistant Secretary Distributor, Van Kampen Management Inc. and Van Kampen
Advisors Inc. Prior to September of 1996, Mr. Wetherell was
Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.
Assistant Secretary of each of the funds in the Fund Complex
and other investment companies advised by the Advisers or
their affiliates.
Steven M. Hill....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 10/16/64 Assistant Treasurer of each of the funds in the Fund Complex
Assistant Treasurer and other investment companies advised by the Advisers or
their affiliates.
Michael Robert Sullivan.............. Assistant Vice President of the Advisers. Assistant
Date of Birth: 03/30/33 Controller of each of the funds in the Fund Complex and
Assistant Controller other investment companies advised by the Advisers or their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 65 operating funds in the Fund Complex. Each trustee/director who is not an
affiliated person of Van Kampen Investments, the Advisers or the Distributor
(each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex (except the money market series of the Van Kampen Series Fund, Inc.
provides a deferred compensation plan to its Non-Affiliated Trustees that allows
trustees/directors to defer receipt of their compensation and earn a return on
such deferred amounts. Deferring compensation has the economic effect as if the
Non-Affiliated Trustee reinvested his or her compensation into the funds. Each
fund in the Fund Complex (except the money market series of the Van Kampen
Series Fund, Inc.) provides a retirement plan to its Non-Affiliated Trustees
that provides Non-Affiliated Trustees with compensation after retirement,
provided that certain eligibility requirements are met as more fully described
below.
B-30
<PAGE> 587
Effective January 1, 1998, the trustees adopted a standardized compensation
and benefits program for each fund in the Fund Complex. The compensation of each
Non-Affiliated Trustee includes an annual retainer in an amount equal to $50,000
per calendar year, due in four quarterly installments on the first business day
of each quarter. Payment of the annual retainer is allocated among the funds in
the Fund Complex (except the money market series of the Van Kampen Series Fund,
Inc.) on the basis of the relative net assets of each fund as of the last
business day of the preceding calendar quarter. The compensation of each
Non-Affiliated Trustee includes a per meeting fee from each fund in the Fund
Complex (except the money market series of the Van Kampen Series Fund, Inc.) in
the amount of $200 per quarterly or special meeting attended by the
Non-Affiliated Trustee, due on the date of the meeting, plus reasonable expenses
incurred by the Non-Affiliated Trustee in connection with his or her services as
a trustee, provided that no compensation will be paid in connection with certain
telephonic special meetings.
Under the deferred compensation plan, each Non-Affiliated Trustee generally
can elect to defer receipt of all or a portion of the compensation earned by
such Non-Affiliated Trustee until retirement. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to the return on the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
----------------------------------------------------------
AGGREGATE AGGREGATE TOTAL
PENSION OR ESTIMATED MAXIMUM COMPENSATION
AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan $9,790 $35,691 $60,000 $125,200
Linda Hutton Heagy 8,390 3,861 60,000 112,800
R. Craig Kennedy 9,790 2,652 60,000 125,200
Jack E. Nelson 9,790 18,385 60,000 125,200
Phillip B. Rooney 9,790 6,002 60,000 125,200
Dr. Fernando Sisto 9,790 68,615 60,000 125,200
Wayne W. Whalen 9,790 12,658 60,000 125,200
Paul G. Yovovich(1) 0 0 60,000 25,300
</TABLE>
- ---------------
(1) Mr. Paul G. Yovovich became a member of the Board of Trustees effective
October 22, 1998 and thus does not have a full fiscal year of information to
report. Trustees not eligible for compensation or retirement benefits are
not shown in the table.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Trust's fiscal period ended September 30, 1998.
The detail of aggregate compensation before deferral
B-31
<PAGE> 588
for each series, including the Fund, is shown in Table A below. The detail of
amounts deferred for each series, including the Fund, is shown in Table B below.
Amounts deferred are retained by the Fund and earn a rate of return determined
by reference to either the return on the common shares of the Fund or other
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted by
the 1940 Act, each Fund may invest in securities of those funds selected by
the Non-Affiliated Trustees in order to match the deferred compensation
obligation. The detail of cumulative deferred compensation (including
interest) owed to current Trustees by each series, including the Fund, is
shown in Table C below. The deferred compensation plan is described above the
Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for their respective fiscal years ended in 1998. The retirement
plan is described above the Compensation Table.
(4) This is the sum of the estimated maximum annual benefits payable by the
operating investment companies in the Fund Complex for each year of the
10-year period commencing in the year of such trustee's anticipated
retirement. The Retirement Plan is described above the Compensation Table.
Each Non-Affiliated Trustee of the Board of Trustees has served as a member
of the Board of Trustees since he or she was first appointed or elected in
the year set forth in Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1998 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1998. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
trustees were not trustees of such investment companies. Combining the Fund
Complex with other investment companies advised by the Advisers and their
affiliates, Mr. Whalen received Total Compensation of $285,825 during the
calendar year ended December 31, 1998.
As of January 4, 1999, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.
B-32
<PAGE> 589
TABLE A
1998 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL --------------------------------------------------------------------------
FUND NAME YEAR-END* BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............. 9/30 $2,352 $2,152 $2,352 $2,352 $2,352 $2,352 $2,352 $0
Tax Free High Income Fund................ 9/30 1,961 1,761 1,961 1,961 1,961 1,961 1,961 0
California Insured Tax Free Fund......... 9/30 1,005 805 1,005 1,005 1,005 1,005 1,005 0
Municipal Income Fund.................... 9/30 1,931 1,731 1,931 1,931 1,931 1,931 1,931 0
Intermediate Term Municipal Income
Fund................................... 9/30 841 641 841 841 841 841 841 0
Florida Insured Tax Free Income Fund..... 9/30 858 658 858 858 858 858 858 0
New York Tax Free Income Fund............ 9/30 842 642 842 842 842 842 842 0
------ ------ ------ ------ ------ ------ ------ --
Trust Total............................ $9,790 $8,390 $9,790 $9,790 $9,790 $9,790 $9,790 $0
====== ====== ====== ====== ====== ====== ====== ==
</TABLE>
*In 1998, the Fund changed its fiscal year-end from December 31 to September
30. Accordingly, the information reported in this column represents information
for the nine-month fiscal period ended September 30, 1998.
TABLE B
1998 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL --------------------------------------------------------------------------
FUND NAME YEAR-END* BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............. 9/30 $2,352 $2,152 $1,176 $2,352 $2,352 $1,176 $2,352 $0
Tax Free High Income Fund................ 9/30 1,961 1,761 981 1,961 1,961 981 1,961 0
California Insured Tax Free Fund......... 9/30 1,005 805 503 1,005 1,005 503 1,005 0
Municipal Income Fund.................... 9/30 1,931 1,731 966 1,931 1,931 966 1,931 0
Intermediate Term Municipal Income
Fund................................... 9/30 841 641 421 841 841 421 841 0
Florida Insured Tax Free Income Fund..... 9/30 858 658 429 858 858 429 858 0
New York Tax Free Income Fund............ 9/30 842 642 421 842 842 421 842 0
------ ------ ------ ------ ------ ------ ------ --
Trust Total............................ $9,790 $8,390 $4,897 $9,790 $9,790 $4,897 $9,790 $0
====== ====== ====== ====== ====== ====== ====== ==
</TABLE>
*In 1998, the Fund changed its fiscal year-end from December 31 to September
30. Accordingly, the information reported in this column represents information
for the nine-month fiscal period ended September 30, 1998.
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEES
FISCAL --------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- -------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund..................... 9/30 $ 6,579 $ 8,672 $12,057 $ 17,744 $ 3,758 $ 4,177 $15,328 $0
Tax Free High Income
Fund..................... 9/30 6,211 8,299 11,879 17,384 3,388 2,473 14,960 0
California Insured Tax Free
Fund..................... 9/30 5,320 7,393 11,446 16,513 2,492 2,035 14,067 0
Municipal Income Fund...... 9/30 7,043 9,700 15,366 22,215 3,622 8,799 19,040 0
Intermediate Term Municipal
Income Fund.............. 9/30 5,166 7,238 11,372 16,363 2,337 1,959 13,913 0
Florida Insured Tax Free
Income Fund.............. 9/30 5,183 7,254 7,093 11,846 2,354 1,967 10,870 0
New York Tax Free Income
Fund..................... 9/30 2,288 1,814 3,430 5,111 1,700 958 4,413 0
------- ------- ------- -------- ------- ------- ------- --
Trust Total............ $37,790 $50,370 $72,643 $107,176 $19,651 $22,368 $92,591 $0
======= ======= ======= ======== ======= ======= ======= ==
<CAPTION>
FORMER TRUSTEES
-----------------------------------------------------------------
FUND NAME CARUSO GAUGHAN LIPSHIE MILLER REES ROBINSON VERNON
--------- ------ ------- ------- ------ ---- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund..................... $2,695 $1,985 $ 212 $ 9,164 $ 0 $13,380 $ 327
Tax Free High Income
Fund..................... 0 1,985 0 9,164 0 13,380 0
California Insured Tax Free
Fund..................... 0 1,985 0 9,164 0 13,380 0
Municipal Income Fund...... 5,804 2,455 961 12,382 7,502 17,483 1,287
Intermediate Term Municipal
Income Fund.............. 0 1,985 0 9,164 0 13,380 0
Florida Insured Tax Free
Income Fund.............. 0 927 0 5,817 0 9,599 0
New York Tax Free Income
Fund..................... 0 295 0 2,344 0 3,740 0
------ ------- ------ ------- ------ ------- ------
Trust Total............ $8,499 $11,617 $1,173 $57,199 $7,502 $84,342 $1,614
====== ======= ====== ======= ====== ======= ======
</TABLE>
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------
FUND NAME BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......................... 1995 1995 1993 1984 1997 1995 1984 1998
Tax Free High Income Fund............................ 1995 1995 1993 1985 1997 1995 1985 1998
California Insured Tax Free Fund..................... 1995 1995 1993 1985 1997 1995 1985 1998
Municipal Income Fund................................ 1995 1995 1993 1990 1997 1995 1990 1998
Intermediate Term Municipal Income Fund.............. 1995 1995 1993 1993 1997 1995 1993 1998
Florida Insured Tax Free Income Fund................. 1995 1995 1994 1994 1997 1995 1994 1998
New York Tax Free Income Fund........................ 1995 1995 1994 1994 1997 1995 1994 1998
</TABLE>
B-33
<PAGE> 590
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement (the
"Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate and
implement the Fund's investment objectives. The Adviser also furnishes the
services of the Fund's President and such other executive and clerical personnel
as are necessary to prepare the various reports and statements and conduct the
Fund's day-to-day operations. The Fund, however, bears the cost of its
accounting services, which include maintaining its financial books and records
and calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of the Fund's Treasurer and the
personnel operating under his direction. Charges are allocated among the
investment companies advised or subadvised by the Adviser or its affiliates. A
portion of these amounts is paid to the Adviser or its affiliates in
reimbursement of personnel, office space, facilities and equipment costs
attributable to the provision of accounting services to the Fund. See
"Accounting Services Agreement" below. The Fund also pays distribution fees,
service fees, custodian fees, legal and auditing fees, the costs of reports to
shareholders, and all other ordinary business expenses not specifically assumed
by the Adviser. The Advisory Agreement also provides that the Adviser shall not
be liable to the Fund for any error of judgment or of law, or for any loss
suffered by the Fund in connection with the matters to which the agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence on the part of the Adviser in the performance of its obligations and
duties, or by reason of its reckless disregard of its obligations and duties
under the agreement.
Under the Advisory Agreement, the Fund pays to the Adviser, as compensation
for the services rendered, facilities furnished, and expenses paid by it, a
monthly fee payable computed based upon an annual rate applied to the average
daily net assets of the Fund as follows: 0.500% on the first $500 million of
average daily net assets and 0.450% on the average daily net assets over $500
million.
The Fund's average net assets are determined by taking the average of all of
the determinations of the net assets during a given calendar month. Such fee is
payable for each calendar month as soon as practicable after the end of that
month.
The Advisory Agreement also provides that, in the event the annual expenses of
the Fund for any fiscal year exceed the most stringent limit in any state in
which the Fund's shares are offered for sale, the compensation due the Adviser
will be reduced by the amount of such excess and that, if a reduction in and
refund of the advisory fee is insufficient, the Adviser will pay the Fund
monthly an amount sufficient to make up the deficiency, subject to readjustment
during the year.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on 60 days' written notice.
During the fiscal period ended September 30, 1998 and the fiscal years ended
December 31, 1997 and 1996, the Adviser received $0, $0 and $0, respectively, in
advisory fees from the Fund.
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which Advisory Corp. provides accounting services
to the Fund. The Fund shares together with the other Van Kampen funds in the
cost of providing such services, with 25% of such costs shared proportionately
based on the respective number of classes of securities issued per fund and the
remaining 75% of such cost based proportionally on their respective net assets
per fund.
During the fiscal period ended September 30, 1998 and the fiscal years ended
December 31, 1997 and 1996, Advisory Corp. received $0, $0 and $0, respectively,
in accounting services fees from the Fund.
B-34
<PAGE> 591
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen funds
advised by the Adviser and distributed by the Distributor have entered into
Legal Services Agreements pursuant to which Van Kampen Investments provides
legal services, including without limitation: accurate maintenance of the fund's
minute books and records, preparation and oversight of the fund's regulatory
reports, and other information provided to shareholders, as well as responding
to day-to-day legal issues on behalf of the funds. Payment by the Fund for such
services is made on a cost basis for the salary and salary related benefits,
including but not limited to bonuses, group insurance and other regular wages
for the employment of personnel, as well as overhead and the expenses related to
the office space and the equipment necessary to render the legal services. Other
funds distributed by the Distributor also receive legal services from Van Kampen
Investments. Of the total costs for legal services provided to funds distributed
by the Distributor, one half of such costs are allocated equally to each fund
and the remaining one half of such costs are allocated to specific funds based
on monthly time records.
During the fiscal period ended September 30, 1998 and the fiscal years ended
December 31, 1997 and 1996, Van Kampen Investments received $0, $0 and $0,
respectively, in legal services fees from the Fund.
DISTRIBUTION AND SERVICE
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Fund through
authorized dealers on a continuous basis. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required to
take and pay for only such shares of the Fund as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and certain other costs including the cost of
supplemental sales literature and advertising. The Distribution and Service
Agreement is renewable from year to year if approved (a)(i) by the Fund's
Trustees or (ii) by the affirmative vote of a majority of the Fund's outstanding
voting securities and (b) by the affirmative vote of a majority of Trustees who
are not parties to the Distribution and Service Agreement or interested persons
of any party, by votes cast in person at a meeting called for such purpose. The
Distribution and Service Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on 90 days'
written notice. Total underwriting commissions on the sale of shares of the Fund
for the last three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
TOTAL UNDER- AMOUNTS
WRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------ --------------
<S> <C> <C>
Fiscal Period Ended September 30, 1998...................... $144,891 $ 16,749
Fiscal Year Ended December 31, 1997......................... $ 15,284 $128,317
Fiscal Year Ended December 31, 1996......................... $ 18,660 $143,174
</TABLE>
With respect to sales of Class A Shares of the Fund, the total sales charges
and concessions reallowed to authorized dealers at the time of purchase are as
follows:
CLASS A SHARES SALES CHARGE TABLE
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-------------------------------------------------
REALLOWED TO
AS % OF NET DEALERS AS
AS % OF AMOUNT A % OF
SIZE OF INVESTMENT OFFERING PRICE INVESTED OFFERING PRICE
------------------ ------------------ ----------- --------------
<S> <C> <C> <C>
Less than $100,000..................................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000........................ 3.75% 3.90% 3.25%
$250,000 but less than $500,000........................ 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000...................... 2.00% 2.04% 1.75%
$1,000,000 or more..................................... * * *
</TABLE>
- ---------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a deferred
sales charge of 1.00% on certain redemptions made within one year of the
purchase. A commission or transaction fee will be paid by the Distributor at
the time of purchase directly out of the Distributor's assets (and not out of
the Fund's assets) to authorized dealers who initiate
B-35
<PAGE> 592
and are responsible for purchases of $1 million or more computed based on a
percentage of the dollar value of such shares sold as follows: 1.00% on sales
to $2 million, plus 0.80% on the next $1 million and 0.50% on the excess over
$3 million.
With respect to sales of Class B Shares and Class C Shares of the Fund, a
commission or transaction fee generally will be paid by the Distributor at the
time of purchase directly out of the Distributor's assets (and not out of the
Fund's assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 4.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any deferred sales charge and any distribution fees on Class B
Shares and Class C Shares of the Fund are paid to the Distributor and are used
by the Distributor to defray its distribution related expenses in connection
with the sale of the Fund's shares, such as the payment to authorized dealers
for selling such shares. With respect to Class C Shares, the authorized dealers
generally are paid the ongoing commission and transaction fees of up to 0.75% of
the average daily net assets of the Fund's Class C Shares annually commencing in
the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any authorized dealer that sponsors
sales contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the authorized dealer at the public offering price during such programs.
Other programs provide, among other things and subject to certain conditions,
for certain favorable distribution arrangements for shares of the Fund. Also,
the Distributor in its discretion may from time to time, pursuant to objective
criteria established by the Distributor, pay fees to, and sponsor business
seminars for, qualifying authorized dealers for certain services or activities
which are primarily intended to result in sales of shares of the Fund. Fees may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives for meetings or seminars
of a business nature. In some instances additional compensation or promotional
incentives may be offered to brokers, dealers or financial intermediaries that
have sold or may sell significant amounts of shares during specified periods of
time. The Distributor may provide additional compensation to Edward D. Jones &
Co. or an affiliate thereof based on a combination of its sales of shares and
increases in assets under management. All of the foregoing payments are made by
the Distributor out of its own assets. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of the Fund on an annual basis. These
programs will not change the price an investor will pay for shares or the amount
that a Fund will receive from such sale.
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. State securities
laws regarding registration of banks and other financial institutions may differ
from the interpretations of federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to
certain state laws.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans". The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Distribution Plan and the Service Plan are being implemented
through an agreement (the "Distribution and Service Agreement") with the
Distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients
B-36
<PAGE> 593
certain services or assistance, which may include, but not be limited to,
processing purchase and redemption transactions, establishing and maintaining
shareholder accounts regarding the Fund, and such other services as may be
agreed to from time to time and as may be permitted by applicable statute, rule
or regulation. Brokers, dealers and financial intermediaries that have entered
into sub-agreements with the Distributor and sell shares of the Fund are
referred to herein as "financial intermediaries."
The Distributor must submit quarterly reports to the Board of Trustees of the
Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Distribution Plan and the purposes for which
such expenditures were made, together with such other information as from time
to time is reasonably requested by the Trustees. The Plans provide that they
will continue in full force and effect from year to year so long as such
continuance is specifically approved by a vote of the Trustees, and also by a
vote of the disinterested Trustees, cast in person at a meeting called for the
purpose of voting on the Plans. Each of the Plans may not be amended to increase
materially the amount to be spent for the services described therein with
respect to any class of shares without approval by a vote of a majority of the
outstanding voting shares of such class, and all material amendments to either
of the Plans must be approved by the Trustees and also by the disinterested
Trustees. Each of the Plans may be terminated with respect to any class of
shares at any time by a vote of a majority of the disinterested Trustees or by a
vote of a majority of the outstanding voting shares of such class.
The Plans generally provide for the Fund to reimburse the lesser of (i) the
distribution and service fees at the rates specified in the prospectus or (ii)
the amount of the Distributor's actual expenses incurred less any deferred sales
charges it received. For Class A Shares, to the extent the Distributor is not
fully reimbursed in a given year, there is no carryover of such unreimbursed
amounts to succeeding years. For each of the Class B Shares and Class C Shares,
to the extent the Distributor is not fully reimbursed in a given year, any
unreimbursed expenses for such class will be carried forward and paid by the
Fund in future years so long as such Plans are in effect. Except as mandated by
applicable law, the Fund does not impose any limit with respect to the number of
years into the future that such unreimbursed expenses may be carried forward (on
a Fund level basis). Because such expenses are accounted on a Fund level basis,
in periods of extreme net asset value fluctuation such amounts with respect to a
particular Class B Share of Class C Share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such share. In such circumstances, a shareholder of a share may be
deemed to incur expenses attributable to other shareholders of such class. As of
September 30, 1998, there were $763,721 and $10,720 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 3.23% and 0.66% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Plan were terminated
or not continued, the Fund would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through deferred sales charge.
Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution-related expenses
attributable to any other class of shares.
For the fiscal period ended September 30, 1998, the Fund's aggregate expenses
under the Plans for Class A Shares were 48,633 or 0.25% of the Class A Shares'
average daily net assets. Such expenses were paid to reimburse the Distributor
for payments made to financial intermediaries for servicing Fund shareholders
and for administering the Plans. For the fiscal period ended September 30, 1998,
the Fund's aggregate expenses under the Class B Plan were $168,987 or 1.00% of
the Class B Shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $127,644 for commissions and transaction
fees paid to financial intermediaries in respect of sales of Class B Shares of
the Fund and $41,343 for fees paid to financial intermediaries for servicing
Class B shareholders and administering the Plans. For the fiscal period ended
September 30, 1998, the Fund's aggregate expenses under the Plans for Class C
Shares were $9,183 or 1.00% of the Class C Shares' average net assets. Such
expenses were paid to reimburse the Distributor for the following payments;
$5,940 for commissions and transaction fees paid to financial intermediaries in
respect of
B-37
<PAGE> 594
sales of Class C Shares of the Fund and $3,243 for fees paid to financial
intermediaries for servicing Class C shareholders and administering the Class C
Plan.
TRANSFER AGENT
The Fund's transfer agent is Van Kampen Investor Services Inc., PO Box 418256,
Kansas City, MO 64141-9256. During the fiscal period ended September 30, 1998
and the fiscal years ended December 31, 1997 and 1996, Investor Services,
shareholder service agent and dividend disbursing agent for the Fund, received
fees aggregating $0, $0 and $0, respectively for these services. Prior to 1998,
these services were provided at cost plus a profit. Beginning in 1998, the
transfer agency prices are determined through negotiations with the Fund's Board
of Trustees and are based on competitive benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of the Fund's
portfolio business, the policies and practices in this regard will at all times
be subject to review by the trustees of the Fund.
As most transactions made by the Fund are principal transactions at net
prices, the Fund generally incurs little or no brokerage costs. The portfolio
securities in which the Fund invests are normally purchased directly from the
issuer or in the over-the-counter market from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include a spread or markup to the dealer
between the bid and asked price. Sales to dealers are effected at bid prices.
The Fund may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid, or may purchase and
sell listed bonds on a exchange, which are effected through brokers who charge a
commission for their services.
The Adviser is responsible for placing portfolio transactions and does so in a
manner deemed fair and reasonable to the Fund and not according to any formula.
The primary consideration in all portfolio transactions is prompt execution of
orders in an effective manner at the most favorable price. In selecting
broker/dealers and in negotiating prices and any brokerage commissions on such
transactions, the Adviser considers the firm's reliability, integrity and
financial condition and the firm's execution capability, the size and breadth of
the market for the security, the size of and difficulty in executing the order,
and the best net price. There are many instances when, in the judgment of the
Adviser, more than one firm can offer comparable execution services. In
selecting among such firms, consideration may be given to those firms which
supply research and other services in addition to execution services. The
Adviser is authorized to pay higher commissions to brokerage firms that provide
it with investment and research information than to firms which do not provide
such services if the Adviser determines that such commissions are reasonable in
relation to the overall services provided. No specific value can be assigned to
such research services which are furnished without cost to the Adviser. Since
statistical and other research information is only supplementary to the research
efforts of the Adviser to the Fund and still must be analyzed and reviewed by
its staff, the receipt of research information is not expected to reduce its
expenses materially. The investment advisory fee is not reduced as a result of
the Adviser's receipt of such research services. Services provided may include
(a) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or pur-chasers or sellers of securities; (b) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts; and (c) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement and custody). Research services furnished by firms through
which the Fund effects its securities transactions may be used by the Adviser in
servicing all of its advisory accounts; not all of such services may be used by
the Adviser in connection with the Fund.
B-38
<PAGE> 595
The Adviser also may place portfolio transactions, to the extent permitted by
law, with brokerage firms affiliated with the Fund, the Adviser or the
Distributor and with brokerage firms participating in the distribution of the
Fund's shares if it reasonably believes that the quality of execution and the
commission are comparable to that available from other qualified firms.
Similarly, to the extent permitted by law and subject to the same considerations
on quality of execution and comparable commission rates, the Adviser may direct
an executing broker to pay a portion or all of any commissions, concessions or
discounts to a firm supplying research or other services or to a firm
participating in the distribution of the Fund's shares.
The Adviser may place portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for the Fund and another advisory account.
In some cases, this procedure could have an adverse effect on the price or the
amount of securities available to the Fund. In making such allocations among the
Fund and other advisory accounts, the main factors considered by the Adviser are
the respective sizes of the Fund and other advisory accounts, the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
Effective October 31, 1996, Morgan Stanley Group Inc. ("Morgan Stanley")
became an affiliate of the Adviser. Effective May 31, 1997, Dean Witter Discover
& Co. ("Dean Witter") became an affiliate of the Adviser. The trustees have
adopted certain policies incorporating the standards of Rule 17e-1 issued by the
SEC under the 1940 Act which requires that the commissions paid to affiliates of
the Fund must be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time. The rule and procedures also contain review requirements and require
the Adviser to furnish reports to the trustees and to maintain records in
connection with such reviews. After consideration of all factors deemed
relevant, the trustees will consider from time to time whether the advisory fee
for the Fund will be reduced by all or a portion of the brokerage commission
given to affiliated brokers.
The Fund paid the following commissions to all brokers and affiliated brokers
during the periods shown:
<TABLE>
<CAPTION>
AFFILIATED BROKERS
-------------------
MORGAN DEAN
BROKERS STANLEY WITTER
------- ---------- ------
<S> <C> <C> <C>
Commission paid:
Fiscal period ended September 30, 1998.................... $ 880 -- --
Fiscal year ended December 31, 1997....................... $2,232 $0 $0
Fiscal year ended December 31, 1996....................... $0 N/A N/A
Fiscal period 1998 Percentages:
Commissions with affiliate to total commissions........... -- --
Value of brokerage transactions with affiliate to total
transactions........................................... -- --
</TABLE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's shares
of the Fund are held by Investor Services, the Fund's transfer agent. Investor
Services performs bookkeeping, data processing and administrative services
related to the maintenance of shareholder accounts. Except as described in the
Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in
B-39
<PAGE> 596
any of the Participating Funds will receive statements quarterly from Investor
Services showing any reinvestments of dividends and capital gains distributions
and any other activity in the account since the preceding statement. Such
shareholders also will receive separate confirmations for each purchase or sale
transaction other than reinvestment of dividends and capital gains distributions
and systematic purchases or redemptions. Additions to an investment account may
be made at any time by purchasing shares through authorized dealers or by
mailing a check directly to Investor Services.
SHARE CERTIFICATES
Generally, the Fund will not issue share certificates. However, upon written
or telephone request to the Fund, a share certificate will be issued
representing shares (with the exception of fractional shares) of the Fund. A
shareholder will be required to surrender such certificates upon redemption
thereof. In addition, if such certificates are lost the shareholder must write
to Van Kampen Funds, c/o Investor Services, PO Box 418256, Kansas City, MO
64141-9256, requesting an "affidavit of loss" and obtain a Surety Bond in a form
acceptable to Investor Services. On the date the letter is received, Investor
Services will calculate a fee for replacing the lost certificate equal to no
more than 2.00% of the net asset value of the issued shares, and bill the party
to whom the replacement certificate was mailed.
RETIREMENT PLANS
Eligible investors may establish individual retirement accounts ("IRAs"); SEP;
401(k) plans; Section 403(b)(7) plans in the case of employees of public school
systems and certain non-profit organizations; or other pension or profit sharing
plans. Documents and forms containing detailed information regarding these plans
are available from the Distributor. Van Kampen Trust Company serves as custodian
under the IRA, 403(b)(7) and Keogh plans. Details regarding fees, as well as
full plan administration for profit sharing, pension and 401(k) plans, are
available from the Distributor.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS
Holders of Class A Shares can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemptions transferred to a bank
account via the ACH plan are available to be credited to the account on the
second business day following normal payment. In order to utilize this option,
the shareholder's bank must be a member of ACH. In addition, the shareholder
must fill out the appropriate section of the account application. The
shareholder must also include a voided check or deposit slip from the bank
account into which redemptions are to be deposited together with the completed
application. Once Investor Services has received the application and the voided
check or deposit slip, such shareholder's designated bank account, following any
redemption, will be credited with the proceeds of such redemption. Once enrolled
in the ACH plan, a shareholder may terminate participation at any time by
writing Investor Services.
DIVIDEND DIVERSIFICATION
A shareholder may, upon written request or by completing the appropriate
section of the application form accompanying the Prospectus or by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired), elect to have all dividends
and other distributions paid on a class of shares of the Fund invested into
shares of the same class of any Participating Fund so long as the investor has a
pre-existing account for such class of shares of the other fund. Both accounts
must be of the same type, either non-retirement or retirement. If the accounts
are retirement accounts, they must both be for the same class and of the same
type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for the benefit
of the same individual. If a qualified, pre-existing account does not exist, the
shareholder must establish a new account subject to minimum investment and other
requirements of the fund into which distributions would be invested.
Distributions are invested into the selected fund at its net asset value per
share as of the payable date of the distribution.
B-40
<PAGE> 597
SYSTEMATIC WITHDRAWAL PLAN
Any investor whose shares in a single account total $10,000 or more at the
offering price next computed after receipt of instructions may establish a
monthly, quarterly, semi-annual or annual withdrawal plan. Any investor whose
shares in a single account total $5,000 or more at the offering price next
computed after receipt of instructions may establish a quarterly, semiannual or
annual withdrawal plan. This plan provides for the orderly use of the entire
account, not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which any capital gain or loss will be
recognized. The planholder may arrange for monthly, quarterly, semi-annual or
annual checks in any amount, not less than $25. Such a systematic withdrawal
plan may also be maintained by an investor purchasing shares for a retirement
plan established on a form made available by the Fund.
Class B shareholders and Class C shareholders who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a CDSC. Initial account balance means the amount of the
shareholder's investment at the time the election to participate in the plan is
made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plans are reinvested in additional shares
at the next determined net asset value per share. If periodic withdrawals
continuously exceed reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Withdrawals made concurrently with the purchase of additional shares
ordinarily will be disadvantageous to the shareholder because of the duplication
of sales charges. Any gain or loss realized by the shareholder upon redemption
of shares is a taxable event. The Fund reserves the right to amend or terminate
the systematic withdrawal program on 30 days' notice to its shareholders.
REINSTATEMENT PRIVILEGE
A Class A shareholder or Class B shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class A Shares of the Fund. A Class C shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class C Shares of the Fund with credit given for any CDSC paid upon such
redemption. Such reinstatement is made at the net asset value per share (without
sales charge) next determined after the order is received, which must be within
180 days after the date of the redemption. Reinstatement at net asset value per
share is also offered to participants in those eligible retirement plans held or
administered by Van Kampen Trust Company for repayment of principal (and
interest) on their borrowings on such plans.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed. The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
Additionally, if the Board of Trustees determines that payment wholly or
partly in cash would be detrimental to the best interests of the remaining
shareholders of the Fund, the Fund may pay the redemption proceeds in whole or
in part by a distribution-in-kind of portfolio securities held by the Fund in
lieu of cash in conformity with applicable rules of the SEC. Shareholders may
incur brokerage charges upon the sale of portfolio securities so received in
payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
For purposes of the CDSC-Class A, when shares of one fund are exchanged for
shares of another fund, the purchase date for the shares of the fund exchanged
into will be assumed to be the date on which shares were purchased in the fund
from which the exchange was made. If the exchanged shares themselves are
acquired
B-41
<PAGE> 598
through an exchange, the purchase date is assumed to carry over from the date of
the original election to purchase shares subject to a CDSC-Class A rather than a
front-end load sales charge. In determining whether a CDSC-Class A is payable,
it is assumed that shares held the longest are the first to be redeemed.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED
SALES CHARGE ("CDSC-CLASS B AND C")
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a CDSC. The CDSC-Class B
and C is waived on redemptions of Class B Shares and Class C Shares in the
circumstances described below:
REDEMPTION UPON DEATH OR DISABILITY
The Fund will waive the CDSC-Class B and C on redemptions following the death
or disability of a Class B shareholder and Class C shareholder. An individual
will be considered disabled for this purpose if he or she meets the definition
thereof in Section 72(m)(7) of the Code, which in pertinent part defines a
person as disabled if such person "is unable to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or to be of long-continued
and indefinite duration." While the Fund does not specifically adopt the balance
of the Code's definition which pertains to furnishing the Secretary of Treasury
with such proof as he or she may require, the Distributor will require
satisfactory proof of death or disability before it determines to waive the
CDSC-Class B and C.
In cases of death or disability, the CDSC-Class B and C will be waived where
the decedent or disabled person is either an individual shareholder or owns the
shares as a joint tenant with right of survivorship or is the beneficial owner
of a custodial or fiduciary account, and where the redemption is made within one
year of the death or initial determination of disability. This waiver of the
CDSC-Class B and C applies to a total or partial redemption, but only to
redemptions of shares held at the time of the death or initial determination of
disability.
REDEMPTION IN CONNECTION WITH CERTAIN DISTRIBUTIONS FROM RETIREMENT PLANS
The Fund will waive the CDSC-Class B and C when a total or partial redemption
is made in connection with certain distributions from Retirement Plans. The
charge will be waived upon the tax-free rollover or transfer of assets to
another Retirement Plan invested in one or more Participating Funds; in such
event, as described below, the Fund will "tack" the period for which the
original shares were held on to the holding period of the shares acquired in the
transfer or rollover for purposes of determining what, if any, CDSC-Class B and
C is applicable in the event that such acquired shares are redeemed following
the transfer or rollover. The charge also will be waived on any redemption which
results from the return of an excess contribution pursuant to Section 408(d)(4)
or (5) of the Code, the return of excess deferral amounts pursuant to Code
Section 401(k)(8) or 402(g)(2), or from the death or disability of the employee
(see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition, the charge will be
waived on any minimum distribution required to be distributed in accordance with
Code Section 401(a)(9).
The Fund does not intend to waive the CDSC-Class B and C for any distributions
from IRAs or other Retirement Plans not specifically described above.
REDEMPTION PURSUANT TO A FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC-Class B and C will be waived on
redemptions made under the Plan.
B-42
<PAGE> 599
The amount of the shareholder's investment in a Fund at the time the election
to participate in the Plan is made with respect to the Fund is hereinafter
referred to as the "initial account balance." The amount to be systematically
redeemed from the Fund without the imposition of a CDSC-Class B and C may not
exceed a maximum of 12% annually of the shareholder's initial account balance.
The Fund reserves the right to change the terms and conditions of the Plan and
the ability to offer the Plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
The Fund will waive the CDSC-Class B and C in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase of shares.
INVOLUNTARY REDEMPTIONS OF SHARES
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC-Class B and C upon
such involuntary redemption.
REINVESTMENT OF REDEMPTION PROCEEDS
A shareholder who has redeemed Class C Shares of a Fund may reinvest at net
asset value, with credit for any CDSC-Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C Shares of the Fund, provided that the reinvestment is effected
within 180 days after such redemption and the shareholder has not previously
exercised this reinvestment privilege with respect to Class C Shares of the
Fund. Shares acquired in this manner will be deemed to have the original cost
and purchase date of the redeemed shares for purposes of applying the CDSC-Class
C to subsequent redemptions.
REDEMPTION BY ADVISER
The Fund may waive the CDSC-Class B and C when a total or partial redemption
is made by the Adviser with respect to its investments in the Fund.
TAXATION
FEDERAL INCOME TAXATION. The Trust and each of its series, including the Fund,
will be treated as separate corporations for federal income tax purposes. The
Fund has elected and qualified, and intends to continue to qualify each year, to
be treated as a regulated investment company under Subchapter M of the Code. To
qualify as a regulated investment company, the Fund must comply with certain
requirements of the Code relating to, among other things, the source of its
income and diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gain, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses), it
will not be required to pay federal income taxes on any income distributed to
shareholders. The Fund intends to distribute at least the minimum amount of net
investment income necessary to satisfy the 90% distribution requirement. The
Fund will not be subject to federal income tax on any net capital gains
distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income (not including tax-exempt income) for such year and (ii) 98%
of its capital gain net income (the latter of which generally is computed on the
basis of the one-year period ending on October 31st of such year), plus any
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income
B-43
<PAGE> 600
(even if such income were distributed to its shareholders) and all distributions
out of earnings and profits would be taxed to shareholders as ordinary income.
To qualify again as a regulated investment company in a subsequent year, the
Fund may be required to pay an interest charge on 50% of its earnings and
profits attributable to non-regulated investment company years and would be
required to distribute such earnings and profits to shareholders (less any
interest charge). In addition, if the Fund failed to qualify as a regulated
investment company for its first taxable year or, if immediately after
qualifying as a regulated investment company for any taxable year, it failed to
qualify for a period greater than one taxable year, the Fund would be required
to recognize any net built-in gains (the excess of aggregate gains, including
items of income, over aggregate losses that would have been realized if it had
been liquidated) in order to qualify as a regulated investment company in a
subsequent year.
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have continued to hold. A
portion of the discount relating to certain stripped tax-exempt obligations may
constitute taxable income when distributed to shareholders.
DISTRIBUTIONS. The Fund intends to invest in sufficient tax-exempt municipal
securities to permit payment of "exempt-interest dividends" (as defined in the
Code). Dividends paid by the Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
B-44
<PAGE> 601
Exempt-interest dividends are included in determining what portion, if any, of
a person's social security and railroad retirement benefits will be includable
in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund. "Substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses in his trade or business a part
of any facilities financed with the tax-exempt obligations and whose gross
revenues derived from such facilities exceed 5% of the total revenues derived
from the facilities by all users, or who occupies more than 5% of the useable
area of the facilities or for whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
While the Fund expects that a major portion of its net investment income will
constitute tax-exempt interest, a significant portion may consist of investment
company taxable income. Distributions of the Fund's net investment company
taxable income are taxable to shareholders as ordinary income to the extent of
the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains ("capital gain
dividends"), if any, are taxable to shareholders as long-term capital gains
regardless of the length of time shares of the Fund have been held by such
shareholders. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming such shares are held as a capital asset). For a summary of the
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates" below. Interest on indebtedness which is incurred to
purchase or carry shares of a mutual fund which distributes exempt interest
dividends during the year is not deductible for federal income tax purposes.
Tax-exempt shareholders not subject to federal income tax on their income
generally will not be taxed on distributions from the Fund.
Shareholders receiving distributions in the form of additional shares issued
by the Fund will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the distribution date. The basis of such shares will equal the
fair market value on the distribution date.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt-interest dividends cannot exceed the
excess of the amount of interest exempt from tax under Section 103 of the Code
received by the Fund during the year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code. Since the percentage of dividends
which are exempt-interest dividends is determined on an average annual method
for the taxable year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax exempt during the period covered by the dividend.
Fund distributions generally will not qualify for the dividends received
deduction for corporations.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
SALE OF SHARES. The sale of shares (including transfers in connection with a
redemption or repurchase of shares) will be a taxable transaction for federal
income tax purposes. Selling shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
shares and the amount received. If such shares are held as a capital asset, the
gain or loss will be a capital gain or loss. For a summary of the tax rates
applicable to capital gains (including capital gain dividends), see "Capital
Gains
B-45
<PAGE> 602
Rates" below. Any loss recognized upon a taxable disposition of shares held for
six months or less will be treated as a long-term capital loss to the extent of
any capital gain dividends received with respect to such shares. For purposes of
determining whether shares have been held for six months or less, the holding
period is suspended for any periods during which the shareholder's risk of loss
is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES. The maximum tax rate applicable to net capital gains
recognized by individuals and other non-corporate taxpayers is (i) the same as
the maximum ordinary income tax rate for capital assets held for one year or
less or (ii) 20% for capital assets held for more than one year. A special 28%
tax rate may apply to a portion of the capital gain dividends paid by the Fund
with respect to its taxable year ended September 30, 1998. The maximum long-term
capital gains rate for corporations is 35%.
BACKUP WITHHOLDING. The Fund may be required to withhold federal income tax at
a rate of 31% ("backup withholding") from dividends and redemption proceeds paid
to non-corporate shareholders. This tax may be withheld from dividends if (i)
the shareholder fails to furnish the Fund with its correct taxpayer
identification number, (ii) the IRS notifies the Fund that the shareholder has
failed to properly report certain interest and dividend income to the IRS and to
respond to notices to that effect or (iii) when required to do so, the
shareholder fails to certify that he or she is not subject to backup
withholding. Redemption proceeds may be subject to withholding under the
circumstances described in (i) above.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's United States federal income tax liability,
if any, provided that the required information is furnished to the IRS.
GENERAL. The federal, income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal tax consequences of purchasing, holding and disposing of
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
The table below illustrates approximate equivalent taxable and tax-free yields
at the 1998 federal individual income tax rates in effect on the date of this
Statement of Additional Information, including the 36% and 39.6% rates enacted
in August 1993 as part of the Revenue Reconciliation Act of 1993.
The table shows, for example, that a couple with a taxable income of $90,000,
or a single individual with a taxable income of $55,000, whose investments earn
a 6% tax-free yield, would have to earn approximately an 8.3% taxable yield at
current federal income tax rates to receive the same benefit.
The State of Florida imposes no income tax on individuals; accordingly, the
table reflects only the exemption from Federal income taxes. The table does not
reflect the exemption of shares of the Fund from the State's intangible tax;
accordingly, Florida residents subject to such tax would need a somewhat higher
taxable return than those shown to equal the tax-exempt return of the Florida
Fund.
1998 FEDERAL TAXABLE VS. TAX-FREE YIELDS
<TABLE>
<CAPTION>
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
SINGLE JOINT TAX -------------------------------------------------------------------------------
RETURN RETURN BRACKET 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5%
- ---------------- --------------- ------- ---- ---- ---- ---- ---- ---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25,750 0-43,050 15.00% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82% 9.41% 10.00%
25,750-62,450 43,050-104,050 28.00% 4.86 5.56 6.25 6.94 7.64 8.33 9.03 9.72 10.42 11.11 11.81
62,450-130,250 104,050-158,550 31.00% 5.07 5.80 6.52 7.25 7.97 8.70 9.42 10.14 10.87 11.59 12.32
130,250-283,150 158,550-283,150 36.00% 5.47 6.25 7.03 7.81 8.59 9.38 10.16 10.94 11.72 12.50 13.28
Over 283,150 Over 283,150 39.60% 5.79 6.62 7.45 8.28 9.11 9.93 10.76 11.59 12.42 13.25 14.07
</TABLE>
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one year, five year and ten year periods. Other total return
quotations, aggregate or average, over other time periods may also be included.
B-46
<PAGE> 603
The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes the maximum sales charge for Class A Shares); that all income
dividends or capital gains distributions during the period are reinvested in
Fund shares at net asset value; and that any applicable CDSC has been paid. The
Fund's total return will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and unrealized
net capital gains or losses during the period. Total return is based on
historical earnings and asset value fluctuations and is not intended to indicate
future performance. No adjustments are made to reflect any income taxes payable
by shareholders on dividends and distributions paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares.
Non-standardized total return calculations do not reflect the imposition of a
contingent deferred sales charge, and if any such contingent deferred sales
charge with respect to the CDSC imposed at the time of redemption were
reflected, it would reduce the performance quoted.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Yield and total return are calculated separately for Class A Shares, Class B
Shares and Class C Shares. Class A Shares total return figures include the
maximum sales charge; Class B Shares and Class C Shares total return figures
include any applicable CDSC. Because of the differences in sales charges and
distribution fees, the total returns for each of the classes will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield, which is a measure of
the income actually earned by the Fund's investments, and from total return
B-47
<PAGE> 604
which is a measure of the income actually earned by the Fund's investments plus
the effect of any realized and unrealized appreciation or depreciation of such
investments during a stated period. Distribution rate is, therefore, not
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
From time to time marketing materials may provide a portfolio manager update,
an adviser update or discuss general economic conditions and outlooks. The
Fund's marketing materials may also show the Fund's asset class diversification,
top five sectors, ten largest holdings and other Fund asset structures, such as
duration, maturity, coupon, NAV, rating breakdown, AMT exposure and number of
issues in the portfolio. Materials may also mention how the Distributor believes
the Fund compares relative to other Van Kampen funds. Materials may also discuss
the Dalbar Financial Services study from 1984 to 1994 which studied investor
cash flow into and out of all types of mutual funds. The ten year study found
that investors who bought mutual fund shares and held such shares outperformed
investors who bought and sold. The Dalbar study conclusions were consistent
regardless of if shareholders purchased their funds in direct or sales force
distribution channels. The study showed that investors working with a
professional representative have tended over time to earn higher returns than
those who invested directly. The Fund will also be marketed on the internet.
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the rankings or ratings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds with the Consumer Price Index, other appropriate
indices of investment securities, or with investment or savings vehicles. The
performance information may also include evaluations of the Fund published by
nationally recognized ranking services and by nationally recognized financial
publications. Such comparative performance information will be stated in the
same terms in which the comparative data or indices are stated. Such
advertisements and sales material may also include a yield quotation as of a
current period. In each case, such total return and yield information, if any,
will be calculated pursuant to rules established by the SEC and will be computed
separately for each class of the Fund's shares. For these purposes, the
performance of the Fund, as well as the performance of other mutual funds or
indices, do not reflect sales charges, the inclusion of which would reduce Fund
performance. The Fund will include performance data for each class of shares of
the Fund in any advertisement or information including performance data of the
Fund.
The Fund may also utilize performance information in hypothetical
illustrations. For example, the Fund may, from time to time: (1) illustrate the
benefits of tax-deferral by comparing taxable investments to investments made
through tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
of different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return.
Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
computed by dividing that portion of the yield of the Fund (as computed above)
which is tax-exempt by a percentage equal to 100% minus a stated percentage
income tax rate and adding the result to that portion of the Fund's yield, if
any, that is not tax-exempt.
The Fund's Annual Report and Semi-Annual Report contain additional performance
information. A copy of the Annual Report or Semi-Annual Report may be obtained
without charge by calling or writing the Fund at the telephone number and
address printed on the back cover of the Prospectus.
CLASS A SHARES
The average annualized total return, including payment of the sales charge,
with respect to the Class A Shares for (i) the one year period ended September
30, 1998 was 4.30% and (ii) the approximately four year,
B-48
<PAGE> 605
two month period from July 29, 1994 (the commencement of investment operations
of the Fund) through September 30, 1998 was 6.79%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.19%. The Fund's current distribution
rate with respect to the Class A Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.63%. The Fund's taxable equivalent distribution rate with
respect to the Class A Shares for the month ending September 30, 1998 was 7.23%.
The Class A Shares cumulative non-standardized total return, including payment
of the maximum sales charge, with respect to the Class A Shares from its
inception to September 30, 1997 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 31.62%.
The Fund's cumulative non-standardized total return, excluding payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
September 30, 1998 was 38.16%.
CLASS B SHARES
The average annualized total return, including payment of the CDSC, with
respect to the Class B Shares for (i) the one year period ended September 30,
1998 was 4.70% and (ii) the approximately four year, two month period of July
29, 1994 (commencement of investment operations of the Fund) through September
30, 1998 was 6.98%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.63%. The Fund's current distribution
rate with respect to the Class B Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.14%. The Fund's taxable equivalent distribution rate with
respect to the Class B Shares for the month ending September 30, 1997 was 6.47%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class B Shares from its inception to September 30,
1998 (as calculated in the manner described in the Prospectus under the heading
"Fund Performance") was 32.57%.
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to September 30,
1998 was 34.07%.
CLASS C SHARES
The average annualized total return, including payment of the CDSC, with
respect to the Class C Shares for (i) the one year period ended September 30,
1998 was 7.61% and (ii) the approximately three year, five month period from
July 29, 1994 (the commencement of investment operations of the Fund) through
September 30, 1998 was 7.28%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 3.64%. The Fund's current distribution
rate with respect to the Class C Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.14%. The Fund's taxable equivalent distribution rate with
respect to the Class C Shares for the month ending September 30, 1998 was 6.47%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class C Shares from its inception to September 30,
1998 (as calculated in the manner described in the Prospectus under the heading
"Fund Performance") was 34.15%.
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class C Shares from its inception to September 30,
1998 was 34.15%.
B-49
<PAGE> 606
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash, including
proceeds from the sale of shares of the Fund and of securities in the Fund's
investment portfolio, are held by State Street Bank and Trust Company, 225 West
Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual statements are furnished to shareholders,
and annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS -- KPMG LLP, 303 East Wacker Drive, Chicago, Illinois
60601, the independent accountants for the Fund, performs an annual audit of the
Fund's financial statements.
LEGAL COUNSEL -- Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom
(Illinois). Squire, Sanders & Dempsey L.L.P. acts as special counsel to the Fund
for Florida disclosure and Florida tax matters.
B-50
<PAGE> 607
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen Florida Insured Tax Free Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Florida Insured Tax Free Income Fund (the "Fund"), including the
portfolio of investments, as of September 30, 1998, and the related statement of
operations for the nine-month period ended September 30, 1998 and the year ended
December 31, 1997, the statement of changes in net assets for the nine-month
period ended September 30, 1998 and for each of the two years in the period
ended December 31, 1997, 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
September 30, 1998, 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 Florida Insured Tax Free Income Fund as of September 30, 1998, the
results of its operations for the nine-month period ended September 30, 1998 and
the year ended December 31, 1997, the changes in its net assets for the
nine-month period ended September 30, 1998 and for each of the two years in the
period ended December 31, 1997, and the financial highlights for each of the
periods presented, in conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
November 6, 1998
F-1
<PAGE> 608
PORTFOLIO OF INVESTMENTS
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS
FLORIDA 102.8%
$1,500 Alachua Cnty, FL Sch Brd Ctfs Partn (AMBAC
Insd)............................................ 5.000% 07/01/18 $ 1,525,965
1,000 Boca Raton, FL Cmnty Redev Agy Mizner Park Proj
Rfdg (FSA Insd) (a).............................. 4.500 03/01/12 1,000,380
1,805 Boca Raton, FL Cmnty Redev Agy Mizner Park Proj
Rfdg (FSA Insd) (a).............................. 4.625 03/01/14 1,802,960
465 Brevard Cnty, FL Hsg Fin Auth Single Family Mtg
Rev (GNMA Collateralized)........................ 6.650 09/01/21 501,972
650 Brevard Cnty, FL Sales Tax Rev (MBIA Insd)....... 5.750 12/01/13 713,148
1,000 Brevard Cnty, FL Sch Brd Ctfs Partn Ser A (AMBAC
Insd) (b)........................................ 5.400 07/01/12 1,105,020
445 Broward Cnty, FL Hsg Fin Auth Single Family Mtg
Rev Rfdg Ser A (GNMA Collateralized)............. 6.100 10/01/19 477,845
670 Broward Cnty, FL Hsg Fin Auth Single Family Mtg
Rev Rfdg Ser A (GNMA Collateralized)............. 6.200 04/01/30 719,205
500 Citrus Cnty, FL Hosp Brd Rev Citrus Mem Hosp Ser
A Rfdg (FSA Insd)................................ 6.500 08/15/12 551,770
1,000 Dade Cnty, FL Aviation Rev Ser B (MBIA Insd)..... 5.600 10/01/26 1,079,040
1,000 Dade Cnty, FL Edl Fac Auth Rev Univ of Miami Ser
B (MBIA Insd).................................... 5.750 04/01/20 1,094,310
980 Dade Cnty, FL Sch Brd Ctfs Partn Ser A (MBIA
Insd) (Prerefunded @ 05/01/04)................... 5.750 05/01/08 1,082,488
500 Dade Cnty, FL Sch Brd Ctfs Partn Ser A (MBIA
Insd) (Prerefunded @ 05/01/04)................... 6.000 05/01/14 558,525
1,000 Dade Cnty, FL Seaport Rfdg (MBIA Insd)........... 5.125 10/01/21 1,014,070
750 Dade Cnty, FL Wtr & Swr Sys Rev (FGIC Insd)...... 5.375 10/01/16 802,755
900 Daytona Beach, FL Wtr & Swr Rev Rfdg (AMBAC
Insd)............................................ 5.750 11/15/10 974,691
400 Florida Hsg Fin Agy Hsg Reserves at Kanapaha Ser
G (AMBAC Insd)................................... 5.600 07/01/27 418,384
2,500 Florida St Brd Edl Cap Outlay Pub Edl Ser C (MBIA
Insd)............................................ 5.600 06/01/20 2,659,025
1,750 Florida St Brd Regt Univ Sys Impt Rev (MBIA
Insd)............................................ 5.625 07/01/19 1,890,262
1,750 Florida St Division Bond Fin Dept Genl Svcs Rev
(AMBAC Insd)..................................... 5.000 07/01/12 1,826,072
1,500 Hillsborough Cnty, FL Edl Fac Univ Tampa Proj
Rfdg............................................. 5.750 04/01/18 1,566,720
500 Hillsborough Cnty, FL Hosp Auth Hosp Rev Tampa
Genl Hosp Proj Rfdg (FSA Insd)................... 6.375 10/01/13 549,320
750 Hillsborough Cnty, FL Indl Dev Auth Pollutn Ctl
Rev Tampa Elec Co Proj Rfdg (MBIA Insd).......... 6.250 12/01/34 838,050
1,300 Indian River Cnty, FL Hosp Rev Rfdg (FSA Insd)... 5.700 10/01/15 1,428,076
1,000 Indian River Cnty, FL Hosp Rev Rfdg (FSA Insd)... 6.100 10/01/18 1,122,340
1,000 Jacksonville, FL Elec Auth Rev Saint John's Pwr-2
Ser 7 Rfdg (MBIA Insd) (b)....................... 5.500 10/01/14 1,052,320
1,000 Jacksonville, FL Wtr & Swr Rev United Wtr FL Proj
(AMBAC Insd)..................................... 6.350 08/01/25 1,136,150
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 609
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FLORIDA (CONTINUED)
$2,250 Jupiter Islands, FL Util Sys Rev South Martin Reg
Util (MBIA Insd)................................. 5.000% 10/01/28 $ 2,267,190
925 Lee Cnty, FL Hsg Fin Auth Single Family Mtg Rev
Multi-Cnty Pgm Ser A (GNMA Collateralized)....... 7.450 09/01/27 1,057,090
960 Manatee Cnty, FL Hsg Fin Auth Mtg Rev (GNMA
Collateralized) (b).............................. 6.875 11/01/26 1,083,254
835 Martin Cnty, FL Consolidated Util Sys Rev (FGIC
Insd)............................................ 5.750 10/01/08 924,520
55 Martin Cnty, FL Consolidated Util Sys Rev
(Prerefunded @ 10/01/04) (FGIC Insd)............. 5.750 10/01/08 61,538
750 Martin Cnty, FL Indl Dev Auth Indl Dev Rev
Indiantown Cogeneration Proj A Rfdg.............. 7.875 12/15/25 883,958
545 Melbourne, FL Arpt Rev Rfdg (MBIA Insd).......... 6.250 10/01/18 623,387
500 Miramar, FL Wastewater Impt Assmt Rev (FGIC
Insd)............................................ 6.750 10/01/25 582,055
1,000 Naples, FL Hosp Rev Naples Cmnty Hosp Inc Rfdg
(MBIA Insd)...................................... 5.500 10/01/26 1,055,500
1,250 North Broward, FL Hosp Dist Rev Rfdg & Impt (MBIA
Insd)............................................ 5.375 01/15/24 1,300,013
775 Orange Cnty, FL Hsg Fin Auth Single Family Mtg
Rev (GNMA Collateralized) (b).................... 6.550 10/01/21 835,179
900 Orange Cnty, FL Tourist Dev Tax Rev Ser B
(Prerefunded @ 10/01/02) (AMBAC Insd)............ 6.500 10/01/19 1,008,864
1,000 Orlando & Orange Cnty Expressway Auth FL
Expressway Rev (FGIC Insd)....................... 5.000 07/01/21 1,007,440
750 Palm Beach Cnty, FL Hlth Fac Auth Rev Abbey
Delray South Proj Rfdg........................... 5.500 10/01/11 761,858
1,550 Palm Beach Cnty, FL Hlth Fac Auth Rev Retirement
Cmnty............................................ 5.625 11/15/20 1,641,931
450 Palm Beach Cnty, FL Hlth Fac Auth Rev Waterford
Proj Rfdg........................................ 5.500 10/01/15 456,075
750 Palm Beach Cnty, FL Sch Brd Ctfs Partn Ser A
(Prerefunded @ 08/01/04) (AMBAC Insd)............ 6.375 08/01/15 855,578
1,000 Polk Cnty, FL Indl Dev Auth Tampa Elec Co Proj... 5.850 12/01/30 1,087,670
500 Port Orange, FL Wtr & Swr Rev Rfdg (AMBAC
Insd) (a)........................................ 5.000 10/01/16 504,655
500 Reedy Creek Impt Dist FL Ser A (MBIA Insd) (a)... 5.250 06/01/15 528,105
1,000 Santa Rosa Bay Brdg Auth FL Rev.................. 6.250 07/01/28 1,100,880
750 Sarasota Cnty, FL Util Sys Rev (Prerefunded @
10/01/04) (FGIC Insd)............................ 6.500 10/01/14 869,085
500 Sunrise, FL Util Sys Rev Rfdg (AMBAC Insd)....... 5.000 10/01/28 515,045
600 Tampa, FL Sports Auth Rev (AMBAC Insd)........... 5.000 10/01/28 601,938
1,000 Volusia Cnty, FL Edl Fac Auth Rev Stetson Univ
Proj Ser A (MBIA Insd)........................... 5.500 06/01/26 1,066,730
500 Volusia Cnty, FL Hlth Fac Auth Rev Hosp Fac Mem
Hlth Rfdg & Impt (AMBAC Insd).................... 5.750 11/15/13 550,485
1,000 Volusia Cnty, FL Hlth Fac Auth Rev John Knox Hlth
Care Rfdg (Asset Gty Insd)....................... 6.000 06/01/17 1,090,400
-----------
53,811,286
-----------
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 610
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PUERTO RICO 2.7%
$ 670 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev Ser V
Rfdg............................................. 6.625% 07/01/12 $ 737,978
650 Puerto Rico Pub Bldgs Auth Gtd Pub Edl & Hlth Fac
Ser M Rfdg (FSA Insd)............................ 5.750 07/01/15 697,028
-----------
1,435,006
-----------
TOTAL LONG-TERM INVESTMENTS 105.5%
(Cost $50,655,943)......................................................... 55,246,292
-----------
SHORT-TERM INVESTMENTS 0.2%
(Cost $100,000)............................................................ 100,000
-----------
TOTAL INVESTMENTS 105.7%
(Cost $50,755,943)......................................................... 55,346,292
LIABILITIES IN EXCESS OF OTHER ASSETS (5.7%)................................ (2,995,531)
-----------
NET ASSETS 100.0%........................................................... $52,350,761
----------
</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.
AMBAC-- AMBAC Indemnity Corporation
FGIC-- Financial Guaranty Insurance Company
FSA-- Financial Security Assurance Inc.
MBIA-- Municipal Bond Investors Assurance Corp.
Asset Gty-- Asset Guaranty Insurance Company
See Notes to Financial Statements
F-4
<PAGE> 611
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $50,755,943)........................ $55,346,292
Cash........................................................ 125,868
Receivables:
Investments Sold.......................................... 1,044,837
Interest.................................................. 991,891
Fund Shares Sold.......................................... 46,339
Unamortized Organizational Costs............................ 11,532
Other....................................................... 124
-----------
Total Assets.......................................... 57,566,883
-----------
LIABILITIES:
Payables:
Investments Purchased..................................... 4,806,234
Fund Shares Repurchased................................... 109,550
Income Distributions...................................... 106,609
Distributor and Affiliates................................ 80,481
Trustees' Deferred Compensation and Retirement Plans........ 80,038
Accrued Expenses............................................ 33,210
-----------
Total Liabilities..................................... 5,216,122
-----------
NET ASSETS.................................................. $52,350,761
===========
NET ASSETS CONSIST OF:
Capital..................................................... $48,101,270
Net Unrealized Appreciation................................. 4,590,349
Accumulated Distributions in Excess of Net Investment
Income.................................................... (58,071)
Accumulated Net Realized Loss............................... (282,787)
-----------
NET ASSETS.................................................. $52,350,761
===========
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $27,113,986 and 1,703,029 shares of
beneficial interest issued and outstanding)........... $ 15.92
Maximum sales charge (4.75%* of offering price)......... .79
-----------
Maximum offering price to public........................ $ 16.71
===========
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $23,614,356 and 1,482,836 shares of
beneficial interest issued and outstanding)........... $ 15.93
===========
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $1,622,419 and
101,774 shares of beneficial interest issued and
outstanding).......................................... $ 15.94
===========
*On sales of $100,000 or more, the sales charge will be reduced.
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 612
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998
and the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest............................................... $ 2,048,317 $ 2,523,156
------------ -----------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to
Classes A, B and C of $49,218, $170,192 and $9,173,
respectively, for the nine months ended 9/30/98 and
$59,871, $201,488 and $6,432, respectively, for the
year ended 12/31/97)................................. 228,583 267,791
Investment Advisory Fee................................ 188,173 223,516
Shareholder Reports.................................... 50,357 40,584
Registration and Filing Fees........................... 19,687 35,205
Shareholder Services................................... 19,093 19,910
Trustees' Fees and Expenses............................ 18,888 5,729
Custody................................................ 12,604 71,138
Legal.................................................. 3,006 9,125
Other.................................................. 82,881 58,605
------------ -----------
Total Expenses....................................... 623,272 731,603
Less Fees Waived and Expenses Reimbursed ($188,173
and $75,838, respectively, for the nine months
ended 9/30/98 and $223,516 and $88,936,
respectively, for the year ended 12/31/97)......... 264,011 312,452
------------ -----------
Net Expenses....................................... 359,261 419,151
------------ -----------
NET INVESTMENT INCOME.................................. $ 1,689,056 $ 2,104,005
============ ===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments.......................................... $ 305,575 $ (229,913)
Futures.............................................. 5,036 (363,485)
------------ -----------
Net Realized Gain/Loss................................. 310,611 (593,398)
------------ -----------
Unrealized Appreciation/Depreciation:
Beginning of the Period.............................. 3,637,769 1,459,008
------------ -----------
End of the Period:
Investments.......................................... 4,590,349 3,647,942
Futures.............................................. -0- (10,173)
------------ -----------
4,590,349 3,637,769
------------ -----------
Net Unrealized Appreciation During the Period.......... 952,580 2,178,761
------------ -----------
NET REALIZED AND UNREALIZED GAIN....................... $ 1,263,191 $ 1,585,363
============ ===========
NET INCREASE IN NET ASSETS FROM OPERATIONS............. $ 2,952,247 $ 3,689,368
============ ===========
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 613
STATEMENT OF CHANGES IN NET ASSETS
For the Nine Months Ended September 30, 1998
and the Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Year Ended
September 30, 1998 December 31, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................... $ 1,689,056 $ 2,104,005 $ 1,687,363
Net Realized Gain/Loss.................. 310,611 (593,398) 287,514
Net Unrealized Appreciation/Depreciation
During the Period..................... 952,580 2,178,761 (547,665)
------------ ----------- -----------
Change in Net Assets from Operations.... 2,952,247 3,689,368 1,427,212
------------ ----------- -----------
Distributions from Net Investment
Income................................ (1,689,056) (2,104,005) (1,654,415)
Distributions in Excess of Net
Investment Income..................... (53,515) (24,977) -0-
------------ ----------- -----------
Distributions from and in Excess of Net
Investment Income*.................... (1,742,571) (2,128,982) (1,654,415)
------------ ----------- -----------
Distributions from Net Realized Gain:
Class A Shares........................ -0- (14,898) -0-
Class B Shares........................ -0- (12,813) -0-
Class C Shares........................ -0- (397) -0-
------------ ----------- -----------
-0- (28,108) -0-
------------ ----------- -----------
Total Distributions..................... (1,742,571) (2,157,090) (1,654,415)
------------ ----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES............................ 1,209,676 1,532,278 (227,203)
------------ ----------- -----------
FROM CAPITAL TRANSACTIONS
Proceeds from Shares Sold............... 11,498,972 15,913,603 16,047,069
Net Asset Value of Shares Issued Through
Dividend Reinvestment................. 804,084 999,451 701,942
Cost of Shares Repurchased.............. (14,206,014) (7,278,428) (8,255,409)
------------ ----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS.......................... (1,902,958) 9,634,626 8,493,602
------------ ----------- -----------
TOTAL INCREASE/DECREASE IN NET ASSETS... (693,282) 11,166,904 8,266,399
NET ASSETS:
Beginning of the Period................. 53,044,043 41,877,139 33,610,740
------------ ----------- -----------
End of the Period (Including accumulated
undistributed net investment income of
$(58,071), $(4,556) and $20,971,
respectively)......................... $ 52,350,761 $53,044,043 $41,877,139
============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Year Ended
*Distributions by Class September 30, 1998 December 31, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Distributions from and in Excess of Net
Investment Income:
Class A Shares........................ $ (981,519) $(1,223,114) $ (868,212)
Class B Shares........................ (722,360) (878,013) (768,924)
Class C Shares........................ (38,692) (27,855) (17,279)
----------- ----------- -----------
$(1,742,571) $(2,128,982) $(1,654,415)
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 614
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
Nine Months of Investment
Ended Year Ended December 31, Operations) to
September 30, ---------------------------- December 31,
Class A Shares 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $15.550 $15.060 $ 15.203 $13.796 $14.300
------- ------- -------- ------- -------
Net Investment Income............ .564 .766 .784 .789 .291
Net Realized and Unrealized
Gain/Loss...................... .388 .508 (.153) 1.416 (.507)
------- ------- -------- ------- -------
Total from Investment Operations... .952 1.274 .631 2.205 (.216)
------- ------- -------- ------- -------
Less:
Distributions from and in Excess
of Net Investment Income....... .581 .774 .774 .798 .288
Distributions from Net Realized
Gain........................... -0- .010 -0- -0- -0-
------- ------- -------- ------- -------
Total Distributions................ .581 .784 .774 .798 .288
------- ------- -------- ------- -------
Net Asset Value, End of the
Period........................... $15.921 $15.550 $ 15.060 $15.203 $13.796
======= ======= ======== ======= =======
Total Return* (a).................. 6.26%** 8.72% 4.37% 16.29% (1.47%)**
Net Assets at End of the Period (In
millions)........................ $ 27.1 $ 29.3 $ 22.2 $ 16.2 $ 9.0
Ratio of Expenses to Average Net
Assets*.......................... .60% .59% .28% .44% .49%
Ratio of Net Investment Income to
Average Net Assets*.............. 4.85% 5.05% 5.31% 5.33% 5.13%
Portfolio Turnover................. 50%** 48% 73% 41% 19%**
* If certain expenses had not been
assumed by Van Kampen, total
return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets........................... 1.30% 1.29% 1.47% 1.70% 1.99%
Ratio of Net Investment Income to
Average Net Assets............... 4.15% 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
F-8
<PAGE> 615
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
Nine Months of Investment
Ended Year Ended December 31, Operations) to
September 30, --------------------------- December 31,
Class B Shares 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $15.554 $15.064 $15.201 $13.792 $14.300
------- ------- ------- ------- -------
Net Investment Income............ .478 .650 .677 .685 .251
Net Realized and Unrealized
Gain/Loss...................... .388 .510 (.154) 1.415 (.509)
------- ------- ------- ------- -------
Total from Investment Operations... .866 1.160 .523 2.100 (.258)
------- ------- ------- ------- -------
Less:
Distributions from and in Excess
of Net Investment Income....... .495 .660 .660 .691 .250
Distributions from Net Realized
Gain........................... -0- .010 -0- -0- -0-
------- ------- ------- ------- -------
Total Distributions................ .495 .670 .660 .691 .250
------- ------- ------- ------- -------
Net Asset Value, End of the
Period........................... $15.925 $15.554 $15.064 $15.201 $13.792
======= ======= ======= ======= =======
Total Return* (a).................. 5.74%** 7.91% 3.58% 15.53% (1.81%)**
Net Assets at End of the Period (In
millions)........................ $ 23.6 $ 22.5 $ 18.9 $ 16.9 $ 10.9
Ratio of Expenses to Average Net
Assets*.......................... 1.35% 1.33% 1.03% 1.12% 1.26%
Ratio of Net Investment Income to
Average Net Assets*.............. 4.09% 4.30% 4.56% 4.66% 4.31%
Portfolio Turnover................. 50%** 48% 73% 41% 19%**
* If certain expenses had not been
assumed by Van Kampen, total
return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets........................... 2.05% 2.03% 2.22% 2.38% 2.75%
Ratio of Net Investment Income to
Average Net Assets............... 3.39% 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
F-9
<PAGE> 616
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
Nine Months of Investment
Ended Year Ended December 31, Operations) to
September 30, ----------------------------- December 31,
Class C Shares 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.......................... $ 15.581 $ 15.081 $ 15.213 $13.786 $14.300
-------- -------- -------- ------- -------
Net Investment Income........... .483 .666 .668 .690 .249
Net Realized and Unrealized
Gain/Loss..................... .372 .504 (.140) 1.428 (.513)
-------- -------- -------- ------- -------
Total from Investment
Operations...................... .855 1.170 .528 2.118 (.264)
-------- -------- -------- ------- -------
Less:
Distributions from and in Excess
of Net Investment Income...... .495 .660 .660 .691 .250
Distribution from Net Realized
Gain.......................... -0- .010 -0- -0- -0-
-------- -------- -------- ------- -------
Total Distributions............... .495 .670 .660 .691 .250
-------- -------- -------- ------- -------
Net Asset Value, End of the
Period.......................... $ 15.941 $ 15.581 $ 15.081 $15.213 $13.786
======== ======== ======== ======= =======
Total Return* (a)................. 5.60%** 7.97% 3.65% 15.61% (1.81%)**
Net Assets at End of the Period
(In thousands).................. $1,622.4 $1,195.1 $ 849.2 $ 461.8 $ 11.4
Ratio of Expenses to Average Net
Assets*......................... 1.32% 1.37% 1.03% 1.13% 1.26%
Ratio of Net Investment Income to
Average Net Assets*............. 4.08% 4.38% 4.56% 4.51% 4.28%
Portfolio Turnover................ 50%** 48% 73% 41% 19%**
* If certain expenses had not been
assumed by Van Kampen, total
return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets.......................... 2.03% 2.06% 2.22% 2.39% 2.74%
Ratio of Net Investment Income to
Average Net Assets.............. 3.38% 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
F-10
<PAGE> 617
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Florida Insured Tax Free Income Fund (the "Fund"), is organized as a
series of the Van Kampen 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. In July, 1998, the Fund's Board of Trustees
approved a change in the Fund's fiscal year end from December 31 to September
30. As a result, this financial report reflects the nine month period commencing
on January 1, 1998, and ending on September 30, 1998.
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
F-11
<PAGE> 618
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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. ORGANIZATIONAL COSTS--The Fund has reimbursed Van Kampen Funds Inc. or its
affiliates (collectively "Van Kampen") for costs incurred in connection with the
Fund's organization in the amount of $70,000. These costs are being amortized on
a straight line basis over the 60 month period ending July 28, 1999. Van Kampen
Investment Advisory Corp. (the "Adviser") has agreed that in the event any of
the initial shares of the Fund originally purchased by Van Kampen 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 September 30, 1998, the Fund had an accumulated capital loss carryforward for
tax purposes of $282,787 which will expire on September 30, 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.
At September 30, 1998, for federal income tax purposes the cost of long- and
short-term investments is $50,755,943, the aggregate gross unrealized
appreciation is $4,590,349 and the aggregate gross unrealized depreciation is
$0, resulting in net unrealized appreciation on long- and short-term investments
of $4,590,349.
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. For the nine months ended September 30, 1998, 100% of the
income distributions made
F-12
<PAGE> 619
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
by the Fund were exempt from federal income taxes. In January, 1999, the Fund
will provide tax information to shareholders for the 1998 calendar year.
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 nine months ended September 30, 1998 and the year ended December 31,
1997, the Fund recognized expenses of approximately $1,000 and $1,800,
respectively, 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 nine months ended September 30, 1998 and the year ended December 31,
1997, the Fund recognized expenses of approximately $42,200 and $27,100,
respectively, representing Van Kampen's cost of providing accounting and legal
services to the Fund. All of these expenses were assumed by Van Kampen.
Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent of the Fund. For the nine months ended September
30, 1998 and the year ended December 31, 1997, the Fund recognized expenses of
approximately $11,600 and $11,400, respectively. All of these expenses were
assumed by Van Kampen. Beginning in 1998, transfer agency fees are determined
through negotiations with the Fund's Board of Trustees and are based on
competitive market benchmarks.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. 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 $2,500.
At September 30, 1998, Van Kampen owned 100 shares each of Classes A, B and
C.
F-13
<PAGE> 620
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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 September 30, 1998, capital aggregated $24,924,266, $21,619,168 and
$1,557,836 for Classes A, B and C, respectively. For the nine months ended
September 30, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ----------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A............................... 352,234 $ 5,494,787
Class B............................... 320,092 4,997,538
Class C............................... 64,525 1,006,647
-------- ------------
Total Sales............................. 736,851 $ 11,498,972
======== ============
Dividend Reinvestment:
Class A............................... 30,117 $ 469,824
Class B............................... 19,918 310,753
Class C............................... 1,504 23,507
-------- ------------
Total Dividend Reinvestment............. 51,539 $ 804,084
======== ============
Repurchases:
Class A............................... (566,619) $ (8,834,774)
Class B............................... (303,798) (4,731,240)
Class C............................... (40,958) (640,000)
-------- ------------
Total Repurchases....................... (911,375) $(14,206,014)
======== ============
</TABLE>
F-14
<PAGE> 621
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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>
F-15
<PAGE> 622
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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). Class B shares will
automatically convert to Class A shares after the eighth year following
purchase. The CDSC will be imposed on
F-16
<PAGE> 623
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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 nine months ended September 30, 1998 and the year ended December 31,
1997, Van Kampen as Distributor for the Fund, received commissions on sales of
the Fund's Class A shares of approximately $16,900 and $15,100, respectively and
CDSC on redeemed shares of approximately $54,100 and $68,700, respectively.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
For the nine months ended September 30, 1998, the cost of purchases and proceeds
from sales of investments, excluding short-term investments were $25,816,471 and
$26,705,963, respectively. For the year ended December 31, 1997, 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.
F-17
<PAGE> 624
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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).
Transactions in futures contracts for the year ended December 31, 1997, and
for the nine months ended September 30, 1998, 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
Futures Opened............................................. 104
Futures Closed............................................. (110)
----
Outstanding at September 30, 1998.......................... -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 nine months ended September 30, 1998 and the year ended December 31,
1997, are payments retained by Van Kampen of approximately $135,200 and
$156,100, respectively.
7. YEAR 2000 COMPLIANCE (UNAUDITED)
Van Kampen utilizes a number of computer programs across its entire operation
relying on both internal software as well as external software systems provided
by third parties. In 1996 Van Kampen initiated a CountDown 2000 Project to
review both the internal systems and external vendor connections. The goal of
this project is to position its business to
F-18
<PAGE> 625
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
continue unaffected as a result of the century change. At this time, there can
be no assurance that the steps taken will be sufficient to avoid any adverse
impact to the Fund, but Van Kampen does not anticipate that the move to Year
2000 will have a material impact on its ability to continue to provide the Fund
with service at current levels. In addition, it is possible that the securities
markets in which the Fund invests may be detrimentally affected by computer
failures throughout the financial services industry beginning January 1, 2000.
Improperly functioning trading systems may result in settlement problems and
liquidity issues.
F-19
<PAGE> 626
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN NEW YORK TAX FREE INCOME FUND
Van Kampen New York Tax Free Income Fund (the "Fund") is a mutual fund with an
investment objective 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 is designed for investors who are
residents of New York for tax purposes. The Fund's management seeks to achieve
the investment objective by investing primarily in a portfolio of New York
municipal securities that are rated investment grade at the time of purchase.
The Fund is organized as a non-diversified series of Van Kampen Tax Free
Trust, an open-end, management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This Statement
of Additional Information should be read in conjunction with the Fund's
Prospectus (the "Prospectus") dated as of the same date as this Statement of
Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-2833
for the hearing impaired).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... B-2
Investment Objective and Policies........................... B-4
Investment Restrictions..................................... B-16
Description of Securities Ratings........................... B-17
Trustees and Officers....................................... B-22
Investment Advisory and Other Services...................... B-31
Distribution and Service.................................... B-32
Transfer Agent.............................................. B-35
Portfolio Transactions and Brokerage Allocation............. B-35
Shareholder Services........................................ B-36
Redemption of Shares........................................ B-38
Contingent Deferred Sales Charge-Class A.................... B-38
Waiver of Class B and Class C Contingent Deferred Sales
Charge.................................................... B-39
Taxation.................................................... B-40
Fund Performance............................................ B-44
Other Information........................................... B-47
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-11
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JANUARY 28, 1999.
B-1
<PAGE> 627
GENERAL INFORMATION
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated May 10, 1995. The Declaration of Trust permits the Trustees to
create one or more separate investment portfolios and issue a series of shares
for each portfolio. The Trustees can further sub-divide each series of shares
into one or more classes of shares for each portfolio.
The Trust was originally organized in 1985 under the name Van Kampen Merritt
Tax Free Trust as a Massachusetts business trust (the "Massachusetts Trust").
The Massachusetts Trust was reorganized into the Trust under the name Van Kampen
American Capital Tax Free Trust on July 31, 1995. The Trust was created for the
purpose of facilitating the Massachusetts Trust reorganization into a Delaware
business trust. On July 14, 1998, the Trust adopted its current name.
The Fund was originally organized in 1994 under the name Van Kampen Merritt
New York Tax Free Income Fund as a sub-trust of the Massachusetts Trust. The
Fund was reorganized as a series of the Trust under the name Van Kampen American
Capital New York Tax Free Income Fund on July 31, 1995. On July 14, 1998, the
Fund adopted its current name.
Van Kampen Investment Advisory Corp. (the "Adviser" or "Advisory Corp."), Van
Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley Dean Witter & Co. The principal office of the Trust, the Fund,
the Adviser, the Distributor and Van Kampen Investments is located at 1 Parkview
Plaza, PO Box 5555, Oakbrook Terrace, Illinois 60181-5555.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and securities lending.
The authorized capitalization of the Trust consists of an unlimited number of
shares of beneficial interest, par value $0.01 per share, which can be divided
into series such as the Fund and further subdivided into classes of each series.
Each share represents an equal proportionate interest in the assets of the
series with each other share in such series and no interest in any other series.
No series is subject to the liabilities of any other series. The Declaration of
Trust provides that shareholders are not liable for any liabilities of the Trust
or any of its series, requires inclusion of a clause to that effect in every
agreement entered into by the Trust or any of its series and indemnifies
shareholders against any such liability.
The Fund currently offers three classes of shares, designated Class A Shares,
Class B Shares and Class C Shares. Other classes may be established from time to
time in accordance with provisions of the Declaration of Trust. Each class of
shares of the Fund generally are identical in all respects except that each
class bears certain distribution expenses and has exclusive voting rights with
respect to its distribution fee.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution fee for a class of a series
would be voted upon by shareholders of only the class of such series involved.
Except as otherwise described in the Prospectus or herein, shares do not have
cumulative voting rights, preemptive rights or any conversion, subscription or
exchange rights.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to
B-2
<PAGE> 628
consider the removal of Trustees by a vote of two-thirds of the shares then
outstanding cast in person or by proxy at such meeting. The Fund will assist
such holders in communicating with other shareholders of the Fund to the extent
required by the Investment Company Act of 1940, as amended (the "1940 Act"), or
rules or regulations promulgated by the Securities and Exchange Commission
("SEC").
In the event of liquidation, each of the shares of the Fund is entitled to its
portion of all of the Fund's net assets after all debts and expenses of the Fund
have been paid. Since Class B Shares and Class C Shares have higher distribution
fees and transfer agency costs, the liquidation proceeds to holders of Class B
Shares and Class C Shares are likely to be lower than to holders of Class A
Shares.
The Trustees may amend the Declaration of Trust (including with respect to any
series) in any manner without shareholder approval, except that the Trustees may
not adopt any amendment adversely affecting the rights of shareholders of any
series without approval by a majority of the shares of each affected series
present at a meeting of shareholders (or such higher vote as may be required by
the 1940 Act or other applicable law) and except that the Trustees cannot amend
the Declaration of Trust to impose any liability on shareholders, make any
assessment on shares or impose liabilities on the Trustees without approval from
each affected shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
As of January 4, 1999, no person was known by the Fund to own beneficially or
to hold of record 5% or more of the outstanding Class A Shares, Class B Shares
or Class C Shares of the Fund, except as follows:
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT
NAME AND ADDRESS JANUARY 4, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OWNERSHIP
- ------------------------------------------------------------ ------------ --------- ----------
<S> <C> <C> <C>
Advanced Clearing FBO 6510150911............................ 202,371.80 A 11.94%
PO Box 2228
Omaha, NE 68103-2226
August Casale & Valeria Casale JT Ten....................... 104,733.15 A 6.18%
154 Park Hill Ave
Yonkers, NY 10705-1420
NFSC FEBO & C18-381748...................................... 98,778.22 A 5.83%
Lane Grijns
20 Fox Run Lane
Greenwich, CT 03831-3737
NFSC FEBO & C18-593125...................................... 89,679.63 A 5.29%
Nesim Bildirici
2264 Ocean Pkwy
Brooklyn, NY 11223-5133
Painewebber FBO............................................. 32,333.54 C 16.44%
Diana Riklis
1020 Park Ave
New York, NY 10028-0913
Salomon Smith Barney Inc.................................... 28,023.00 C 14.24%
00124807645
333 West 34th St - 3rd Floor
New York, NY 10001-2483
Leora Yehuda................................................ 12,916.48 C 6.57%
200 E 62nd St # 30A
New York, NY 10021-8209
Salomon Smith Barney Inc.................................... 10,529.00 C 5.35%
00124607646
333 West 34th St - 3rd Floor
New York, NY 10001-2483
</TABLE>
B-3
<PAGE> 629
INVESTMENT OBJECTIVE AND POLICIES
The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to this
caption in the Prospectus for a complete presentation of the matters disclosed
below.
MUNICIPAL SECURITIES
Municipal securities include long-term obligations, which often are called
municipal bonds, as well as shorter term municipal notes, municipal leases, and
tax exempt commercial paper. Under normal market conditions, longer term
municipal securities generally provide a higher yield than shorter term
municipal securities, and therefore the Fund generally expects to be invested
primarily in longer term municipal securities. The Fund will, however, invest in
shorter term municipal securities when yields are greater than yields available
on longer term municipal securities, for temporary defensive purposes and when
redemption requests are expected. The two principal classifications of municipal
securities are "general obligation" and "revenue" or "special obligation"
securities, which include "industrial revenue bonds." General obligation
securities are secured by the issuer's pledge of its faith, credit, and taxing
power for the payment of principal and interest. Revenue or special obligation
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source, such as from the user of the facility
being financed. The Fund may also invest in "moral obligation" bonds which are
normally issued by special purpose public authorities. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of such bonds
becomes a moral commitment but not a legal obligation of the state or
municipality in question.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of state and local
governments or authorities used to finance the acquisition of equipment and
facilities. Lease obligations generally do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged. A lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. In addition to the "non-appropriation" risk, these securities represent
a relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. Additionally,
use of the leased property may be limited by state or local law to a specified
use thereby further limiting ability to rent. There is no limitation on the
percentage of the Fund's assets that may be invested in "non-appropriation"
lease obligations. In evaluating such lease obligations, the Adviser will
consider such factors as it deems appropriate, which factors may include (a)
whether the lease can be cancelled, (b) the ability of the lease obligee to
direct the sale of the underlying assets, (c) the general creditworthiness of
the lease obligor, (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality, (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding and (f) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services than those covered by the lease obligation.
Also included in the term municipal securities are participation certificates
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given
B-4
<PAGE> 630
period, to prepay at its discretion upon notice to the noteholders the
outstanding principal amount of the notes plus accrued interest. The interest
rate on a floating rate demand note is based on a known lending rate, such as a
bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 20% of its total assets in derivative variable
rate municipal securities such as inverse floaters whose rates vary inversely
with changes in market rates of interest or range floaters or capped floaters
whose rates are subject to periodic or lifetime caps. Derivation variable rate
securities may pay a rate of interest determined by applying a multiple to the
variable rate. The extent of increases and decreases in the value of derivative
variable rate securities in response to changes in market rates of interest
generally will be larger than comparable changes in the value of an equal
principal amount of a fixed rate municipal security having similar credit
quality, redemption provisions and maturity.
The Fund also may acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain municipal securities. The underwriter of
these certificates or receipts typically purchases municipal securities and
deposits the securities in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Although under the terms of a custodial receipt, the
Fund typically would be authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantor
of such payment obligations, of the municipal securities.
Municipal securities, like other debt obligations, are subject to the risk of
non-payment. The ability of issuers of municipal securities to make timely
payments of interest and principal may be adversely impacted in general economic
downturns and as relative governmental cost burdens are allocated and
reallocated among federal, state and local governmental units. Such non-payment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal security experiencing non-payment and a
potential decrease in the net asset value of the Fund. Issuers of municipal
securities might seek protection under the bankruptcy laws. In the event of
bankruptcy of such an issuer, the Fund could experience delays and limitations
with respect to the collection of principal and interest on such municipal
securities and the Fund may not, in all circumstances, be able to collect all
principal and interest to which it is entitled. To enforce its rights in the
event of a default in the payment of interest or repayment of principal, or
both, the Fund may take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase the Fund's operating
expenses and adversely affect the net asset value of the Fund. Any income
derived from the Fund's ownership or operation of such assets may not be
tax-exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the extent to which the Fund may exercise its rights by
taking possession of such assets, because as a regulated investment company the
Fund is subject to certain limitations on its investments and on the nature of
its income. Further, in connection with the working out or restructuring of a
defaulted security, the Fund may acquire additional securities of the issuer,
the acquisition of which may be deemed to be a loan of money or property. Such
additional securities should be considered speculative with respect to the
capacity to pay interest or repay principal in accordance with their terms.
B-5
<PAGE> 631
SPECIAL CONDITIONS REGARDING NEW YORK MUNICIPAL SECURITIES
As described in the Prospectus, except during temporary periods, the Fund will
invest substantially all of its assets in New York municipal securities. In
addition, the specific New York municipal securities in which the Fund will
invest will change from time to time. The Fund is therefore susceptible to
political, economic, regulatory or other factors affecting issuers of New York
municipal securities. The following information constitutes only a brief summary
of a number of the complex factors which may impact issuers of New York
municipal securities and does not purport to be a complete or exhaustive
description of all adverse conditions to which issuers of New York municipal
securities may be subject. Such information is derived from official statements
utilized in connection with the issuance of New York municipal securities, as
well as from other publicly available documents. Such information has not been
independently verified by the Fund, and the Fund assumes no responsibility for
the completeness or accuracy of such information. The summary below does not
include all of the information pertaining to the budget, receipts and
disbursements of the State of New York that would ordinarily be included in
various public documents issued thereby, such as an Official Statement prepared
in connection with the issuance of general obligation bonds of the State of New
York. Such an Official Statement, together with any updates or supplements
thereto, may generally be obtained upon request to the Budget Office of the
State of New York.
THE NEW YORK STATE ECONOMY. New York is the third most populous state in the
nation and has a relatively high level of personal wealth. The state's economy
is diverse, with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. Travel and tourism constitute an
important part of the state's economy. As in most states, New York has a
declining proportion of its workforce engaged in manufacturing, and an
increasing proportion engaged in service industries. To the extent that a
particular industry sector represents a larger portion of the state's total
economy, the greater impact that a downturn in such sector is likely to have on
the state's economy.
Services: The services sector, which includes entertainment, personal
services, such as health care and auto repairs, and business-related services,
such as information processing, law and accounting, is the state's leading
economic sector. The services sector accounts for more than three of every ten
nonagricultural jobs in New York and has a noticeably higher proportion of total
jobs than does the rest of the nation.
Manufacturing: Manufacturing employment continues to decline in importance in
New York, as in most other states, and New York's economy is less reliant on
this sector than is the nation. The principal manufacturing industries in recent
years produced printing and publishing materials, instruments and related
products, machinery, apparel and finished fabric products, electronic and other
electric equipment, food and related products, chemicals and allied products,
and fabricated metal products.
Trade: Wholesale and retail trade is the second largest sector in terms of
nonagricultural jobs in New York but is considerably smaller when measured by
income share. Trade consists of wholesale businesses and retail businesses, such
as department stores and eating and drinking establishments.
Finance, Insurance and Real Estate: New York City is the nation's leading
center of banking and finance and, as a result, this is a far more important
sector in the state than in the nation as a whole. Although this sector accounts
for under one-tenth of all nonagricultural jobs in the state, it contributes
over one-sixth of all nonfarm labor and proprietors' income.
Agriculture: Farming is an important part of the economy of large regions of
the state, although it constitutes a very minor part of total state output.
Principal agricultural products of the state include milk and dairy products,
greenhouse and nursery products, apples and other fruits, and fresh vegetables.
New York ranks among the nation's leaders in the production of these
commodities.
Government: Federal, state and local government together are the third largest
sector in terms of nonagricultural jobs, with the bulk of the employment
accounted for by local governments. Public education is the source of nearly
one-half of total state and local government employment.
STATE BUDGETARY OUTLOOK. State law requires the Governor of New York to
propose a balanced budget each year. In recent years, New York closed projected
budget gaps of $5.0 billion (1995-96), $3.9 billion
B-6
<PAGE> 632
(1996-97), $2.3 billion (1997-98), and less than $1 billion (1998-99). The
state, as a part of the 1998-99 Executive Budget projections submitted to the
state legislature in February 1998, projected a 1990-00 budget gap of
approximately $1.7 billion and a 2000-01 gap of $3.7 billion for the General
Fund, the primary operating fund of the state. As a result of changes made in
the 1998-99 enacted budget, the 1999-00 gap is now expected to be roughly $1.3
billion, or about $400 million less than previously projected, after application
of reserves created as part of the 1998-99 budget process. Such reserves would
not be available against subsequent year imbalances.
Sustained growth in the state's economy could contribute to closing projected
budget gaps over the next several years, both in terms of higher-than-projected
tax receipts and in lower-than-expected entitlement spending. However, the
state's projections in 1990-00 currently assume actions to achieve $600 million
in lower disbursements and $250 million in additional receipts from the
settlement of state claims against the tobacco industry. These projections do
not include any costs associated with new collective bargaining agreements after
the expiration of the current round of contracts at the end of the 1998-99
fiscal year. The state expects that the 1999-00 Financial Plan will achieve
savings from initiatives by state agencies to deliver services more efficiently,
workforce management efforts, maximization of the federal and non-General Fund
spending offsets, and other actions necessary to bring projected disbursements
and receipts into balance.
The state will formally update its outyear projections of receipts and
disbursements for the 2000-01 and 2001-02 fiscal years as a part of the 1999-00
Executive Budget process, as required by law. The revised expectations for years
2000-01 and 2001-02 will reflect the cumulative impact of tax reductions and
spending commitments enacted over the last several years as well as new 1999-000
Executive Budget recommendations. The School Tax Relief or "STAR" program, which
dedicates a portion of personal income tax receipts to fund school tax
reductions, has a significant impact on General Fund receipts. STAR is projected
to reduce personal income tax revenues available to the General Fund by an
estimated $1.3 billion in 2000-01. Measured from the 1998-99 base, scheduled
reductions to estate and gift, sales and other taxes, reflecting tax cuts
enacted in 1997-98 and 1998-99, will lower General Fund taxes and fees by an
estimated $1.8 billion in 2000-01. Disbursement projections for the outyears
currently assume additional outlays for school aid, Medicaid, welfare reform,
mental health community reinvestment, and other multi-year spending commitments
in law.
Actions affecting the level of receipts and disbursements, the relative
strength of the state and regional economy, and actions by the federal
government have helped to create projected structural budget gaps for the State
of New York. These gaps result from a significant disparity between recurring
revenues and the costs of maintaining or increasing the level of support for
state programs. To address a potential imbalance in any given fiscal year, the
state would be required to take actions to increase receipts and/or reduce
disbursements as it enacts the budget for that year. There can be no assurance,
however, that the state legislature will enact the Governor's proposals or that
the state's actions will be sufficient to preserve budgetary balance in a given
fiscal year or to align recurring receipts and disbursements in future fiscal
years. For example, the fiscal effects of tax reductions adopted in the last
several fiscal years (including 1998-99) are projected to grow more
substantially beyond the 1998-99 fiscal year, with the incremental annual cost
of all currently enacted tax reductions estimated at over $4 billion by the time
they are fully effective in State fiscal year 2002-03. These actions will place
pressure on future budget balance in New York State. An additional risk to the
state's financial plan arises from the potential impact of certain litigation
and of federal disallowances now pending against the state, which could
adversely affect the state's projections of receipts and disbursements.
STATE YEAR 2000 COMPLIANCE. New York State is currently addressing "Year 2000"
data processing compliance issues. In 1996, the state created the Office for
Technology (OFT) to help address statewide technology issues, including the Year
2000 issue. OFT has estimated that investments of at least $140 million will be
required to bring approximately 350 state mission-critical and high-priority
computer systems not otherwise scheduled for replacement into Year 2000
compliance, and the state is planning to spend $100 million in the 1998-99
fiscal year for this purpose. Mission-critical computer applications are those
which impact the health, safety and welfare of the state and its citizens, and
for which failure to be in Y2K compliance could have a material and adverse
impact upon state operations. High-priority computer applications are those that
are critical for a state agency to fulfill its mission and deliver services, but
for which there are manual alternatives. Work has been completed on roughly 20
percent of these systems. All
B-7
<PAGE> 633
remaining unfinished mission-critical and high-priority systems have at least 40
percent or more of the work completed. Contingency planning is under way for
those systems which may be noncompliant prior to failure dates. The enacted
budget also continues funding for major systems scheduled for replacement,
including the state payroll, civil service, tax and finance and welfare
management systems, for which year 2000 compliance is included as a part of the
project. OFT is monitoring compliance on a quarterly basis and is providing
assistance and assigning resources to accelerate compliance for mission critical
systems, with most compliance testing expected to be completed by mid-1999.
There can be no guarantee, however, that all of the state's mission-critical and
high-priority computer systems will be Year 2000 complaint and that there will
not be an adverse impact upon state operations or state finances as a result.
NEW YORK CITY. New York City, with a population of approximately 7.4 million,
is an international center of business and culture. Its non-manufacturing
economy is broadly based, with the banking and securities, life insurance,
communications, publishing, fashion design, retailing and construction
industries accounting for a significant portion of the city's total employment
earnings. Additionally, the city is the nation's leading tourist destination.
Manufacturing activity in the city is conducted primarily in apparel and
printing.
For each of the 1981 through 1997 fiscal years, the city had an operating
surplus, before discretionary transfers, and achieved balanced operating results
as reported in accordance with then applicable generally accepted accounting
principals, after discretionary transfers. The city has been required to close
substantial gaps between forecast revenues and forecast expenditures in order to
maintain balanced operating results. There can be no assurance that the city
will continue to maintain balanced operating results as required by state law
without tax or other revenue increases or reductions in city services or
entitlement programs, which could adversely affect the city's economic base.
As required by law, the city prepares a four-year annual financial plan, which
is reviewed and revised on a quarterly basis and which includes the city's
capital, revenue and expense projections and outlines proposed gap-closing
programs for years with projected budget gaps. The city's current financial plan
projects a surplus in the 1999 fiscal year, before discretionary transfers, and
budget gaps for each of the 2000, 2001 and 2002 fiscal years. This pattern of
current year surplus operating results and projected subsequent year budget gaps
has been consistent through the entire period since 1982, during which the city
has achieved surplus operating results, before discretionary transfers, for each
fiscal year.
The city depends on aid from the State of New York both to enable the city to
balance its budget and to meet its cash requirements. There can be no assurance
that there will not be reductions in state aid to the city from amounts
currently projected; that state budgets will be adopted by the April 1 statutory
deadline, or interim appropriations enacted; or that any such reductions or
delays will not have adverse effects on the city's cash flow or expenditures. In
addition, the federal budget negotiation process could result in a reduction in
or a delay in the receipt of federal grants which could have additional adverse
effects on the city's cash flow or revenues.
Implementation of the city's financial plan is dependent upon the city's
ability to market its securities successfully. The city's financing program for
fiscal years 1999 through 2002 contemplates the issuance of $5.2 billion of
general obligation bonds and $5.4 billion of bonds to be issued by the New York
City Transitional Finance Authority (the "Finance Authority") to finance city
capital projects. The Finance Authority was created to assist the city in
financing its capital program while keeping city indebtedness within the
forecast level of the constitutional restrictions on the amount of debt the city
is authorized to incur. In addition, the city issues revenue and tax
anticipation notes to finance its seasonal working capital requirements. The
success of projected public sales of city bonds and notes, New York City
Municipal Water Finance Authority ("Water Authority") bonds and Finance
Authority bonds will be subject to prevailing market conditions. The city's
planned capital and operating expenditures are dependent upon the sale of its
general obligation bonds and notes, and the Water Authority and Finance
Authority bonds. Future developments concerning the city and public discussion
of such developments, as well as prevailing market conditions, may affect the
market for outstanding city general obligation bonds and notes.
OTHER NEW YORK RISK FACTORS. When compared with the average ratings among
other states of full faith and credit state debt obligations, the credit risk
associated with obligations of the state of New York and its agencies and
authorities, including general obligation and revenue bonds, "moral obligation"
bonds, lease debt,
B-8
<PAGE> 634
appropriation debt and notes is somewhat higher than average. Moreover, the
credit quality of such obligations may be more volatile insofar as the state's
credit rating has historically been upgraded and downgraded much more frequently
than most other states.
The combined state and local taxes of residents of the state of New York, and
particularly of residents of New York City, are among the highest in the
country, which may limit the ability of the state and its localities to raise
additional revenue. In addition, combined state and local debt per capita in the
state is significantly above the national average and debt service expenditures
have represented an increasing claim on state and local budgets.
Additionally, many factors, including national, economic, social and
environmental policies and conditions, which are not within the control of such
issuers, could have an adverse impact on the financial condition of such
issuers. The Fund cannot predict whether or to what extent such factors or other
factors may affect the issuers of New York municipal securities, the market
value or marketability of such securities or the ability of the respective
issuers of such securities acquired by the Fund to pay interest on or principal
of such securities. The creditworthiness of obligations issued by local New York
issuers may be unrelated to the creditworthiness of obligations issued by the
State of New York, and there is no responsibility on the part of the State of
New York to make payments on such local obligations. There may be specific
factors that are applicable in connection with investment in the obligations of
particular issuers located within New York, and it is possible the Fund will
invest in obligations of particular issuers as to which such specific factors
are applicable. However, the information set forth below is intended only as a
general summary and not as a discussion of any specific factors that may affect
any particular issuer of New York municipal securities.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, financial futures, interest rate indices and
other financial instruments, purchase and sell financial futures contracts and
options thereon, or enter into various interest rate transactions such as swaps,
caps, floors or collars (collectively, all the above are called "Strategic
Transactions"). Strategic Transactions may be used to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets fluctuations, to
protect the Fund's unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of the Fund's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchasing or
selling particular securities.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund
B-9
<PAGE> 635
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of the Fund creates the possibility that losses on the hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of futures and
options transactions should tend to minimize the risk of loss due to a decline
in the value of the hedged position, at the same time they tend to limit any
potential gain which might result from an increase in value of such position.
Finally, the daily variation margin requirements for futures contracts would
create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. Income earned or deemed to be earned, if
any, by the Fund from its Strategic Transactions will generally be taxable
income of the Fund.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the
B-10
<PAGE> 636
relevant market for that option on that exchange would cease to exist, although
outstanding options on that exchange would generally continue to be exercisable
in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only enter into OTC options that have a buy-back provision permitting
the Fund to require the Counterparty to close the option at a formula price
within seven days. The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other NRSRO. The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on illiquid securities
described herein.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities that are traded on securities exchanges
and in the over-the-counter markets and related futures on such contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold. In the event of exercise of a call option
sold by the Fund with respect to securities not owned by the Fund, the Fund may
be required to acquire the underlying security at a disadvantageous price in
order to satisfy its obligation with respect to the call option.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and corporate debt securities (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
B-11
<PAGE> 637
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The purchase of a futures contract
creates a firm obligation by the Fund, as purchaser, to take delivery from the
seller the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) for other than bona fide hedging purposes if, immediately
thereafter, the sum of the amount of its initial margin and premiums on open
futures contracts and options thereon would exceed 5% of the Fund's total assets
(taken at current value); however, in the case of an option that is in-the-money
at the time of the purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. The segregation requirements with respect to
futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the
B-12
<PAGE> 638
Adviser's judgment that the combined strategies will reduce risk or otherwise
more effectively achieve the desired portfolio management goal, it is possible
that the combination will instead increase such risks or hinder achievement of
the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash and liquid
securities with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash and liquid
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash and
liquid securities equal to the excess of the index value over the exercise price
on a current basis. A put option written by the Fund requires the Fund to
segregate cash and liquid securities equal to the exercise price.
OTC options entered into by the Fund, including those on securities, financial
instruments or indices and OCC issued and exchange listed index options, will
generally provide for cash settlement. As a result, when the Fund sells these
instruments it will only segregate an amount of cash and liquid securities equal
to its accrued net obligations, as there is no requirement for payment or
delivery of amounts in excess of the net
B-13
<PAGE> 639
amount. These amounts will equal 100% of the exercise price in the case of a non
cash-settled put, the same as an OCC guaranteed listed option sold by the Fund,
or the in-the-money amount plus any sell-back formula amount in the case of a
cash-settled put or call. In addition, when the Fund sells a call option on an
index at a time when the in-the-money amount exceeds the exercise price, the
Fund will segregate, until the option expires or is closed out cash and liquid
securities equal in value to such excess. OCC issued and exchange listed options
sold by the Fund other than those above generally settle with physical delivery,
and the Fund will segregate an amount of cash and liquid securities equal to the
full value of the option. OTC options settling with physical delivery, or with
an election of either physical delivery or cash settlement, will be treated the
same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
cash and liquid securities sufficient to meet its obligation to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of cash and liquid securities with a value equal to the Fund's net obligation,
if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash and
liquid securities, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating cash and liquid
securities if the Fund held a futures or forward contract, it could purchase a
put option on the same futures or forward contract with a strike price as high
or higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction no segregation is required, but if it
terminates prior to such time, cash and liquid securities equal to any remaining
obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of the Code for qualification as a regulated investment company.
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may also purchase and sell municipal securities on a "when-issued"
and "delayed delivery" basis. No income accrues to the Fund on municipal
securities in connection with such transactions prior to the date the Fund
actually takes delivery of such securities. These transactions are subject to
market fluctuation; the value of the municipal securities at delivery may be
more or less than their purchase price, and yields generally available on
municipal securities when delivery occurs may be higher or lower than yields on
the municipal securities obtained pursuant to such transactions. Because the
Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. When the Fund is the buyer in such a transaction, however, it
will maintain, in a segregated account with its custodian, cash or liquid
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. The Fund will make commitments to purchase
municipal securities on such basis only with the intention of actually acquiring
these securities, but the Fund may sell such securities prior to the settlement
date if such sale is considered to be advisable. To the extent the Fund engages
in "when-issued" and "delayed delivery" transactions, it will do so for the
purpose of acquiring securities for the Fund's portfolio consistent with the
Fund's investment objectives and policies and not for the purposes of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when-issued" or "delayed
delivery" basis.
B-14
<PAGE> 640
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The Fund's portfolio turnover rate (the lesser of
the value of the securities purchased or securities sold divided by the average
value of the securities held in the Fund's portfolio excluding all securities
whose maturities at acquisition were one year or less) is shown in the table of
"Financial Highlights" in the Prospectus. A high portfolio turnover rate (100%
or more) increases the Fund's transaction costs, including brokerage
commissions, and may result in the realization of more short-term capital gains
than if the Fund had a lower portfolio turnover. The turnover rate will not be a
limiting factor, however, if the Adviser deems portfolio changes appropriate.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities, which
includes securities that are not readily marketable, repurchase agreements which
have a maturity of longer than seven days and generally includes securities that
are restricted from sale to the public without registration under the Securities
Act of 1933, as amended (the "1933 Act"). The sale of such securities often
requires more time and results in higher brokerage charges or dealer discounts
and other selling expenses than does the sale of liquid securities trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities are often purchased at a discount from the market price of
unrestricted securities of the same issuer reflecting the fact that such
securities may not be readily marketable without some time delay. Investments in
securities which have no ready market are valued at fair value as determined in
good faith by the Adviser in accordance with procedures approved by the Fund's
Trustees. Ordinarily, the Fund would invest in restricted securities only when
it receives the issuer's commitment to register the securities without expense
to the Fund. However, registration and underwriting expenses (which may range
from 7% to 15% of the gross proceeds of the securities sold) may be paid by the
Fund. Restricted securities which can be offered and sold to qualified
institutional buyers under Rule 144A under the 1933 Act ("144A Securities") and
are determined to be liquid under guidelines adopted by and subject to the
supervision of the Fund's Board of Trustees are not subject to the limitation on
illiquid securities. Such 144A Securities are subject to monitoring and may
become illiquid to the extent qualified institutional buyers become, for a time,
uninterested in purchasing such securities. Factors used to determine whether
144A Securities are liquid include, among other things, a security's trading
history, the availability of reliable pricing information, the number of dealers
making quotes or making a market in such security and the number of potential
purchasers in the market for such security. For purposes hereof, investments by
the Fund in securities of other investment companies will not be considered
investments in restricted securities to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption
or other relief from the provisions of the 1940 Act.
B-15
<PAGE> 641
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions which
may not be changed without approval by the vote of a majority of its outstanding
voting shares, which is defined by the 1940 Act as the lesser of (i) 67% or more
of the voting securities present in person or by proxy at the meeting, if the
holders of more than 50% of the outstanding voting securities are present in
person or by proxy; or (ii) more than 50% of the outstanding voting securities.
The Fund may not:
1. Invest more than 25% of its assets in a single industry; however, the Fund
may from time to time invest more than 25% of its assets in a particular
segment of the municipal bond market; however, the Fund will not invest
more than 25% of its assets in industrial development bonds in a single
industry and except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
2. Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the total asset value of the Fund, or mortgage,
pledge, or hypothecate any assets except in connection with a borrowing
and in amounts not in excess of 10% of the total asset value of the Fund.
Borrowings may not be made for investment leverage, but only to enable the
Fund to satisfy redemption requests where liquidation of portfolio
securities is considered disadvantageous or inconvenient. In this
connection, the Fund will not purchase portfolio securities during any
period that such borrowings exceed 5% of the total asset value of the
Fund. Notwithstanding this investment restriction, the Fund may enter into
when issued and delayed delivery transactions.
3. Make loans of money or property to any person, except to the extent the
securities in which the Fund may invest are considered to be loans and
except that the Fund may lend money or property in connection with
maintenance of the value of, or the Fund's interest with respect to, the
securities owned by the Fund.
4. Buy any securities "on margin." Neither the deposit of initial or
maintenance margin in connection with hedging transactions nor short term
credits as may be necessary for the clearance of transactions is
considered the purchase of a security on margin.
5. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except in connection with
Strategic Transactions in accordance with the requirements of the SEC and
the Commodity Futures Trading Commission.
6. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
7. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under agreements related to securities owned by the Fund would be deemed
to constitute such control or participation and except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
8. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except that the Fund
may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief form the
provisions of the 1940 Act.
9. Invest in oil, gas or mineral leases or in equity interests in oil, gas,
or other mineral exploration or development programs, except pursuant to
the exercise by the Fund of its rights under agreements relating to
municipal securities.
B-16
<PAGE> 642
10. Purchase or sell real estate, commodities or commodity contracts, except
to the extent the securities the Fund may invest in are considered to be
interest in real estate, commodities or commodity contracts or to the
extent the Fund exercises its rights under agreements relating to such
securities (in which case the Fund may own, hold, foreclose, liquidate or
otherwise dispose of real estate acquired as a result of a default on a
mortgage), and except to the extent that Strategic Transactions the Fund
may engage in are considered to be commodities or commodities contracts.
As long as the percentage restrictions described above are satisfied at the
time of the investment or borrowing, the Fund will be considered to have abided
by those restrictions even if, at a later time, a change in values or net assets
causes an increase or decrease in percentage beyond that allowed.
DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S--A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P follows):
A S&P corporate or municipal debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment--capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the
terms of the obligation:
2. Nature of and provisions of the obligation:
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditor's rights.
LONG-TERM DEBT--INVESTMENT GRADE
<TABLE>
<S> <C>
AAA: Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to meet its financial commitment on the obligation
is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only
in small degree. Capacity to meet its financial commitment
on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions
than obligations in higher rated categories. Capacity to
meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
to meet its financial commitment on the obligation.
</TABLE>
B-17
<PAGE> 643
SPECULATIVE GRADE
BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
<TABLE>
<S> <C>
BB: Debt rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the
obligation.
B: Debt rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the
capacity to meet its financial commitment on the obligation.
Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and
economic conditions for the obligor to meet its financial
commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is
not likely to have the capacity to meet its financial
commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to
nonpayment.
C: The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being
continued.
D: Debt rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made
on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period. The "D" rating also will be used
upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
R: This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to
principal or volatility of expected returns which are not
addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment
risk--such as interest-only or principal-only mortgage
securities; and obligations with unusually risky interest
terms, such as inverse floaters.
</TABLE>
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating.
The following criteria will be used in making that assessment.
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
<TABLE>
<S> <C>
SP-1: Strong or strong capacity to pay principal and interest.
Issues determined to possess very strong characteristics are
a plus (+) designation.
</TABLE>
B-18
<PAGE> 644
<TABLE>
<S> <C>
SP-2: Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse Financial and economic changes
over the term of the notes.
SP-3: Speculative capacity to pay principal and interest.
</TABLE>
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from
'A-1' for the highest quality obligations to 'D' for the lowest. These
categories are as follows:
<TABLE>
<S> <C>
A-1: A short-term obligation rated A-1 is rated in the highest
category by S&P. The obligor's capacity to meet its
financial commitment on the obligation is strong. Within
this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is
extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is
satisfactory.
A-3: A short-term obligation rated A-3 exhibits adequate
protection parameters. However, adverse economic conditions
or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated B is regarded as having
significant speculative characteristics. The obligor
currently has the capacity to meet its financial commitment
on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C: A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent on favorable business,
financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D: A short-term obligation rated D is in payment default. The D
rating is used when payments on an obligation are not made
on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
</TABLE>
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by
the issuer or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in
or unavailability of, such information.
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option
or demand feature as part of their structure.
The first rating addresses the likelihood of repayment of principal
and interest as due, and the second rating addresses only the demand
feature. The long-term debt rating symbols are used for bonds to denote the
long-term maturity and the commercial paper rating symbols for the put
option (for example, 'AAA/ A-1+'). With short-term demand debt, S&P's note
rating symbols are used with the commercial paper rating symbols (for
example, 'SP-1+/A-1+').
B-19
<PAGE> 645
MOODY'S INVESTORS SERVICE INC.--A brief description of the applicable Moody's
Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
<TABLE>
<S> <C>
AAA: Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edged." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some
time in the future.
BAA: Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor
poorly secured). Interest payment and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may
be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
CA: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers, 1, 2, and 3 in each
generic rating classification from Aa to B. The modifier 1
indicates that the issue ranks in the higher end of its
generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
</TABLE>
Absence of Rating: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the
quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
B-20
<PAGE> 646
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date date to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term ratings, while other factors of major importance
in bond risk, long-term secular trends for example, may be less important
over the short run. A short-term rating may also be assigned on an issue
having a demand feature-variable rate demand obligation. Such ratings will
be designated as VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
SG. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity
in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933,
nor does it represent that any specific note is a valid obligation of a
rated issuer or issued in conformity with any applicable law.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Issuers rated Prime-1 (on supporting institutions) have a superior
ability for repayment of short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
B-21
<PAGE> 647
-- Well established access to a ranges of financial markets and
assured sources of alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or supported institutions) have an acceptable
ability for repayment of short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the prime rating
categories.
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and officers of the Fund and
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with Van
Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment
Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Management
Inc., Van Kampen Advisors Inc., Van Kampen Insurance Agency of Illinois Inc.,
Van Kampen Insurance Agency of Texas Inc., Van Kampen System Inc., Van Kampen
Recordkeeping Services Inc., American Capital Contractual Services, Inc., Van
Kampen Trust Company, Van Kampen Exchange Corp. and Van Kampen Investor Services
Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are
referred to herein collectively as the "Advisers". For purposes hereof, the term
"Fund Complex" includes each of the open-end investment companies advised by the
Advisers (excluding Van Kampen Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee/Director of each of the
funds in the Fund Complex.
</TABLE>
B-22
<PAGE> 648
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Richard M. DeMartini*..................... Chairman and Chief Executive Officer of International
Two World Trade Center Private Client Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Chairman of Dean Witter Futures & Currency
New York, NY 10048 Management Inc. and Demeter Management Corporation.
Date of Birth: 10/12/52 Director of Dean Witter Reynolds Inc. Chairman and
Director of Dean Witter Capital Corporation. Chairman,
Chief Executive Officer, President and a Director of Dean
Witter Alliance Capital Corporation, Director of the
National Healthcare Resources, Inc., Morgan Stanley Dean
Witter Distributors, Inc., Dean Witter Realty Inc., Dean
Witter Reynolds Venture Equities Inc., DW Window Covering
Holding, Inc., and is a member of the Morgan Stanley Dean
Witter Management Committee. Prior to December of 1998,
Mr. DeMartini was President and Chief Operating Officer
of Morgan Stanley Dean Witter Individual Asset Management
and a Director of Morgan Stanley Dean Witter Trust FSB.
Formerly Vice Chairman of the Board of the National
Association of Securities Dealers, Inc. and Chairman of
the Board of the Nasdaq Stock Market, Inc. Trustee of the
TCW/DW Funds, Director of the Morgan Stanley Dean Witter
Funds and Trustee/Director of each of the funds in the
Fund Complex.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board,
Vice Chair of the Board of The YMCA of Metropolitan
Chicago and a member of the Women's Board of the
University of Chicago. Prior to 1996, Trustee of The
International House Board. Trustee/Director of each of
the funds in the Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and Member of the Investment Committee
of the Joyce Foundation, a private foundation.
Trustee/Director of each of the funds in the Fund
Complex.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee/Director of each of
the funds in the Fund Complex.
</TABLE>
B-23
<PAGE> 649
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Don G. Powell*............................ Currently a member of the board of governors and
3 Wexford Court executive committee for the Investment Company Institute,
Houston, TX 77024 and a member of the Board of Trustees of the Houston
Date of Birth: 10/19/39 Museum of Natural Science. Immediate past Chairman of the
Investment Company Institute. Prior to January 1999,
Chairman and a Director of Van Kampen Investments, the
Advisers, the Distributor and Investor Services and
Director or officer of certain other subsidiaries of Van
Kampen Investments. Prior to July of 1998, Director and
Chairman of VK/AC Holding, Inc. Prior to November 1996,
President, Chief Executive Officer and a Director of
VK/AC Holding, Inc. Trustee/Director of each of the funds
in the Fund Complex and Trustee of other funds advised by
the Advisers or Van Kampen Management Inc.
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer services company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company and
Date of Birth: 07/08/44 the Urban Shopping Centers Inc., a retail mall management
company. Trustee, University of Notre Dame. Prior to
1998, Director of Stone Smurfit Container Corp., a paper
manufacturing company. Formerly, President, Chief
Executive Officer and Chief Operating Officer of Waste
Management, Inc., an environmental services company.
Trustee/Director of each of the funds in the Fund
Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen Management Inc.
Trustee/Director of each of the funds in the Fund
Complex, and Trustee/Managing General Partner of other
open-end and closed-end funds advised by the Advisers or
Van Kampen Management Inc.
Paul G. Yovovich.......................... Private investor. Prior to April 1996, President of
Sears Tower Advance Ross Corporation. Director of 3Com Corporation,
233 South Wacker Drive APAC Teleservices, Inc., and COMARCO, Inc.
Suite 9700 Trustee/Director of each of the Funds in the Fund
Chicago, IL 60606 Complex.
Date of Birth: 10/29/53
</TABLE>
- ------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
current or former positions with Morgan Stanley Dean Witter & Co. or its
affiliates.
B-24
<PAGE> 650
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Sullivan, Wood, Dalmaso, Martin, Wetherell
and Hill are located at 1 Parkview Plaza, PO Box 5555, Oakbrook Terrace, IL
60181-5555. The Fund's other officers are located at 2800 Post Oak Blvd.,
Houston, TX 77056.
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Dennis J. McDonnell.................. Executive Vice President and a Director of Van Kampen
Date of Birth: 05/20/42 Investments. President, Chief Operating Officer and a
President Director of the Advisers, Van Kampen Advisors Inc., and Van
Kampen Management Inc. Prior to July of 1998, Director and
Executive Vice President of VK/AC Holding, Inc. Prior to
April of 1998, President and a Director of Van Kampen
Merritt Equity Advisors Corp. Prior to April of 1997, Mr.
McDonnell was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996, Mr. McDonnell was
Chief Executive Officer and Director of MCM Group, Inc.,
McCarthy, Crisanti & Maffei, Inc. and Chairman and Director
of MCM Asia Pacific Company, Limited and MCM (Europe)
Limited. Prior to July of 1996, Mr. McDonnell was President,
Chief Operating Officer and Trustee of VSM Inc. and VCJ Inc.
President of each of the funds in the Fund Complex.
President, Chairman of the Board and Trustee/Managing
General Partner of other investment companies advised by the
Advisers or their affiliates.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Prior to July
Vice President of 1996, Mr. Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of McCarthy, Crisanti &
Maffei, Inc. Vice President of each of the funds in the Fund
Complex and certain other investment companies advised by
the Advisers or their affiliates.
John L. Sullivan..................... First Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Treasurer, Vice President and Chief Financial
Treasurer, Vice President and Chief Officer of each of the funds in the Fund Complex and certain
Financial Officer other investment companies advised by the Advisers or their
affiliates.
Curtis W. Morell..................... Senior Vice President of the Advisers, Vice President and
Date of Birth: 08/04/46 Chief Accounting Officer of each of the funds in the Fund
Vice President and Chief Accounting Complex and certain other investment companies advised by
Officer the Advisers or their affiliates.
</TABLE>
B-25
<PAGE> 651
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Ronald A. Nyberg..................... Executive Vice President, General Counsel, Secretary and
Date of Birth: 07/29/53 Director of Van Kampen Investments. Mr. Nyberg is Executive
Vice President and Secretary Vice President, General Counsel, Assistant Secretary and a
Director of the Advisers and the Distributor, Van Kampen
Advisors Inc., Van Kampen Management Inc., Van Kampen
Exchange Corp., American Capital Contractual Services, Inc.
and Van Kampen Trust Company. Executive Vice President,
General Counsel and Assistant Secretary of Investor Services
and River View International Inc. Director or officer of
certain other subsidiaries of Van Kampen Investments.
Director of ICI Mutual Insurance Co., a provider of
insurance to members of the Investment Company Institute.
Prior to July of 1998, Director and Executive Vice
President, General Counsel and Secretary of VK/AC Holding,
Inc. Prior to April of 1998, Executive Vice President,
General Counsel and Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he was Executive Vice
President, General Counsel and a Director of Van Kampen
Merritt Equity Holdings Corp. Prior to September of 1996, he
was General Counsel of McCarthy, Crisanti & Maffei, Inc.
Prior to July of 1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc. and Executive Vice
President and General Counsel of VCJ Inc. Vice President and
Secretary of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Paul R. Wolkenberg................... Executive Vice President and Director of Van Kampen
Date of Birth: 11/10/44 Investments. Executive Vice President of Asset Management
Vice President and the Distributor. President and a Director of Investor
Services. President and Chief Operating Officer of Van
Kampen Recordkeeping Services Inc. Prior to July of 1998,
Director and Executive Vice President of VK/AC Holding, Inc.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Edward C. Wood III................... Senior Vice President of the Advisers, Van Kampen
Date of Birth: 01/11/56 Investments and Van Kampen Management Inc. Senior Vice
Vice President President and Chief Operating Officer of the Distributor.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Tanya M. Loden....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 11/19/59 Controller of each of the funds in the Fund Complex and
Controller other investment companies advised by the Advisers or their
affiliates.
Nicholas Dalmaso..................... Associate General Counsel and Assistant Secretary of Van
Date of Birth: 03/01/65 Kampen Investments. Vice President, Associate General
Assistant Secretary Counsel and Assistant Secretary of the Advisers, the
Distributor, Van Kampen Advisors Inc. and Van Kampen
Management Inc. Assistant Secretary of each of the funds in
the Fund Complex and other investment companies advised by
the Advisers or their affiliates.
</TABLE>
B-26
<PAGE> 652
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Scott E. Martin...................... Senior Vice President, Deputy General Counsel and Assistant
Date of Birth: 08/20/56 Secretary of Van Kampen Investments. Senior Vice President,
Assistant Secretary Deputy General Counsel and Secretary of the Advisers, the
Distributor, Investor Services, American Capital Contractual
Services, Inc., Van Kampen Management Inc., Van Kampen
Exchange Corp., Van Kampen Advisors Inc., Van Kampen
Insurance Agency of Illinois Inc., Van Kampen System Inc.
and Van Kampen Recordkeeping Services Inc. Prior to July of
1998, Senior Vice President, Deputy General Counsel and
Assistant Secretary of VK/AC Holding, Inc. Prior to April of
1998, Van Kampen Merritt Equity Advisors Corp. Prior to
April of 1997, Senior Vice President, Deputy General Counsel
and Secretary of Van Kampen American Capital Services, Inc.
and Van Kampen Merritt Holdings Corp. Prior to September of
1996, Mr. Martin was Deputy General Counsel and Secretary of
McCarthy, Crisanti & Maffei, Inc., and prior to July of
1996, he was Senior Vice President, Deputy General Counsel
and Secretary of VSM Inc. and VCJ Inc. Assistant Secretary
of each of the funds in the Fund Complex and other
investment companies advised by the Advisers or their
affiliates.
Weston B. Wetherell.................. Vice President, Associate General Counsel and Assistant
Date of Birth: 06/15/56 Secretary of Van Kampen Investments, the Advisers, the
Assistant Secretary Distributor, Van Kampen Management Inc. and Van Kampen
Advisors Inc. Prior to September of 1996, Mr. Wetherell was
Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.
Assistant Secretary of each of the funds in the Fund Complex
and other investment companies advised by the Advisers or
their affiliates.
Steven M. Hill....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 10/16/64 Assistant Treasurer of each of the funds in the Fund Complex
Assistant Treasurer and other investment companies advised by the Advisers or
their affiliates.
Michael Robert Sullivan.............. Assistant Vice President of the Advisers. Assistant
Date of Birth: 03/30/33 Controller of each of the funds in the Fund Complex and
Assistant Controller other investment companies advised by the Advisers or their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 65 operating funds in the Fund Complex. Each trustee/director who is not an
affiliated person of Van Kampen Investments, the Advisers or the Distributor
(each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex (except the money market series of the Van Kampen Series Fund,
Inc.) provides a deferred compensation plan to its Non-Affiliated Trustees that
allows trustees/directors to defer receipt of their compensation and earn a
return on such deferred amounts. Deferring compensation has the economic effect
as if the Non-Affiliated Trustee reinvested his or her compensation into the
funds. Each fund in the Fund Complex (except the money market series of the Van
Kampen Series Fund, Inc.) provides a retirement plan to its Non-Affiliated
Trustees that provides Non-Affiliated Trustees with compensation after
retirement, provided that certain eligibility requirements are met as more fully
described below.
Effective January 1, 1998, the trustees adopted a standardized compensation
and benefits program for each fund in the Fund Complex. The compensation of each
Non-Affiliated Trustee includes an annual retainer in an amount equal to $50,000
per calendar year, due in four quarterly installments on the first business day
of each quarter. Payment of the annual retainer is allocated among the funds in
the Fund Complex (except the money market series of the Van Kampen Series Fund,
Inc.) on the basis of the relative net assets of each fund as of the last
business day of the preceding calendar quarter. The compensation of each
Non-Affiliated Trustee
B-27
<PAGE> 653
includes a per meeting fee from each fund in the Fund Complex (except the money
market series of the Van Kampen Series Fund, Inc.) in the amount of $200 per
quarterly or special meeting attended by the Non-Affiliated Trustee, due on the
date of the meeting, plus reasonable expenses incurred by the Non-Affiliated
Trustee in connection with his or her services as a trustee, provided that no
compensation will be paid in connection with certain telephonic special
meetings.
Under the deferred compensation plan, each Non-Affiliated Trustee generally
can elect to defer receipt of all or a portion of the compensation earned by
such Non-Affiliated Trustee until retirement. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to the return on the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is set
forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
----------------------------------------------------------
AGGREGATE AGGREGATE TOTAL
PENSION OR ESTIMATED MAXIMUM COMPENSATION
AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan $9,790 $35,691 $60,000 $125,200
Linda Hutton Heagy 8,390 3,861 60,000 112,800
R. Craig Kennedy 9,790 2,652 60,000 125,200
Jack E. Nelson 9,790 18,385 60,000 125,200
Phillip B. Rooney 9,790 6,002 60,000 125,200
Dr. Fernando Sisto 9,790 68,615 60,000 125,200
Wayne W. Whalen 9,790 12,658 60,000 125,200
Paul G. Yovovich(1) 0 0 60,000 25,300
</TABLE>
- ---------------
(1) Mr. Paul G. Yovovich became a member of the Board of Trustees effective
October 22, 1998 and thus does not have a full fiscal year of information to
report. Trustees not eligible for compensation or retirement benefits are
not shown in the table.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Trust's fiscal period ended September 30, 1998.
The detail of aggregate compensation before deferral for each series,
including the Fund, is shown in Table A below. The detail of amounts
deferred for each series, including the Fund, is shown in Table B below.
Amounts deferred are retained by the Fund and earn a rate of return
determined by reference to either the return on the common shares of the
Fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the
B-28
<PAGE> 654
extent permitted by the 1940 Act, each Fund may invest in securities of
those funds selected by the Non-Affiliated Trustees in order to match the
deferred compensation obligation. The detail of cumulative deferred
compensation (including interest) owed to current Trustees by each series,
including the Fund, is shown in Table C below. The deferred compensation
plan is described above the Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for their respective fiscal years ended in 1998. The retirement
plan is described above the Compensation Table.
(4) This is the sum of the estimated maximum annual benefits payable by the
operating investment companies in the Fund Complex for each year of the
10-year period commencing in the year of such trustee's anticipated
retirement. The Retirement Plan is described above the Compensation Table.
Each Non-Affiliated Trustee of the Board of Trustees has served as a member
of the Board of Trustees since he or she was first appointed or elected in
the year set forth in Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1998 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1998. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
trustees were not trustees of such investment companies. Combining the Fund
Complex with other investment companies advised by the Advisers and their
affiliates, Mr. Whalen received Total Compensation of $285,825 during the
calendar year ended December 31, 1998.
As of January 4, 1999, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.
B-29
<PAGE> 655
TABLE A
1998 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL --------------------------------------------------------------------------
FUND NAME YEAR-END* BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............. 9/30 $2,352 $2,152 $2,352 $2,352 $2,352 $2,352 $2,352 $0
Tax Free High Income Fund................ 9/30 1,961 1,761 1,961 1,961 1,961 1,961 1,961 0
California Insured Tax Free Fund......... 9/30 1,005 805 1,005 1,005 1,005 1,005 1,005 0
Municipal Income Fund.................... 9/30 1,931 1,731 1,931 1,931 1,931 1,931 1,931 0
Intermediate Term Municipal Income
Fund................................... 9/30 841 641 841 841 841 841 841 0
Florida Insured Tax Free Income Fund..... 9/30 858 658 858 858 858 858 858 0
New York Tax Free Income Fund............ 9/30 842 642 842 842 842 842 842 0
------ ------ ------ ------ ------ ------ ------ --
Trust Total............................ $9,790 $8,390 $9,790 $9,790 $9,790 $9,790 $9,790 $0
====== ====== ====== ====== ====== ====== ====== ==
</TABLE>
*In 1998, the Fund changed its fiscal year-end from December 31 to September
30. Accordingly, the information reported in this column represents information
for the nine-month fiscal period ended September 30, 1998.
TABLE B
1998 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL --------------------------------------------------------------------------
FUND NAME YEAR-END* BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund............. 9/30 $2,352 $2,152 $1,176 $2,352 $2,352 $1,176 $2,352 $0
Tax Free High Income Fund................ 9/30 1,961 1,761 981 1,961 1,961 981 1,961 0
California Insured Tax Free Fund......... 9/30 1,005 805 503 1,005 1,005 503 1,005 0
Municipal Income Fund.................... 9/30 1,931 1,731 966 1,931 1,931 966 1,931 0
Intermediate Term Municipal Income
Fund................................... 9/30 841 641 421 841 841 421 841 0
Florida Insured Tax Free Income Fund..... 9/30 858 658 429 858 858 429 858 0
New York Tax Free Income Fund............ 9/30 842 642 421 842 842 421 842 0
------ ------ ------ ------ ------ ------ ------ --
Trust Total............................ $9,790 $8,390 $4,897 $9,790 $9,790 $4,897 $9,790 $0
====== ====== ====== ====== ====== ====== ====== ==
</TABLE>
*In 1998, the Fund changed its fiscal year-end from December 31 to September
30. Accordingly, the information reported in this column represents information
for the nine-month fiscal period ended September 30, 1998.
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEES
FISCAL --------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
--------- -------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund..................... 9/30 $ 6,579 $ 8,672 $12,057 $ 17,744 $ 3,758 $ 4,177 $15,328 $0
Tax Free High Income
Fund..................... 9/30 6,211 8,299 11,879 17,384 3,388 2,473 14,960 0
California Insured Tax Free
Fund..................... 9/30 5,320 7,393 11,446 16,513 2,492 2,035 14,067 0
Municipal Income Fund...... 9/30 7,043 9,700 15,366 22,215 3,622 8,799 19,040 0
Intermediate Term Municipal
Income Fund.............. 9/30 5,166 7,238 11,372 16,363 2,337 1,959 13,913 0
Florida Insured Tax Free
Income Fund.............. 9/30 5,183 7,254 7,093 11,846 2,354 1,967 10,870 0
New York Tax Free Income
Fund..................... 9/30 2,288 1,814 3,430 5,111 1,700 958 4,413 0
------- ------- ------- -------- ------- ------- ------- --
Trust Total............ $37,790 $50,370 $72,643 $107,176 $19,651 $22,368 $92,591 $0
======= ======= ======= ======== ======= ======= ======= ==
<CAPTION>
FORMER TRUSTEES
-----------------------------------------------------------------
FUND NAME CARUSO GAUGHAN LIPSHIE MILLER REES ROBINSON VERNON
--------- ------ ------- ------- ------ ---- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income
Fund..................... $2,695 $1,985 $ 212 $ 9,164 $ 0 $13,380 $ 327
Tax Free High Income
Fund..................... 0 1,985 0 9,164 0 13,380 0
California Insured Tax Free
Fund..................... 0 1,985 0 9,164 0 13,380 0
Municipal Income Fund...... 5,804 2,455 961 12,382 7,502 17,483 1,287
Intermediate Term Municipal
Income Fund.............. 0 1,985 0 9,164 0 13,380 0
Florida Insured Tax Free
Income Fund.............. 0 927 0 5,817 0 9,599 0
New York Tax Free Income
Fund..................... 0 295 0 2,344 0 3,740 0
------ ------- ------ ------- ------ ------- ------
Trust Total............ $8,499 $11,617 $1,173 $57,199 $7,502 $84,342 $1,614
====== ======= ====== ======= ====== ======= ======
</TABLE>
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------
FUND NAME BRANAGAN HEAGY KENNEDY NELSON ROONEY SISTO WHALEN YOVOVICH
- --------- -------- ----- ------- ------ ------ ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insured Tax Free Income Fund......................... 1995 1995 1993 1984 1997 1995 1984 1998
Tax Free High Income Fund............................ 1995 1995 1993 1985 1997 1995 1985 1998
California Insured Tax Free Fund..................... 1995 1995 1993 1985 1997 1995 1985 1998
Municipal Income Fund................................ 1995 1995 1993 1990 1997 1995 1990 1998
Intermediate Term Municipal Income Fund.............. 1995 1995 1993 1993 1997 1995 1993 1998
Florida Insured Tax Free Income Fund................. 1995 1995 1994 1994 1997 1995 1994 1998
New York Tax Free Income Fund........................ 1995 1995 1994 1994 1997 1995 1994 1998
</TABLE>
B-30
<PAGE> 656
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement (the
"Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate and
implement the Fund's investment objectives. The Adviser also furnishes the
services of the Fund's President and such other executive and clerical personnel
as are necessary to prepare the various reports and statements and conduct the
Fund's day-to-day operations. The Fund, however, bears the cost of its
accounting services, which include maintaining its financial books and records
and calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of the Fund's Treasurer and the
personnel operating under his direction. Charges are allocated among the
investment companies advised or subadvised by the Adviser or its affiliates. A
portion of these amounts is paid to the Adviser or its affiliates in
reimbursement of personnel, office space, facilities and equipment costs
attributable to the provision of accounting services to the Fund. See
"Accounting Services Agreement" below. The Fund also pays distribution fees,
service fees, custodian fees, legal and auditing fees, the costs of reports to
shareholders, and all other ordinary business expenses not specifically assumed
by the Adviser. The Advisory Agreement also provides that the Adviser shall not
be liable to the Fund for any error of judgment or of law, or for any loss
suffered by the Fund in connection with the matters to which the agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence on the part of the Adviser in the performance of its obligations and
duties, or by reason of its reckless disregard of its obligations and duties
under the agreement.
Under the Advisory Agreement, the Fund pays to the Adviser, as compensation
for the services rendered, facilities furnished, and expenses paid by it, a
monthly fee payable computed based upon an annual rate applied to the average
daily net assets of the Fund as follows: 0.600% on the first $500 million of
average daily net assets and 0.500% on the average daily net assets over $500
million.
The Fund's average net assets are determined by taking the average of all of
the determinations of the net assets during a given calendar month. Such fee is
payable for each calendar month as soon as practicable after the end of that
month.
The Advisory Agreement also provides that, in the event the annual expenses of
the Fund for any fiscal year exceed the most stringent limit in any state in
which the Fund's shares are offered for sale, the compensation due the Adviser
will be reduced by the amount of such excess and that, if a reduction in and
refund of the advisory fee is insufficient, the Adviser will pay the Fund
monthly an amount sufficient to make up the deficiency, subject to readjustment
during the year.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on 60 days' written notice.
During the fiscal period ended September 30, 1998 and the fiscal years ended
December 31, 1997 and 1996, the Adviser received $0, $0 and $0, respectively, in
advisory fees from the Fund.
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which Advisory Corp. provides accounting services
to the Fund. The Fund shares together with the other Van Kampen funds in the
cost of providing such services, with 25% of such costs shared proportionately
based on the respective number of classes of securities issued per fund and the
remaining 75% of such cost based proportionally on their respective net assets
per fund.
B-31
<PAGE> 657
During the fiscal period ended September 30, 1998 and the fiscal years ended
December 31, 1997 and 1996, Advisory Corp. received $0, $0 and $0, respectively,
in accounting services fees from the Fund.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen funds
advised by the Adviser and distributed by the Distributor have entered into
Legal Services Agreements pursuant to which Van Kampen Investments provides
legal services, including without limitation: accurate maintenance of the fund's
minute books and records, preparation and oversight of the fund's regulatory
reports, and other information provided to shareholders, as well as responding
to day-to-day legal issues on behalf of the funds. Payment by the Fund for such
services is made on a cost basis for the salary and salary related benefits,
including but not limited to bonuses, group insurance and other regular wages
for the employment of personnel, as well as overhead and the expenses related to
the office space and the equipment necessary to render the legal services. Other
funds distributed by the Distributor also receive legal services from Van Kampen
Investments. Of the total costs for legal services provided to funds distributed
by the Distributor, one half of such costs are allocated equally to each fund
and the remaining one half of such costs are allocated to specific funds based
on monthly time records.
During the fiscal period ended September 30, 1998 and the fiscal years ended
December 31, 1997 and 1996, Van Kampen Investments received $0, $0 and $0,
respectively, in legal services fees from the Fund.
DISTRIBUTION AND SERVICE
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Fund through
authorized dealers on a continuous basis. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required to
take and pay for only such shares of the Fund as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and certain other costs including the cost of
supplemental sales literature and advertising. The Distribution and Service
Agreement is renewable from year to year if approved (a)(i) by the Fund's
Trustees or (ii) by the affirmative vote of a majority of the Fund's outstanding
voting securities and (b) by the affirmative vote of a majority of Trustees who
are not parties to the Distribution and Service Agreement or interested persons
of any party, by votes cast in person at a meeting called for such purpose. The
Distribution and Service Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on 90 days'
written notice. Total underwriting commissions on the sale of shares of the Fund
for the last three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
TOTAL UNDERWRITING AMOUNTS RETAINED
COMMISSIONS BY DISTRIBUTOR
------------------- ----------------
<S> <C> <C>
Fiscal Period Ended September 30, 1998...................... $153,026 $12,738
Fiscal Year Ended December 31, 1997......................... $163,312 $12,562
Fiscal Year Ended December 31, 1996......................... $ 63,306 $10,787
</TABLE>
With respect to sales of Class A Shares of the Fund, the total sales charges
and concessions reallowed to authorized dealers at the time of purchase are as
follows:
CLASS A SHARES SALES CHARGE TABLE
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-----------------------------------------------
REALLOWED TO
AS % OF NET DEALERS AS
AS % OF AMOUNT A % OF
SIZE OF INVESTMENT OFFERING PRICE INVESTED OFFERING PRICE
------------------ -------------- ----------- --------------
<S> <C> <C> <C>
Less than $100,000....................................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000.......................... 3.75% 3.90% 3.25%
$250,000 but less than $500,000.......................... 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000........................ 2.00% 2.04% 1.75%
$1,000,000 or more....................................... * * *
</TABLE>
- ---------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a deferred
sales charge of 1.00% on certain redemptions made within one
B-32
<PAGE> 658
year of the purchase. A commission or transaction fee will be paid by the
Distributor at the time of purchase directly out of the Distributor's assets
(and not out of the Fund's assets) to authorized dealers who initiate and are
responsible for purchases of $1 million or more computed based on a percentage
of the dollar value of such shares sold as follows: 1.00% on sales to $2
million, plus 0.80% on the next $1 million and 0.50% on the excess over $3
million.
With respect to sales of Class B Shares and Class C Shares of the Fund, a
commission or transaction fee generally will be paid by the Distributor at the
time of purchase directly out of the Distributor's assets (and not out of the
Fund's assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 4.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any deferred sales charge and any distribution fees on Class B
Shares and Class C Shares of the Fund are paid to the Distributor and are used
by the Distributor to defray its distribution related expenses in connection
with the sale of the Fund's shares, such as the payment to authorized dealers
for selling such shares. With respect to Class C Shares, the authorized dealers
generally are paid the ongoing commission and transaction fees of up to 0.75% of
the average daily net assets of the Fund's Class C Shares annually commencing in
the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any authorized dealer that sponsors
sales contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the authorized dealer at the public offering price during such programs.
Other programs provide, among other things and subject to certain conditions,
for certain favorable distribution arrangements for shares of the Fund. Also,
the Distributor in its discretion may from time to time, pursuant to objective
criteria established by the Distributor, pay fees to, and sponsor business
seminars for, qualifying authorized dealers for certain services or activities
which are primarily intended to result in sales of shares of the Fund. Fees may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives for meetings or seminars
of a business nature. In some instances additional compensation or promotional
incentives may be offered to brokers, dealers or financial intermediaries that
have sold or may sell significant amounts of shares during specified periods of
time. The Distributor may provide additional compensation to Edward D. Jones &
Co. or an affiliate thereof based on a combination of its sales of shares and
increases in assets under management. All of the foregoing payments are made by
the Distributor out of its own assets. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of the Fund on an annual basis. These
programs will not change the price an investor will pay for shares or the amount
that a Fund will receive from such sale.
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. State securities
laws regarding registration of banks and other financial institutions may differ
from the interpretations of federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to
certain state laws.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans". The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Distribution Plan and the Service Plan are being implemented
through an agreement (the "Distribution and Service
B-33
<PAGE> 659
Agreement") with the Distributor of each class of the Fund's shares,
sub-agreements between the Distributor and members of the NASD who are acting as
securities dealers and NASD members or eligible non-members who are acting as
brokers or agents and similar agreements between the Fund and financial
intermediaries who are acting as brokers (collectively, "Selling Agreements")
that may provide for their customers or clients certain services or assistance,
which may include, but not be limited to, processing purchase and redemption
transactions, establishing and maintaining shareholder accounts regarding the
Fund, and such other services as may be agreed to from time to time and as may
be permitted by applicable statute, rule or regulation. Brokers, dealers and
financial intermediaries that have entered into sub-agreements with the
Distributor and sell shares of the Fund are referred to herein as "financial
intermediaries."
The Distributor must submit quarterly reports to the Board of Trustees of the
Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Distribution Plan and the purposes for which
such expenditures were made, together with such other information as from time
to time is reasonably requested by the Trustees. The Plans provide that they
will continue in full force and effect from year to year so long as such
continuance is specifically approved by a vote of the Trustees, and also by a
vote of the disinterested Trustees, cast in person at a meeting called for the
purpose of voting on the Plans. Each of the Plans may not be amended to increase
materially the amount to be spent for the services described therein with
respect to any class of shares without approval by a vote of a majority of the
outstanding voting shares of such class, and all material amendments to either
of the Plans must be approved by the Trustees and also by the disinterested
Trustees. Each of the Plans may be terminated with respect to any class of
shares at any time by a vote of a majority of the disinterested Trustees or by a
vote of a majority of the outstanding voting shares of such class.
The Plans generally provide for the Fund to reimburse the lesser of (i) the
distribution and service fees at the rates specified in the prospectus or (ii)
the amount of the Distributor's actual expenses incurred less any deferred sales
charges it received. For Class A Shares, to the extent the Distributor is not
fully reimbursed in a given year, there is no carryover of such unreimbursed
amounts to succeeding years. For each of the Class B Shares and Class C Shares,
to the extent the Distributor is not fully reimbursed in a given year, any
unreimbursed expenses for such class will be carried forward and paid by the
Fund in future years so long as such Plans are in effect. Except as mandated by
applicable law, the Fund does not impose any limit with respect to the number of
years into the future that such unreimbursed expenses may be carried forward (on
a Fund level basis). Because such expenses are accounted on a Fund level basis,
in periods of extreme net asset value fluctuation such amounts with respect to a
particular Class B Share of Class C Share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such share. In such circumstances, a shareholder of a share may be
deemed to incur expenses attributable to other shareholders of such class. As of
September 30, 1998, there were $599,078 and $17,398 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 3.16% and 0.55% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Plan were terminated
or not continued, the Fund would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through deferred sales charge.
Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution-related expenses
attributable to any other class of shares.
For the fiscal period ended September 30, 1998, the Fund's aggregate expenses
under the Plans for Class A Shares were $37,105 or 0.25% of the Class A Shares'
average daily net assets. Such expenses were paid to reimburse the Distributor
for payments made to financial intermediaries for servicing Fund shareholders
and for administering the Plans. For the fiscal period ended September 30, 1998,
the Fund's aggregate expenses under the Class B Plan were $114,800 or 1.00% of
the Class B Shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $86,979 for commissions and transaction
fees paid to financial intermediaries in respect of sales of Class B Shares of
the Fund and $27,821 for fees paid to financial intermediaries for servicing
Class B shareholders and administering the Plans. For the fiscal period
B-34
<PAGE> 660
ended September 30, 1998, the Fund's aggregate expenses under the Plans for
Class C Shares were $14,452 or 1.00% of the Class C Shares' average net assets.
Such expenses were paid to reimburse the Distributor for the following payments;
$11,439 for commissions and transaction fees paid to financial intermediaries in
respect of sales of Class C Shares of the Fund and $3,013 for fees paid to
financial intermediaries for servicing Class C shareholders and administering
the Class C Plan.
TRANSFER AGENT
The Fund's transfer agent is Van Kampen Investor Services Inc., PO Box 418256,
Kansas City, MO 64141-9256. During the fiscal period ended September 30, 1998
and the fiscal years ended December 31, 1997 and 1996, Investor Services,
shareholder service agent and dividend disbursing agent for the Fund, received
fees aggregating $11,816, $14,238 and $7,457, respectively for these services.
Prior to 1998, these services were provided at cost plus a profit. Beginning in
1998, the transfer agency prices are determined through negotiations with the
Fund's Board of Trustees and are based on competitive benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of the Fund's
portfolio business, the policies and practices in this regard will at all times
be subject to review by the trustees of the Fund.
As most transactions made by the Fund are principal transactions at net
prices, the Fund generally incurs little or no brokerage costs. The portfolio
securities in which the Fund invests are normally purchased directly from the
issuer or in the over-the-counter market from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include a spread or markup to the dealer
between the bid and asked price. Sales to dealers are effected at bid prices.
The Fund may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid, or may purchase and
sell listed bonds on a exchange, which are effected through brokers who charge a
commission for their services.
The Adviser is responsible for placing portfolio transactions and does so in a
manner deemed fair and reasonable to the Fund and not according to any formula.
The primary consideration in all portfolio transactions is prompt execution of
orders in an effective manner at the most favorable price. In selecting
broker/dealers and in negotiating prices and any brokerage commissions on such
transactions, the Adviser considers the firm's reliability, integrity and
financial condition and the firm's execution capability, the size and breadth of
the market for the security, the size of and difficulty in executing the order,
and the best net price. There are many instances when, in the judgment of the
Adviser, more than one firm can offer comparable execution services. In
selecting among such firms, consideration may be given to those firms which
supply research and other services in addition to execution services. The
Adviser is authorized to pay higher commissions to brokerage firms that provide
it with investment and research information than to firms which do not provide
such services if the Adviser determines that such commissions are reasonable in
relation to the overall services provided. No specific value can be assigned to
such research services which are furnished without cost to the Adviser. Since
statistical and other research information is only supplementary to the research
efforts of the Adviser to the Fund and still must be analyzed and reviewed by
its staff, the receipt of research information is not expected to reduce its
expenses materially. The investment advisory fee is not reduced as a result of
the Adviser's receipt of such research services. Services provided may include
(a) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or pur-chasers or sellers of securities; (b) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts; and (c) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement and custody). Research services furnished by firms through
which the Fund
B-35
<PAGE> 661
effects its securities transactions may be used by the Adviser in servicing all
of its advisory accounts; not all of such services may be used by the Adviser in
connection with the Fund.
The Adviser also may place portfolio transactions, to the extent permitted by
law, with brokerage firms affiliated with the Fund, the Adviser or the
Distributor and with brokerage firms participating in the distribution of the
Fund's shares if it reasonably believes that the quality of execution and the
commission are comparable to that available from other qualified firms.
Similarly, to the extent permitted by law and subject to the same considerations
on quality of execution and comparable commission rates, the Adviser may direct
an executing broker to pay a portion or all of any commissions, concessions or
discounts to a firm supplying research or other services or to a firm
participating in the distribution of the Fund's shares.
The Adviser may place portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for the Fund and another advisory account.
In some cases, this procedure could have an adverse effect on the price or the
amount of securities available to the Fund. In making such allocations among the
Fund and other advisory accounts, the main factors considered by the Adviser are
the respective sizes of the Fund and other advisory accounts, the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
Effective October 31, 1996, Morgan Stanley Group Inc. ("Morgan Stanley")
became an affiliate of the Adviser. Effective May 31, 1997, Dean Witter Discover
& Co. ("Dean Witter") became an affiliate of the Adviser. The trustees have
adopted certain policies incorporating the standards of Rule 17e-1 issued by the
SEC under the 1940 Act which requires that the commissions paid to affiliates of
the Fund must be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time. The rule and procedures also contain review requirements and require
the Adviser to furnish reports to the trustees and to maintain records in
connection with such reviews. After consideration of all factors deemed
relevant, the trustees will consider from time to time whether the advisory fee
for the Fund will be reduced by all or a portion of the brokerage commission
given to affiliated brokers.
The Fund paid the following commissions to all brokers and affiliated brokers
during the periods shown:
<TABLE>
<CAPTION>
AFFILIATED BROKERS
-------------------
MORGAN DEAN
BROKERS STANLEY WITTER
------- ---------- ------
<S> <C> <C> <C>
Commission paid:
Fiscal period ended September 30, 1998.................... -- -- --
Fiscal year ended December 31, 1997....................... -- -- --
Fiscal year ended December 31, 1996....................... -- -- --
Fiscal period 1998 Percentages:
Commissions with affiliate to total commissions........... -- --
Value of brokerage transactions with affiliate to total
transactions........................................... -- --
</TABLE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's shares
of the Fund are held by Investor Services, the Fund's transfer agent. Investor
Services performs bookkeeping, data processing and administrative services
related to the maintenance of shareholder accounts. Except as described in the
B-36
<PAGE> 662
Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in any of the
Participating Funds will receive statements quarterly from Investor Services
showing any reinvestments of dividends and capital gains distributions and any
other activity in the account since the preceding statement. Such shareholders
also will receive separate confirmations for each purchase or sale transaction
other than reinvestment of dividends and capital gains distributions and
systematic purchases or redemptions. Additions to an investment account may be
made at any time by purchasing shares through authorized dealers or by mailing a
check directly to Investor Services.
SHARE CERTIFICATES
Generally, the Fund will not issue share certificates. However, upon written
or telephone request to the Fund, a share certificate will be issued
representing shares (with the exception of fractional shares) of the Fund. A
shareholder will be required to surrender such certificates upon redemption
thereof. In addition, if such certificates are lost the shareholder must write
to Van Kampen Funds, c/o Investor Services, PO Box 418256, Kansas City, MO
64141-9256, requesting an "affidavit of loss" and obtain a Surety Bond in a form
acceptable to Investor Services. On the date the letter is received, Investor
Services will calculate a fee for replacing the lost certificate equal to no
more than 2.00% of the net asset value of the issued shares, and bill the party
to whom the replacement certificate was mailed.
RETIREMENT PLANS
Eligible investors may establish individual retirement accounts ("IRAs"); SEP;
401(k) plans; Section 403(b)(7) plans in the case of employees of public school
systems and certain non-profit organizations; or other pension or profit sharing
plans. Documents and forms containing detailed information regarding these plans
are available from the Distributor. Van Kampen Trust Company serves as custodian
under the IRA, 403(b)(7) and Keogh plans. Details regarding fees, as well as
full plan administration for profit sharing, pension and 401(k) plans, are
available from the Distributor.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS
Holders of Class A Shares can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemptions transferred to a bank
account via the ACH plan are available to be credited to the account on the
second business day following normal payment. In order to utilize this option,
the shareholder's bank must be a member of ACH. In addition, the shareholder
must fill out the appropriate section of the account application. The
shareholder must also include a voided check or deposit slip from the bank
account into which redemptions are to be deposited together with the completed
application. Once Investor Services has received the application and the voided
check or deposit slip, such shareholder's designated bank account, following any
redemption, will be credited with the proceeds of such redemption. Once enrolled
in the ACH plan, a shareholder may terminate participation at any time by
writing Investor Services.
DIVIDEND DIVERSIFICATION
A shareholder may, upon written request or by completing the appropriate
section of the application form accompanying the Prospectus or by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired), elect to have all dividends
and other distributions paid on a class of shares of the Fund invested into
shares of the same class of any Participating Fund so long as the investor has a
pre-existing account for such class of shares of the other fund. Both accounts
must be of the same type, either non-retirement or retirement. If the accounts
are retirement accounts, they must both be for the same class and of the same
type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for the benefit
of the same individual. If a qualified, pre-existing account does not exist, the
shareholder must establish a new account subject to minimum investment and other
requirements of the fund into which distributions would be invested.
Distributions are invested into the selected fund at its net asset value per
share as of the payable date of the distribution.
B-37
<PAGE> 663
SYSTEMATIC WITHDRAWAL PLAN
Any investor whose shares in a single account total $10,000 or more at the
offering price next computed after receipt of instructions may establish a
monthly, quarterly, semi-annual or annual withdrawal plan. Any investor whose
shares in a single account total $5,000 or more at the offering price next
computed after receipt of instructions may establish a quarterly, semiannual or
annual withdrawal plan. This plan provides for the orderly use of the entire
account, not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which any capital gain or loss will be
recognized. The planholder may arrange for monthly, quarterly, semi-annual or
annual checks in any amount, not less than $25. Such a systematic withdrawal
plan may also be maintained by an investor purchasing shares for a retirement
plan established on a form made available by the Fund.
Class B shareholders and Class C shareholders who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a CDSC. Initial account balance means the amount of the
shareholder's investment at the time the election to participate in the plan is
made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plans are reinvested in additional shares
at the next determined net asset value per share. If periodic withdrawals
continuously exceed reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Withdrawals made concurrently with the purchase of additional shares
ordinarily will be disadvantageous to the shareholder because of the duplication
of sales charges. Any gain or loss realized by the shareholder upon redemption
of shares is a taxable event. The Fund reserves the right to amend or terminate
the systematic withdrawal program on 30 days' notice to its shareholders.
REINSTATEMENT PRIVILEGE
A Class A shareholder or Class B shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class A Shares of the Fund. A Class C shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class C Shares of the Fund with credit given for any CDSC paid upon such
redemption. Such reinstatement is made at the net asset value per share (without
sales charge) next determined after the order is received, which must be within
180 days after the date of the redemption. Reinstatement at net asset value per
share is also offered to participants in those eligible retirement plans held or
administered by Van Kampen Trust Company for repayment of principal (and
interest) on their borrowings on such plans.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed. The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
Additionally, if the Board of Trustees determines that payment wholly or
partly in cash would be detrimental to the best interests of the remaining
shareholders of the Fund, the Fund may pay the redemption proceeds in whole or
in part by a distribution-in-kind of portfolio securities held by the Fund in
lieu of cash in conformity with applicable rules of the SEC. Shareholders may
incur brokerage charges upon the sale of portfolio securities so received in
payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
For purposes of the CDSC-Class A, when shares of one fund are exchanged for
shares of another fund, the purchase date for the shares of the fund exchanged
into will be assumed to be the date on which shares were purchased in the fund
from which the exchange was made. If the exchanged shares themselves are
acquired
B-38
<PAGE> 664
through an exchange, the purchase date is assumed to carry over from the date of
the original election to purchase shares subject to a CDSC-Class A rather than a
front-end load sales charge. In determining whether a CDSC-Class A is payable,
it is assumed that shares held the longest are the first to be redeemed.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED
SALES CHARGE ("CDSC-CLASS B AND C")
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a CDSC. The CDSC-Class B
and C is waived on redemptions of Class B Shares and Class C Shares in the
circumstances described below:
REDEMPTION UPON DEATH OR DISABILITY
The Fund will waive the CDSC-Class B and C on redemptions following the death
or disability of a Class B shareholder and Class C shareholder. An individual
will be considered disabled for this purpose if he or she meets the definition
thereof in Section 72(m)(7) of the Code, which in pertinent part defines a
person as disabled if such person "is unable to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or to be of long-continued
and indefinite duration." While the Fund does not specifically adopt the balance
of the Code's definition which pertains to furnishing the Secretary of Treasury
with such proof as he or she may require, the Distributor will require
satisfactory proof of death or disability before it determines to waive the
CDSC-Class B and C.
In cases of death or disability, the CDSC-Class B and C will be waived where
the decedent or disabled person is either an individual shareholder or owns the
shares as a joint tenant with right of survivorship or is the beneficial owner
of a custodial or fiduciary account, and where the redemption is made within one
year of the death or initial determination of disability. This waiver of the
CDSC-Class B and C applies to a total or partial redemption, but only to
redemptions of shares held at the time of the death or initial determination of
disability.
REDEMPTION IN CONNECTION WITH CERTAIN DISTRIBUTIONS FROM RETIREMENT PLANS
The Fund will waive the CDSC-Class B and C when a total or partial redemption
is made in connection with certain distributions from Retirement Plans. The
charge will be waived upon the tax-free rollover or transfer of assets to
another Retirement Plan invested in one or more Participating Funds; in such
event, as described below, the Fund will "tack" the period for which the
original shares were held on to the holding period of the shares acquired in the
transfer or rollover for purposes of determining what, if any, CDSC-Class B and
C is applicable in the event that such acquired shares are redeemed following
the transfer or rollover. The charge also will be waived on any redemption which
results from the return of an excess contribution pursuant to Section 408(d)(4)
or (5) of the Code, the return of excess deferral amounts pursuant to Code
Section 401(k)(8) or 402(g)(2), or from the death or disability of the employee
(see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition, the charge will be
waived on any minimum distribution required to be distributed in accordance with
Code Section 401(a)(9).
The Fund does not intend to waive the CDSC-Class B and C for any distributions
from IRAs or other Retirement Plans not specifically described above.
REDEMPTION PURSUANT TO A FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC-Class B and C will be waived on
redemptions made under the Plan.
B-39
<PAGE> 665
The amount of the shareholder's investment in a Fund at the time the election
to participate in the Plan is made with respect to the Fund is hereinafter
referred to as the "initial account balance." The amount to be systematically
redeemed from the Fund without the imposition of a CDSC-Class B and C may not
exceed a maximum of 12% annually of the shareholder's initial account balance.
The Fund reserves the right to change the terms and conditions of the Plan and
the ability to offer the Plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
The Fund will waive the CDSC-Class B and C in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase of shares.
INVOLUNTARY REDEMPTIONS OF SHARES
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC-Class B and C upon
such involuntary redemption.
REINVESTMENT OF REDEMPTION PROCEEDS
A shareholder who has redeemed Class C Shares of a Fund may reinvest at net
asset value, with credit for any CDSC-Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C Shares of the Fund, provided that the reinvestment is effected
within 180 days after such redemption and the shareholder has not previously
exercised this reinvestment privilege with respect to Class C Shares of the
Fund. Shares acquired in this manner will be deemed to have the original cost
and purchase date of the redeemed shares for purposes of applying the CDSC-Class
C to subsequent redemptions.
REDEMPTION BY ADVISER
The Fund may waive the CDSC-Class B and C when a total or partial redemption
is made by the Adviser with respect to its investments in the Fund.
TAXATION
FEDERAL INCOME TAXATION. The Trust and each of its series, including the Fund,
will be treated as separate corporations for federal income tax purposes. The
Fund has elected and qualified, and intends to continue to qualify each year, to
be treated as a regulated investment company under Subchapter M of the Code. To
qualify as a regulated investment company, the Fund must comply with certain
requirements of the Code relating to, among other things, the source of its
income and diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gain, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses), it
will not be required to pay federal income taxes on any income distributed to
shareholders. The Fund intends to distribute at least the minimum amount of net
investment income necessary to satisfy the 90% distribution requirement. The
Fund will not be subject to federal income tax on any net capital gains
distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income (not including tax-exempt income) for such year and (ii) 98%
of its capital gain net income (the latter of which generally is computed on the
basis of the one-year period ending on October 31st of such year), plus any
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income
B-40
<PAGE> 666
(even if such income were distributed to its shareholders) and all distributions
out of earnings and profits would be taxed to shareholders as ordinary income.
To qualify again as a regulated investment company in a subsequent year, the
Fund may be required to pay an interest charge on 50% of its earnings and
profits attributable to non-regulated investment company years and would be
required to distribute such earnings and profits to shareholders (less any
interest charge). In addition, if the Fund failed to qualify as a regulated
investment company for its first taxable year or, if immediately after
qualifying as a regulated investment company for any taxable year, it failed to
qualify for a period greater than one taxable year, the Fund would be required
to recognize any net built-in gains (the excess of aggregate gains, including
items of income, over aggregate losses that would have been realized if it had
been liquidated) in order to qualify as a regulated investment company in a
subsequent year.
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have continued to hold. A
portion of the discount relating to certain stripped tax-exempt obligations may
constitute taxable income when distributed to shareholders.
DISTRIBUTIONS. The Fund intends to invest in sufficient tax-exempt municipal
securities to permit payment of "exempt-interest dividends" (as defined in the
Code). Dividends paid by the Fund from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Fund consists of municipal securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied in order to maintain
the exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Fund
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Fund receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The Fund
invests a portion of its assets in municipal securities subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Fund could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Fund.
B-41
<PAGE> 667
Exempt-interest dividends are included in determining what portion, if any, of
a person's social security and railroad retirement benefits will be includable
in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Fund. "Substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses in his trade or business a part
of any facilities financed with the tax-exempt obligations and whose gross
revenues derived from such facilities exceed 5% of the total revenues derived
from the facilities by all users, or who occupies more than 5% of the useable
area of the facilities or for whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
While the Fund expects that a major portion of its net investment income will
constitute tax-exempt interest, a significant portion may consist of investment
company taxable income. Distributions of the Fund's net investment company
taxable income are taxable to shareholders as ordinary income to the extent of
the Fund's earnings and profits, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains ("capital gain
dividends"), if any, are taxable to shareholders as long-term capital gains
regardless of the length of time shares of the Fund have been held by such
shareholders. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming such shares are held as a capital asset). For a summary of the
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates" below. Interest on indebtedness which is incurred to
purchase or carry shares of a mutual fund which distributes exempt interest
dividends during the year is not deductible for federal income tax purposes.
Tax-exempt shareholders not subject to federal income tax on their income
generally will not be taxed on distributions from the Fund.
Shareholders receiving distributions in the form of additional shares issued
by the Fund will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the distribution date. The basis of such shares will equal the
fair market value on the distribution date.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt-interest dividends cannot exceed the
excess of the amount of interest exempt from tax under Section 103 of the Code
received by the Fund during the year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code. Since the percentage of dividends
which are exempt-interest dividends is determined on an average annual method
for the taxable year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax exempt during the period covered by the dividend.
Fund distributions generally will not qualify for the dividends received
deduction for corporations.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
SALE OF SHARES. The sale of shares (including transfers in connection with a
redemption or repurchase of shares) will be a taxable transaction for federal
income tax purposes. Selling shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
shares and the amount received. If such shares are held as a capital asset, the
gain or loss will be a capital gain or loss. For a summary of the tax rates
applicable to capital gains (including capital gain dividends), see "Capital
Gains
B-42
<PAGE> 668
Rates" below. Any loss recognized upon a taxable disposition of shares held for
six months or less will be treated as a long-term capital loss to the extent of
any capital gain dividends received with respect to such shares. For purposes of
determining whether shares have been held for six months or less, the holding
period is suspended for any periods during which the shareholder's risk of loss
is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES. The maximum tax rate applicable to net capital gains
recognized by individuals and other non-corporate taxpayers is (i) the same as
the maximum ordinary income tax rate for capital assets held for one year or
less or (ii) 20% for capital assets held for more than one year. A special 28%
tax rate may apply to a portion of the capital gain dividends paid by the Fund
with respect to its taxable year ended September 30, 1998. The maximum long-term
capital gains rate for corporations is 35%.
BACKUP WITHHOLDING. The Fund may be required to withhold federal income tax at
a rate of 31% ("backup withholding") from dividends and redemption proceeds paid
to non-corporate shareholders. This tax may be withheld from dividends if (i)
the shareholder fails to furnish the Fund with its correct taxpayer
identification number, (ii) the IRS notifies the Fund that the shareholder has
failed to properly report certain interest and dividend income to the IRS and to
respond to notices to that effect or (iii) when required to do so, the
shareholder fails to certify that he or she is not subject to backup
withholding. Redemption proceeds may be subject to withholding under the
circumstances described in (i) above.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's United States federal income tax liability,
if any, provided that the required information is furnished to the IRS.
GENERAL. The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal tax consequences of purchasing, holding and disposing of
shares, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
1998 FEDERAL NEW YORK STATE AND NEW YORK CITY TAXABLE VS. TAX-FREE YIELDS
<TABLE>
<CAPTION>
FEDERAL STATE AND COMBINED TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
SINGLE JOINT TAX CITY TAX TAX -----------------------------------------------
RETURN RETURN BRACKET BRACKET* BRACKET* 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ---------------- --------------- ------- --------- -------- ----- ----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25,350 15.00% 11.250% 24.60% 4.64% 5.31% 5.97% 6.63% 7.29% 7.96%
$ 0-42,350 15.00 11.239 24.60 4.64 5.31 5.97 6.63 7.29 7.96
25,350-61,400 42,350-102,300 28.00 11.307 36.10 5.48 6.26 7.04 7.82 8.61 9.39
61,400-128,100 102,300-155,950 31.00 11.307 38.80 5.72 6.54 7.35 8.17 8.99 9.80
128,100-278,450 155,950-278,450 36.00 11.307 43.20 6.16 7.04 7.92 8.80 9.68 10.56
Over 278,450 Over 278,450 39.60 11.307 46.40 6.53 7.46 8.40 9.33 10.26 11.19
</TABLE>
<TABLE>
<CAPTION>
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
SINGLE -----------------------------------------------
RETURN 6.5% 7.0% 7.5% 8.0% 8.5%
- ---------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 0-25,350 8.62% 9.28% 9.95% 10.61% 11.27%
25,350-61,400 10.17 10.95 11.74 12.52 13.30
61,400-128,100 10.62 11.44 12.25 13.07 13.89
128,100-278,450 11.44 12.32 13.20 14.08 14.96
Over 278,450 12.13 13.06 13.99 14.93 15.86
</TABLE>
- ---------------
* Combined Tax Bracket includes Federal, State and New York City income taxes.
Please note that the table does not reflect (i) any federal or state
limitations on the amounts of allowable itemized deductions, phase-outs of
personal or dependent exemption credits or other allowable credits, (ii) any
local taxes imposed (other than New York City), or (iii) any taxes other than
personal income taxes. The table assumes that federal taxable income is equal
to state income subject to tax, and in cases where more than one state rate
falls within a federal bracket, the highest state rate corresponding to the
highest income within that federal bracket is used. Further, the table does
not reflect the New York State supplemental income tax based upon a taxpayer's
New York State taxable income and New
B-43
<PAGE> 669
York State adjusted gross income. This supplemental tax results in an
increased marginal State income tax rate to the extent a taxpayer's New York
State adjusted gross income ranges between $100,000 and $150,000.
1998 FEDERAL AND NEW YORK STATE TAXABLE VS. TAX-FREE YIELDS*
<TABLE>
<CAPTION>
FEDERAL STATE COMBINED TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
SINGLE JOINT TAX TAX TAX ------------------------------------------------
RETURN RETURN BRACKET BRACKET* BRACKET* 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
- ---------------- --------------- ------- -------- -------- ---- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25,350 $ 0-42,350 15.00% 6.850% 20.80% 4.42% 5.05% 5.68% 6.31% 6.94% 7.58% 8.21%
25,350-61,400 42,350-102,300 28.00 6.850 32.90 5.22 5.96 6.71 7.45 8.20 8.94 9.69
61,400-128,100 102,300-155,950 31.00 6.850 35.70 5.44 6.22 7.00 7.78 8.55 9.33 10.11
128,100-278,450 155,950-278,450 36.00 6.850 40.40 5.87 6.71 7.55 8.39 9.23 10.07 10.91
Over 278,450 Over 278,450 39.60 6.850 43.70 6.22 7.10 7.99 8.88 9.77 10.66 11.55
</TABLE>
<TABLE>
<CAPTION>
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
SINGLE ---------------------------------------------
RETURN 7.0% 7.5% 8.0% 8.5%
- ---------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
$ 0-25,350 8.84% 9.47% 10.10% 10.73%
25,350-61,400 10.43 11.18 11.92 12.67
61,400-128,100 10.89 11.66 12.44 13.22
128,100-278,450 11.74 12.58 13.42 14.26
Over 278,450 12.43 13.32 14.21 15.10
</TABLE>
- ---------------
* Please note that the table does not reflect (i) any federal or state
limitations on the amounts of allowable itemized deductions, phase-outs of
personal or dependent exemption credits or other allowable credits, (ii) any
local taxes imposed, or (iii) any taxes other than personal income taxes. The
table assumes that federal taxable income is equal to state income subject to
tax, and in cases where more than one state rate falls within a federal
bracket, the highest state rate corresponding to the highest income within
that federal bracket is used. Further, the table does not reflect the New York
State supplemental income tax based upon a taxpayer's New York State taxable
income and New York State adjusted gross income. This supplemental tax results
in an increased marginal State income tax rate to the extent a taxpayer's New
York State adjusted gross income ranges between $100,000 and $150,000.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one year, five year and ten year periods. Other total return
quotations, aggregate or average, over other time periods may also be included.
The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes the maximum sales charge for Class A Shares); that all income
dividends or capital gains distributions during the period are reinvested in
Fund shares at net asset value; and that any applicable CDSC has been paid. The
Fund's total return will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and unrealized
net capital gains or losses during the period. Total return is based on
historical earnings and asset value fluctuations and is not intended to indicate
future performance. No adjustments are made to reflect any income taxes payable
by shareholders on dividends and distributions paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares.
B-44
<PAGE> 670
Non-standardized total return calculations do not reflect the imposition of a
contingent deferred sales charge, and if any such contingent deferred sales
charge with respect to the CDSC imposed at the time of redemption were
reflected, it would reduce the performance quoted.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Yield and total return are calculated separately for Class A Shares, Class B
Shares and Class C Shares. Class A Shares total return figures include the
maximum sales charge; Class B Shares and Class C Shares total return figures
include any applicable CDSC. Because of the differences in sales charges and
distribution fees, the total returns for each of the classes will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield, which is a measure of
the income actually earned by the Fund's investments, and from total return
which is a measure of the income actually earned by the Fund's investments plus
the effect of any realized and unrealized appreciation or depreciation of such
investments during a stated period. Distribution rate is, therefore, not
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
From time to time marketing materials may provide a portfolio manager update,
an adviser update or discuss general economic conditions and outlooks. The
Fund's marketing materials may also show the Fund's asset class diversification,
top five sectors, ten largest holdings and other Fund asset structures, such as
duration, maturity, coupon, NAV, rating breakdown, AMT exposure and number of
issues in the portfolio. Materials may also mention how the Distributor believes
the Fund compares relative to other Van Kampen funds. Materials may also discuss
the Dalbar Financial Services study from 1984 to 1994 which studied investor
cash flow into and out of all types of mutual funds. The ten year study found
that investors who bought mutual fund shares and held such shares outperformed
investors who bought and sold. The Dalbar study conclusions were consistent
regardless of if shareholders purchased their funds in direct or sales force
distribution channels. The study showed that investors working with a
professional representative have tended over time to earn higher returns than
those who invested directly. The Fund will also be marketed on the internet.
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the rankings or ratings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds with the Consumer Price Index, other appropriate
indices of investment
B-45
<PAGE> 671
securities, or with investment or savings vehicles. The performance information
may also include evaluations of the Fund published by nationally recognized
ranking services and by nationally recognized financial publications. Such
comparative performance information will be stated in the same terms in which
the comparative data or indices are stated. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any, will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's shares. For these purposes, the performance of the
Fund, as well as the performance of other mutual funds or indices, do not
reflect sales charges, the inclusion of which would reduce Fund performance. The
Fund will include performance data for each class of shares of the Fund in any
advertisement or information including performance data of the Fund.
The Fund may also utilize performance information in hypothetical
illustrations. For example, the Fund may, from time to time: (1) illustrate the
benefits of tax-deferral by comparing taxable investments to investments made
through tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
of different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return.
Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
computed by dividing that portion of the yield of the Fund (as computed above)
which is tax-exempt by a percentage equal to 100% minus a stated percentage
income tax rate and adding the result to that portion of the Fund's yield, if
any, that is not tax-exempt.
The Fund's Annual Report and Semi-Annual Report contain additional performance
information. A copy of the Annual Report or Semi-Annual Report may be obtained
without charge by calling or writing the Fund at the telephone number and
address printed on the back cover of the Prospectus.
CLASS A SHARES
The average annualized total return, including payment of the sales charge,
with respect to the Class A Shares for (i) the one year period ended September
30, 1998 was 5.42% and (ii) the approximately four year, two month period from
July 29, 1994 (the commencement of investment operations of the Fund) through
September 30, 1998 was 7.55%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.71%. The Fund's current distribution
rate with respect to the Class A Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.69%. The Fund's taxable equivalent distribution rate with
respect to the Class A Shares for the month ending September 30, 1998 was 7.87%.
The Class A Shares cumulative non-standardized total return, including payment
of the maximum sales charge, with respect to the Class A Shares from its
inception to September 30, 1998 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 35.53%.
The Fund's cumulative non-standardized total return, excluding payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
September 30, 1998 was 42.28%.
CLASS B SHARES
The average annualized total return, including payment of the CDSC, with
respect to the Class B Shares for (i) the one year period ended September 30,
1998 was 5.93% and (ii) the approximately four year, two month period of July
29, 1994 (commencement of investment operations of the Fund) through September
30, 1998 was 7.74%.
B-46
<PAGE> 672
The Fund's yield with respect to the Class B Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.19%. The Fund's current distribution
rate with respect to the Class B Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.26%. The Fund's taxable equivalent distribution rate with
respect to the Class B Shares for the month ending September 30, 1998 was 7.15%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class B Shares from its inception to September 30,
1998 (as calculated in the manner described in the Prospectus under the heading
"Fund Performance") was 36.54%.
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to September 30,
1998 was 38.04%.
CLASS C SHARES
The average annualized total return, including payment of the CDSC, with
respect to the Class C Shares for (i) the one year period ended September 30,
1998 was 8.86% and (ii) the approximately four year, two month period from July
29, 1994 (the commencement of investment operations of the Fund) through
September 30, 1998 was 8.00%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending September 30, 1998 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.20%. The Fund's current distribution
rate with respect to the Class C Shares for the month ending September 30, 1998
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.26%. The Fund's taxable equivalent distribution rate with
respect to the Class C Shares for the month ending September 30, 1998 was 7.15%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class C Shares from its inception to September 30,
1998 (as calculated in the manner described in the Prospectus under the heading
"Fund Performance") was 37.96%.
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class C Shares from its inception to September 30,
1998 was 37.96%.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash, including
proceeds from the sale of shares of the Fund and of securities in the Fund's
investment portfolio, are held by State Street Bank and Trust Company, 225 West
Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual statements are furnished to shareholders,
and annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS -- KPMG LLP, 303 East Wacker Drive, Chicago, Illinois
60601, the independent accountants for the Fund, performs an annual audit of the
Fund's financial statements.
LEGAL COUNSEL -- Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom
(Illinois).
B-47
<PAGE> 673
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders of
Van Kampen New York Tax Free Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen New York Tax Free Income Fund (the "Fund"), including the portfolio of
investments, as of September 30, 1998, and the related statement of operations
for the nine-month period ended September 30, 1998 and the year ended December
31, 1997, the statement of changes in net assets for the nine-month period ended
September 30, 1998 and for each of the two years in the period ended December
31, 1997, 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
September 30, 1998, 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 New York Tax Free Income Fund as of September 30, 1998, the results of
its operations for the nine-month period ended September 30, 1998 and the year
ended December 31, 1997, the changes in its net assets for the nine-month period
ended September 30, 1998 and for each of the two years in the period ended
December 31, 1997, and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
November 5, 1998
F-1
<PAGE> 674
PORTFOLIO OF INVESTMENTS
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS 98.2%
NEW YORK 94.4%
$ 780 Buffalo, NY Muni Wtr Fin Auth Wtr Sys Rev Ser B
Rfdg (FGIC Insd)................................. 5.000% 07/01/18 $ 791,380
1,180 Buffalo, NY Muni Wtr Fin Auth Wtr Sys Rev Ser B
Rfdg (FGIC Insd)................................. 5.000 07/01/19 1,192,992
750 Clifton Springs, NY Hosp & Clinic Ser A Rfdg &
Impt............................................. 7.650 01/01/12 856,162
250 Erie Cnty, NY Indl Dev Agy Life Care Cmnty Rev
Episcopal Church Home Ser A...................... 6.000 02/01/28 257,968
500 Erie Cnty, NY Indl Dev Agy Civic Fac Rev Depaul
Ppty Inc Proj Ser A.............................. 5.750 09/01/28 500,830
500 Islip, NY Cmnty Dev Agy Cmnty Dev Rev NY
Institute of Technology Rfdg..................... 7.500 03/01/26 560,070
1,000 Long Island Power Auth NY Elec Sys Rev Genl Ser
A................................................ 5.500 12/01/29 1,036,700
1,645 Metropolitan Tran Auth NY Commuter Fac Rev....... 5.500 07/01/14 1,756,679
800 Metropolitan Tran Auth NY Commuter Fac Rev Ser A
(MBIA Insd)...................................... 5.625 07/01/27 865,632
400 Metropolitan Tran Auth NY Commuter Fac Svc
Contract Ser O................................... 5.750 07/01/13 439,944
500 Monroe Cnty, NY Indl Dev Agy Rev Indl Dev Empire
Sports Proj Ser A................................ 6.250 03/01/28 505,870
600 New York City Indl Dev Agy Brooklyn Navy Yard.... 5.650 10/01/28 617,400
500 New York City Indl Dev Agy Civic Fac Rev Cmnty
Res Developmentally Disabled..................... 7.500 08/01/26 539,520
500 New York City Indl Dev Agy Civic Fac Rev College
of New Rochelle Proj............................. 5.750 09/01/17 530,155
500 New York City Indl Dev Agy Rev Visy Paper Inc
Proj............................................. 7.950 01/01/28 569,130
375 New York City Indl Dev Agy Spl Fac Rev Terminal
One Group Assn Proj.............................. 5.700 01/01/04 402,705
500 New York City Indl Dev Agy Spl Fac United Airls
Inc Proj......................................... 5.650 10/01/32 513,820
500 New York City Indl Dev Civic YMCA Greater NY
Proj............................................. 6.000 08/01/07 554,535
515 New York City Indl Dev Civic YMCA Greater NY
Proj............................................. 5.800 08/01/16 553,167
500 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev
Ser B (AMBAC Insd)............................... 5.375 06/15/19 517,300
500 New York City Ser B.............................. 5.700 08/15/07 554,085
500 New York City Ser C (Prerefunded @ 08/15/01)..... 7.250 08/15/24 549,105
20 New York City Ser H (FSA Insd)................... 7.000 02/01/21 22,121
480 New York City Ser H (Prerefunded @ 02/01/02) (FSA
Insd)............................................ 7.000 02/01/21 535,862
1,250 New York NY City Indl Dev Agy Rfdg Laguardia
Assoc Lp Proj (a)................................ 6.000 11/01/28 1,269,150
1,500 New York St Dorm Auth Rev Buena Vida Nursing Home
A................................................ 5.000 07/01/18 1,497,090
300 New York St Dorm Auth Rev City Univ Ser F........ 5.000 07/01/14 302,058
600 New York St Dorm Auth Rev City Univ Sys Third
Genl Res 2 Rfdg (b).............................. 6.000 07/01/05 667,542
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 675
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK (CONTINUED)
$ 750 New York St Dorm Auth Rev Cons City Univ Sys Ser
A................................................ 5.625% 07/01/16 $ 825,675
500 New York St Dorm Auth Rev Court Fac Lease Ser
A................................................ 5.700 05/15/22 525,200
570 New York St Dorm Auth Rev Dept Ed St of NY Issue
Ser A............................................ 5.800 07/01/22 610,709
750 New York St Dorm Auth Rev FHA Nursing Home
Menorah (FHA Insd)............................... 5.950 02/01/17 817,373
1,000 New York St Dorm Auth Rev Second Hosp Interfaith
Med Cent Ser D................................... 5.750 02/15/08 1,110,450
500 New York St Dorm Auth Rev St Univ Edl Fac........ 5.750 05/15/10 551,670
1,200 New York St Dorm Auth Rev Svc Contract Albany
Cnty............................................. 5.250 04/01/13 1,255,416
1,000 New York St Dorm Auth Rev Svc Contract Albany
Cnty............................................. 5.250 04/01/17 1,021,230
500 New York St Energy Resh & Dev Auth Elec Fac Rev
Cons Edison Co NY Inc Proj Ser A (MBIA Insd)..... 7.500 01/01/26 525,670
500 New York St Energy Resh & Dev Auth Gas Fac Rev
Brooklyn Union Gas Co Ser B (Inverse Fltg) (c)... 10.051 07/01/26 676,250
300 New York St Energy Resh & Dev Auth St Svc
Contract Rev Western NY Nuclear Svc Cent Proj.... 6.000 04/01/00 309,975
500 New York St Environmental Fac Corp Pollutn Ctl
Rev St Wtr Revolving Fund Ser D (b).............. 6.850 11/15/11 578,775
500 New York St Hsg Fin Agy Rev Insd Multi-Family Mtg
Ser B (AMBAC Insd)............................... 6.250 08/15/14 545,185
500 New York St Local Government Assistance
Corporation Refunding Ser B (MBIA Insd).......... 5.000 04/01/21 501,955
500 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg
Ser A (Prerefunded @ 02/15/05) (AMBAC
Insd) (b)........................................ 6.200 08/15/05 571,995
500 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg
Ser A (Prerefunded @ 02/15/01) (AMBAC Insd)...... 6.600 02/15/11 533,355
300 New York St Med Care Fac Fin Agy Rev Presbyterian
Hosp Mtg Ser A Rfdg (FHA Insd)................... 5.250 08/15/14 312,348
500 New York St Mtg Agy Rev Homeowner Mtg Ser 30B.... 6.650 10/01/25 536,650
750 New York St Mtg Agy Rev Homeowner Mtg Ser 58..... 6.400 04/01/27 825,000
540 New York St Thruway Auth Svc Contract Rev Loc Hwy
& Brdg........................................... 5.100 04/01/08 573,194
290 New York St Thruway Auth Svc Contract Rev Loc Hwy
& Brdg........................................... 5.750 04/01/09 319,658
1,000 New York St Urban Dev Corp Rev Sports Fac
Assistance Pgm Ser A............................. 5.000 04/01/18 993,230
370 New York St Urban Dev Corp Rev Correctional Cap
Fac Rfdg......................................... 5.625 01/01/07 396,440
450 New York St Urban Dev Corp Rev Correctional Cap
Fac Ser 7........................................ 5.700 01/01/27 478,890
500 New York St Urban Dev Corp Rev Correctional Cap
Fac Ser A Rfdg................................... 5.500 01/01/14 540,610
300 New York St Urban Dev Corp Rev Correctional Cap
Fac Rfdg......................................... 5.750 01/01/13 317,571
420 Niagara Falls, NY Pub Impt (MBIA Insd)........... 6.900 03/01/20 483,466
500 Oneida Cnty, NY Pub Impt (Prerefunded @
03/15/01)........................................ 5.850 03/15/12 535,235
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 676
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK (CONTINUED)
$ 600 Oneida Cnty, NY Indl Dev Agy Rev Rfdg Civic Fac
Presbyterian..................................... 5.000% 03/01/14 $ 603,612
455 Orange Cnty NY Indl Dev Agy Life Care Cmnty
Rev.............................................. 5.625 01/01/18 459,050
300 Port Auth NY & NJ Spl Oblig...................... 7.000 10/01/07 339,399
1,000 Port Auth NY & NJ Spl Oblig Rev Spl Proj JFK Intl
Arpt Terminal 6 (MBIA Insd)...................... 5.750 12/01/25 1,075,490
555 Rockland Cnty, NY Indl Dev Agy Civic Fac Rev
Dominican College Proj........................... 6.250 05/01/28 563,697
625 Rockland Cnty, NY Solid Waste Mgmt Auth Ser B
(AMBAC Insd)..................................... 5.550 12/15/16 675,169
500 Suffolk Cnty, NY Indl Dev Agy Indl Dev Rev
Spellman High Voltage Fac Ser A.................. 6.375 12/01/17 511,945
825 Suffolk Cnty, NY Pub Impt Ser D Rfdg (FGIC
Insd)............................................ 4.750 11/01/18 818,111
1,000 Syracuse NY Ser C (FSA Insd)..................... 4.900 10/01/09 1,035,470
225 Syracuse, NY Hsg Auth Rev Sub Proj Loretto Rest
Ser B............................................ 7.500 08/01/10 235,465
400 Triborough Brdg & Tunl Auth NY Rev Genl Purp Ser
A Rfdg........................................... 5.000 01/01/12 407,248
500 Triborough Brdg & Tunl Auth NY Ser A Rfdg (FGIC
Insd)............................................ 5.000 01/01/17 510,105
1,000 Utica NY Indl Dev Agy Civic Fac Rev Utica College
Proj Ser A....................................... 5.750 08/01/28 1,019,270
-----------
44,486,178
-----------
GUAM 1.2%
500 Guam Arpt Auth Rev Ser B......................... 6.700 10/01/23 552,400
-----------
PUERTO RICO 1.1%
500 Puerto Rico Indl Tourist Edl Mennonite Genl Hosp
Proj Ser A....................................... 5.625 07/01/27 513,815
-----------
U. S. VIRGIN ISLANDS 1.5%
650 Virgin Islands Pub Fin Auth Rev Sr Lien Fd Ln Nts
Ser C............................................ 5.500 10/01/07 700,674
-----------
TOTAL LONG-TERM INVESTMENTS 98.2%
(Cost $43,086,936)......................................................... 46,253,067
SHORT-TERM INVESTMENTS 3.1%
(Cost $1,475,000).......................................................... 1,475,000
-----------
TOTAL INVESTMENTS 101.3%
(Cost $44,561,936)......................................................... 47,728,067
LIABILITIES IN EXCESS OF OTHER ASSETS (1.3%)................................ (634,854)
-----------
NET ASSETS 100.0%........................................................... $47,093,213
-----------
</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
F-4
<PAGE> 677
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $44,561,936)........................ $47,728,067
Cash........................................................ 21,300
Receivables:
Interest.................................................. 668,644
Fund Shares Sold.......................................... 100,470
Unamortized Organizational Costs............................ 12,368
Other....................................................... 154
-----------
Total Assets.......................................... 48,531,003
-----------
LIABILITIES:
Payables:
Investments Purchased..................................... 1,265,208
Income Distributions...................................... 60,154
Fund Shares Repurchased................................... 3,492
Distributor and Affiliates................................ 2,536
Accrued Expenses............................................ 68,377
Trustees' Deferred Compensation and Retirement Plans........ 38,023
-----------
Total Liabilities..................................... 1,437,790
-----------
NET ASSETS.................................................. $47,093,213
===========
NET ASSETS CONSIST OF:
Capital..................................................... $43,670,839
Net Unrealized Appreciation................................. 3,166,131
Accumulated Net Realized Gain............................... 271,913
Accumulated Distributions in Excess of Net Investment
Income.................................................... (15,670)
-----------
NET ASSETS.................................................. $47,093,213
===========
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $25,002,174 and 1,541,195 shares of
beneficial interest issued and outstanding)........... $ 16.22
Maximum sales charge (4.75%* of offering price)......... .81
-----------
Maximum offering price to public........................ $ 17.03
===========
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $18,953,004 and 1,169,362 shares of
beneficial interest issued and outstanding)........... $ 16.21
===========
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $3,138,035 and 193,648 shares of
beneficial interest issued and outstanding)........... $ 16.20
===========
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
F-5
<PAGE> 678
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998 and
the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest.......................................... $1,605,334 $1,350,276
---------- ----------
EXPENSES:
Investment Advisory Fee........................... 178,001 139,021
Distribution (12b-1) and Service Fees (Attributed
to Classes A, B and C of $40,153, $120,530 and
$16,150, respectively, for the nine months ended
9/30/98 and $28,117, $113,878 and $5,783,
respectively, for the year ended 12/31/97)...... 176,833 147,778
Reports to Shareholders........................... 41,101 20,778
Accounting Services............................... 36,425 28,263
Shareholder Services.............................. 18,387 23,700
Trustees' Fees and Expenses....................... 18,111 6,690
Legal............................................. 8,424 26,500
Custody........................................... 3,829 13,497
Other............................................. 48,129 20,153
---------- ----------
Total Expenses................................ 529,240 426,380
Less Fees Waived and Expenses Reimbursed
($178,001 and $132,626, respectively, for
the nine months ended 9/30/98 and $139,021
and $52,808, respectively, for the year
ended 12/31/97)............................. 310,627 191,829
---------- ----------
Net Expenses.................................. 218,613 234,551
---------- ----------
NET INVESTMENT INCOME............................. $1,386,721 $1,115,725
========== ==========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments..................................... $ 271,958 $ 302,167
Futures......................................... -0- (47,138)
---------- ----------
Net Realized Gain................................. 271,958 255,029
---------- ----------
Unrealized Appreciation/Depreciation:
Beginning of the Period......................... 2,085,140 967,758
End of the Period............................... 3,166,131 2,085,140
---------- ----------
Net Unrealized Appreciation During the Period..... 1,080,991 1,117,382
---------- ----------
NET REALIZED AND UNREALIZED GAIN.................. $1,352,949 $1,372,411
========== ==========
NET INCREASE IN NET ASSETS FROM OPERATIONS........ $2,739,670 $2,488,136
========== ==========
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 679
STATEMENT OF CHANGES IN NET ASSETS
For the Nine Months Ended September 30, 1998 and the
Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Year Ended
September 30, 1998 December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.............. $ 1,386,721 $ 1,115,725 $ 861,604
Net Realized Gain.................. 271,958 255,029 178,372
Net Unrealized
Appreciation/Depreciation During
the Period....................... 1,080,991 1,117,382 (185,185)
----------- ----------- -----------
Change in Net Assets from
Operations....................... 2,739,670 2,488,136 854,791
----------- ----------- -----------
Distributions from Net Investment
Income........................... (1,386,749) (1,126,124) (843,389)
Distributions in Excess of Net
Investment Income................ (15,670) -0- -0-
----------- ----------- -----------
Distributions from and in Excess of
Net Investment Income*........... (1,402,419) (1,126,124) (843,389)
Distributions from Net Realized
Gains*........................... (40,996) (83,754) -0-
----------- ----------- -----------
Total Distributions................ (1,443,415) (1,209,878) (843,389)
----------- ----------- -----------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES............ 1,296,255 1,278,258 11,402
----------- ----------- -----------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold.......... 16,595,104 16,610,486 5,845,364
Net Asset Value of Shares Issued
Through Dividend Reinvestment.... 924,200 683,838 429,768
Cost of Shares Repurchased......... (3,838,934) (4,637,600) (3,618,542)
----------- ----------- -----------
NET CHANGE IN NET ASSETS FROM
CAPITAL TRANSACTIONS............. 13,680,370 12,656,724 2,656,590
----------- ----------- -----------
TOTAL INCREASE IN NET ASSETS....... 14,976,625 13,934,982 2,667,992
NET ASSETS:
Beginning of the Period............ 32,116,588 18,181,606 15,513,614
----------- ----------- -----------
End of the Period (Including
accumulated undistributed net
investment income of ($15,670),
$28, and $10,427, respectively).. $47,093,213 $32,116,588 $18,181,606
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Year Ended
*Distributions by Class September 30, 1998 December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Distributions from and in Excess of
Net Investment Income:
Class A Shares................... $ (809,026) $ (584,822) $(354,322)
Class B Shares................... (523,570) (515,371) (471,468)
Class C Shares................... (69,823) (25,931) (17,599)
----------- ----------- ---------
$(1,402,419) $(1,126,124) $(843,389)
=========== =========== =========
Distributions from Net Realized
Gain:
Class A Shares................... $ (22,100) $ (46,829) $ -0-
Class B Shares................... (16,870) (34,234) -0-
Class C Shares................... (2,026) (2,691) -0-
--------- --------- --------
$ (40,996) $ (83,754) $ -0-
--------- --------- --------
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 680
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
Nine Months Year Ended December 31 Operations) to
Ended --------------------------- December 31,
Class A Shares September 30, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $15.734 $14.992 $15.048 $13.579 $14.300
------- ------- ------- ------- -------
Net Investment Income............ .596 .786 .816 .821 .302
Net Realized and Unrealized
Gain/Loss...................... .509 .795 (.074) 1.476 (.722)
------- ------- ------- ------- -------
Total from Investment Operations... 1.105 1.581 .742 2.297 (.420)
------- ------- ------- ------- -------
Less:
Distributions from and in Excess
of Net Investment Income....... .599 .798 .798 .828 .301
Distributions from Net Realized
Gain........................... .017 .041 -0- -0- -0-
------- ------- ------- ------- -------
Total Distributions................ .616 .839 .798 .828 .301
------- ------- ------- ------- -------
Net Asset Value, End of the
Period........................... $16.223 $15.734 $14.992 $15.048 $13.579
======= ======= ======= ======= =======
Total Return*(a)................... 7.11%** 10.92% 5.14% 17.33% (2.93%)**
Net Assets at End of the Period (In
millions)........................ $ 25.0 $ 18.0 $ 7.7 $ 5.4 $ 2.9
Ratio of Expenses to Average Net
Assets*.......................... .39% .64% .31% .21% .26%
Ratio of Net Investment Income to
Average Net Assets*.............. 5.01% 5.16% 5.56% 5.63% 5.27%
Portfolio Turnover................. 53%** 60% 126% 51% 68%**
*If certain expenses had not been assumed by Van Kampen, total return would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net
Assets........................... 1.43% 1.47% 1.82% 2.10% 2.73%
Ratio of Net Investment Income to
Average Net Assets............... 3.97% 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
F-8
<PAGE> 681
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
Nine Months Year Ended December 31, of Investment
Ended --------------------------- Operations) to
Class B Shares September 30, 1998 1997 1996 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period....................... $15.727 $14.992 $15.046 $13.578 $14.300
------- ------- ------- ------- -------
Net Investment Income............ .509 .684 .704 .713 .263
Net Realized and Unrealized
Gain/Loss...................... .507 .782 (.068) 1.476 (.722)
------- ------- ------- ------- -------
Total from Investment Operations... 1.016 1.466 .636 2.189 (.459)
------- ------- ------- ------- -------
Less:
Distributions from and in Excess
of Net Investment Income....... .518 .690 .690 .721 .263
Distributions from Net Realized
Gain........................... .017 .041 -0- -0- -0-
------- ------- ------- ------- -------
Total Distributions................ .535 .731 .690 .721 .263
------- ------- ------- ------- -------
Net Asset Value, End of the
Period........................... $16.208 $15.727 $14.992 $15.046 $13.578
======= ======= ======= ======= =======
Total Return*(a)................... 6.58%** 10.07% 4.37% 16.47% (3.20%)**
Net Assets at End of the Period (In
millions)........................ $ 19.0 $ 13.1 $ 10.1 $ 9.7 $ 8.1
Ratio of Expenses to Average Net
Assets*.......................... 1.14% 1.36% 1.07% .93% .96%
Ratio of Net Investment Income to
Average Net Assets*.............. 4.26% 4.49% 4.79% 4.93% 4.58%
Portfolio Turnover................. 53%** 60% 126% 51% 68%**
*If certain expenses had not been assumed by Van Kampen, total return would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net
Assets........................... 2.19% 2.18% 2.60% 2.82% 3.42%
Ratio of Net Investment Income to
Average Net Assets............... 3.21% 3.67% 3.26% 3.04% 2.12%
</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
F-9
<PAGE> 682
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
Nine Months Year Ended December 31, of Investment
Ended --------------------------- Operations) to
Class C Shares September 30, 1998 1997 1996 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $15.726 $14.992 $15.041 $13.579 $14.300
------- ------- ------- ------- -------
Net Investment Income............ .515 .676 .701 .711 .267
Net Realized and Unrealized
Gain/Loss...................... .498 .789 (.060) 1.472 (.725)
------- ------- ------- ------- -------
Total from Investment Operations... 1.013 1.465 .641 2.183 (.458)
------- ------- ------- ------- -------
Less:
Distributions from and in Excess
of Net Investment Income....... .518 .690 .690 .721 .263
Distributions from Net Realized
Gain........................... .017 .041 -0- -0- -0-
------- ------- ------- ------- -------
Total Distributions................ .535 .731 .690 .721 .263
------- ------- ------- ------- -------
Net Asset Value, End of the
Period........................... $16.204 $15.726 $14.992 $15.041 $13.579
======= ======= ======= ======= =======
Total Return*(a)................... 6.51%** 10.07% 4.44% 16.39% (3.20%)**
Net Assets at End of the Period (In
millions)........................ $ 3.1 $ 1.0 $ .4 $ .4 $ .2
Ratio of Expenses to Average Net
Assets*.......................... 1.14% 1.41% 1.08% .98% .96%
Ratio of Net Investment Income to
Average Net Assets*.............. 4.22% 4.37% 4.78% 4.81% 4.58%
Portfolio Turnover................. 53%** 60% 126% 51% 68%**
*If certain expenses had not been assumed by Van Kampen, total return would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net
Assets........................... 2.18% 2.23% 2.61% 2.86% 3.42%
Ratio of Net Investment Income to
Average Net Assets............... 3.17% 3.55% 3.25% 2.93% 2.12%
</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
F-10
<PAGE> 683
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen New York Tax Free Income Fund (the "Fund") is organized as a series
of the Van Kampen 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. In July, 1998, the Fund's Board of Trustees approved a change in
the Fund's fiscal year end from December 31 to September 30. As a result, this
financial report reflects the nine-month period commencing on January 1, 1998,
and ending on September 30, 1998.
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.
F-11
<PAGE> 684
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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.
D. ORGANIZATIONAL COSTS--The Fund has reimbursed Van Kampen Funds Inc. or its
affiliates (collectively "Van Kampen") for costs incurred in connection with the
Fund's organization in the amount of $75,000. These costs are being amortized on
a straight line basis over the 60 month period ending July 28, 1999. Van Kampen
Investment Advisory Corp. (the "Adviser") has agreed that in the event any of
the initial shares of the Fund originally purchased by Van Kampen 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 September 30, 1998, for federal income tax purposes, cost of long- and
short-term investments is $44,561,936; the aggregate gross unrealized
appreciation is $3,166,131 and the aggregate gross unrealized depreciation is
$0, resulting in net unrealized appreciation on long- and short-term investments
of $3,166,131.
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 the nine months ended September 30, 1998, 100% of the income
distributions made by the Fund were exempt from federal income taxes.
Additionally, during the period the Fund designated and paid $40,951 as a 20%
rate gain distribution. In January, 1999 the Fund will provide tax information
to shareholders for the 1998 calendar year.
F-12
<PAGE> 685
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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 nine months ended September 30, 1998 and the year ended December 31,
1997, the Fund recognized expenses of approximately $6,000 and $16,300,
respectively, 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 Van Kampen.
For the nine months ended September 30, 1998 and the year ended December 31,
1997, the Fund recognized expenses of approximately $42,400 and $38,800,
respectively, representing Van Kampen's cost of providing accounting services
and legal services to the Fund. A portion of this cost has been assumed by Van
Kampen.
Van Kampen Investor Services Inc. ("VKIS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the nine months ended
September 30, 1998 and the year ended December 31, 1997, the Fund recognized
expenses of approximately $11,800 and $14,200, respectively. Beginning in 1998,
the transfer agency fees are determined through negotiations with the Fund's
Board of Trustees and are based on competitive market benchmarks.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. 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 $2,500.
At September 30, 1998, Van Kampen owned 100 shares each of Classes A, B
and C.
F-13
<PAGE> 686
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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 September 30, 1998, capital aggregated $23,341,371, $17,309,186, and
$3,020,282 for Classes A, B and C, respectively. For the nine months ended
September 30, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A..................................... 520,265 $ 8,251,633
Class B..................................... 391,237 6,192,887
Class C..................................... 135,402 2,150,584
--------- -----------
Total Sales................................... 1,046,904 $16,595,104
========= ===========
Dividend Reinvestment:
Class A..................................... 39,009 $ 619,536
Class B..................................... 16,654 264,369
Class C..................................... 2,532 40,295
--------- -----------
Total Dividend Reinvestment................... 58,195 $ 924,200
========= ===========
Repurchases:
Class A..................................... (160,416) $(2,542,226)
Class B..................................... (72,177) (1,139,992)
Class C..................................... (9,896) (156,716)
--------- -----------
Total Repurchases............................. (242,489) $(3,838,934)
========= ===========
</TABLE>
F-14
<PAGE> 687
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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>
F-15
<PAGE> 688
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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). Class B shares will
automatically convert to Class A shares after the eighth year following
purchase. 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>
F-16
<PAGE> 689
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
For the nine months ended September 30, 1998 and the year ended December 31,
1997, Van Kampen, as Distributor for the Fund, received commissions on sales of
the Fund's Class A shares of approximately $12,600 and $12,600, respectively and
CDSC on redeemed shares of approximately $21,800 and $59,300, respectively.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
For the nine months ended September 30, 1998, the cost of purchases and proceeds
from sales of investments, excluding short-term investments, were $32,322,738
and $20,195,303, respectively. For the year ended December 31, 1997, the cost of
purchases and proceeds from sales of investments, excluding short-term
investments, were $27,073,236 and $13,692,692, 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).
F-17
<PAGE> 690
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998
- --------------------------------------------------------------------------------
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....................................................... 55
Futures Closed....................................................... (55)
---
Outstanding at December 31, 1997..................................... -0-
===
</TABLE>
The Fund did not enter into any futures transactions for the nine months
ended September 30, 1998.
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 nine months ended September 30, 1998 and the year ended December 31,
1997, are payments retained by Van Kampen of approximately $99,800 and $92,600,
respectively.
7. YEAR 2000 COMPLIANCE (UNAUDITED)
Van Kampen utilizes a number of computer programs across its entire operation
relying on both internal software systems as well as external software systems
provided by third parties. In 1996 Van Kampen initiated a CountDown 2000 Project
to review both the internal systems and external vendor connections. The goal of
this project is to position its business to continue unaffected as a result of
the century change. At this time, there can be no assurance that the steps taken
will be sufficient to avoid any adverse impact to the Fund, but Van Kampen does
not anticipate that the move to Year 2000 will have a material impact on its
ability to continue to provide the Fund with service at current levels. In
addition, it is possible that the securities markets in which the Fund invests
may be detrimentally affected by computer failures throughout the financial
services industry beginning January 1, 2000. Improperly functioning trading
systems may result in settlement problems and liquidity issues.
F-18
<PAGE> 691
PART C: OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<C> <C> <S>
(a)(1) -- Agreement and Declaration of Trust(1)
(2) -- Certificate of Amendment(10)
(3) -- Second Amended and Restated Certificate of Designation for:
(i) Van Kampen Insured Tax Free Income Fund(10)
(ii) Van Kampen Tax Free High Income Fund(10)
(iii) Van Kampen California Insured Tax Free Fund(10)
(iv) Van Kampen Municipal Income Fund(10)
(v) Van Kampen Florida Insured Tax Free Income Fund(10)
(vi) Van Kampen New York Tax Free Income Fund(10)
(vii) Van Kampen California Tax Free Income Fund(10)
(viii) Van Kampen Michigan Tax Free Income Fund(10)
(ix) Van Kampen Missouri Tax Free Income Fund(10)
(x) Van Kampen Ohio Tax Free Income Fund(10)
-- Third Amended and Restated Certificate of Designation for:
(xi) Van Kampen Intermediate Term Municipal Income Fund(10)
(b) -- By-Laws(1)
(c) -- Specimen Certificate of Share of Beneficial Interest of:
(i) Van Kampen Insured Tax Free Income Fund(1)
(ii) Van Kampen Tax Free High Income Fund(1)
(iii) Van Kampen California Insured Tax Free Fund(1)
(iv) Van Kampen Municipal Income Fund(1)
(v) Van Kampen Intermediate Term Municipal Income Fund(1)
(vi) Van Kampen Florida Insured Tax Free Income Fund(1)
(vii) Van Kampen New York Tax Free Income Fund(1)
(viii) Van Kampen California Tax Free Income Fund
1. Class A Shares(2)
2. Class B Shares(2)
3. Class C Shares(2)
(ix) Van Kampen Michigan Tax Free Income Fund
1. Class A Shares(2)
2. Class B Shares(2)
3. Class C Shares(2)
(x) Van Kampen Missouri Tax Free Income Fund
1. Class A Shares(2)
2. Class B Shares(2)
3. Class C Shares(2)
(xi) Van Kampen Ohio Tax Free Income Fund
1. Class A Shares(2)
2. Class B Shares(2)
3. Class C Shares(2)
(d) -- Investment Advisory Agreement for:
(i) Van Kampen Insured Tax Free Income Fund(3)
(ii) Van Kampen Tax Free High Income Fund(3)
(iii) Van Kampen California Insured Tax Free Fund(3)
(iv) Van Kampen Municipal Income Fund(3)
(v) Van Kampen Intermediate Term Municipal Income Fund(3)
(vi) Van Kampen Florida Insured Tax Free Income Fund(3)
(vii) Van Kampen New York Tax Free Income Fund(3)
(viii) Van Kampen California Tax Free Income Fund(2)
(ix) Van Kampen Michigan Tax Free Income Fund(2)
(x) Van Kampen Missouri Tax Free Income Fund(2)
(xi) Van Kampen Ohio Tax Free Income Fund(2)
</TABLE>
C-1
<PAGE> 692
<TABLE>
<C> <C> <S>
(e)(1) -- Distribution and Service Agreement for:
(i) Van Kampen Insured Tax Free Income Fund(3)
(ii) Van Kampen Tax Free High Income Fund(3)
(iii) Van Kampen California Insured Tax Free Fund(3)
(iv) Van Kampen Municipal Income Fund(3)
(v) Van Kampen Intermediate Term Municipal Income Fund(3)
(vi) Van Kampen Florida Insured Tax Free Income Fund(3)
(vii) Van Kampen New York Tax Free Income Fund(3)
(viii) Van Kampen California Tax Free Income Fund(2)
(ix) Van Kampen Michigan Tax Free Income Fund(2)
(x) Van Kampen Missouri Tax Free Income Fund(2)
(xi) Van Kampen Ohio Tax Free Income Fund(2)
(2) -- Form of Dealer Agreement(4)
(3) -- Form of Broker Agreement(4)
(4) -- Form of Bank Agreement(4)
(g)(1) -- Custodian Contract for:
(i) Van Kampen Insured Tax Free Income Fund(5)
(ii) Van Kampen Tax Free High Income Fund(5)
(iii) Van Kampen California Insured Tax Free Fund(5)
(iv) Van Kampen Municipal Income Fund(5) and (6)
(v) Van Kampen Intermediate Term Municipal Income Fund(5)
(vi) Van Kampen Florida Insured Tax Free Income Fund(5)
(vii) Van Kampen New York Tax Free Income Fund(5)
(viii) Van Kampen California Tax Free Income Fund(2) and (5)
(ix) Van Kampen Michigan Tax Free Income Fund(2) and (7)
(x) Van Kampen Missouri Tax Free Income Fund(2) and (7)
(xi) Van Kampen Ohio Tax Free Income Fund(2) and (7)
(2) -- Transfer Agency and Service Agreement(5)
(h)(2) -- Fund Accounting Agreement(5)
(3) -- Legal Services Agreement(3)
(i) -- Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
(Illinois) for:
(i) Van Kampen Insured Tax Free Income Fund(8)
(ii) Van Kampen Tax Free High Income Fund(8)
(iii) Van Kampen California Insured Tax Free Fund(8)
(iv) Van Kampen Municipal Income Fund(8)
(v) Van Kampen Intermediate Term Municipal Income Fund(8)
(vi) Van Kampen Florida Insured Tax Free Income Fund(8)
(vii) Van Kampen New York Tax Free Income Fund(8)
(viii) Van Kampen California Tax Free Income Fund(++)
(ix) Van Kampen Michigan Tax Free Income Fund(++)
(x) Van Kampen Missouri Tax Free Income Fund(++)
(xi) Van Kampen Ohio Tax Free Income Fund(++)
(j) -- Consents of KPMG LLP for:
(i) Van Kampen Insured Tax Free Income Fund+
(ii) Van Kampen Tax Free High Income Fund+
(iii) Van Kampen California Insured Tax Free Fund+
(iv) Van Kampen Municipal Income Fund+
(v) Van Kampen Intermediate Term Municipal Income Fund+
(vi) Van Kampen Florida Insured Tax Free Income Fund+
(vii) Van Kampen New York Tax Free Income Fund+
(viii) Van Kampen California Tax Free Income Fund(2)
(ix) Van Kampen Michigan Tax Free Income Fund(2)
(x) Van Kampen Missouri Tax Free Income Fund(2)
(xi) Van Kampen Ohio Tax Free Income Fund(2)
</TABLE>
C-2
<PAGE> 693
<TABLE>
<C> <C> <S>
(k) -- Computation of Performance Quotations for:
(i) Van Kampen Insured Tax Free Income Fund+
(ii) Van Kampen Tax Free High Income Fund+
(iii) Van Kampen California Insured Tax Free Fund+
(iv) Van Kampen Municipal Income Fund+
(v) Van Kampen Intermediate Term Municipal Income Fund+
(vi) Van Kampen Florida Insured Tax Free Income Fund+
(vii) Van Kampen New York Tax Free Income Fund+
(l) -- Letter of understanding relating to initial capital(9)
(m)(1) -- Plan of Distribution Pursuant to Rule 12b-1 for:
(i) Van Kampen Insured Tax Free Income Fund(1)
(ii) Van Kampen Tax Free High Income Fund(1)
(iii) Van Kampen California Insured Tax Free Fund(1)
(iv) Van Kampen Municipal Income Fund(1)
(v) Van Kampen Intermediate Term Municipal Income Fund(1)
(vi) Van Kampen Florida Insured Tax Free Income Fund(1)
(vii) Van Kampen New York Tax Free Income Fund(1)
(viii) Van Kampen California Tax Free Income Fund(2)
(ix) Van Kampen Michigan Tax Free Income Fund(2)
(x) Van Kampen Missouri Tax Free Income Fund(2)
(xi) Van Kampen Ohio Tax Free Income Fund(2)
(2) -- Form of Shareholder Assistance Agreement(4)
(3) -- Form of Administrative Services Agreement(4)
(4) -- Service Plan for:
(i) Van Kampen Insured Tax Free Income Fund(1)
(ii) Van Kampen Tax Free High Income Fund(1)
(iii) Van Kampen California Insured Tax Free Fund(1)
(iv) Van Kampen Municipal Income Fund(1)
(v) Van Kampen Intermediate Term Municipal Income Fund(1)
(vi) Van Kampen Florida Insured Tax Free Income Fund(1)
(vii) Van Kampen New York Tax Free Income Fund(1)
(viii) Van Kampen California Tax Free Income Fund(2)
(ix) Van Kampen Michigan Tax Free Income Fund(2)
(x) Van Kampen Missouri Tax Free Income Fund(2)
(xi) Van Kampen Ohio Tax Free Income Fund(2)
(n) -- Financial Data Schedules+
(o) -- Amended Multi-Class Plan(8)
(p) -- Power of Attorney+
(z)(1) -- List of Investment Companies in response to Item 27(a)+
(z)(2) -- List of Officers and Directors of Van Kampen Funds Inc. in
response to Item 27(b)+
</TABLE>
- ---------------
(1) Incorporated herein by reference to Post-Effective Amendment No. 39 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on April 29, 1996.
(2) Incorporated herein by reference to Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on September 30, 1994.
(3) Incorporated herein by reference to Post-Effective Amendment No. 41 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on April 30, 1998.
(4) Incorporated herein by reference to Post-Effective Amendment No. 37 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on August 1, 1995.
(5) Incorporated herein by reference to Post-Effective Amendment No. 50 to Van
Kampen American Capital Comstock Fund, File No. 2-27778 filed on April 27,
1998.
(6) Incorporated herein by reference to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed May 25, 1990.
(7) Incorporated herein by reference to Post-Effective Amendment No. 6 to
Registrant's Registration
on Form N-1A, File Number 2-99715, filed February 22, 1988.
C-3
<PAGE> 694
(8) Incorporated herein by reference to Post-Effective Amendment No. 40 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on April 29, 1997.
(9) Incorporated herein by reference to Registrant's Registration Statement on
Form N-1A, File Number 2-99715, filed August 15, 1985.
(10) Incorporated herein by reference to Post-Effective Amendment No. 42 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on November 25, 1998.
+ Filed herewith.
++ To be filed by further amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
See the Statement of Additional Information.
ITEM 25. INDEMNIFICATION.
Reference is made to Article 8, Section 8.4 of the Registrant's Agreement
and Declaration of Trust.
Article 8, Section 8.4 of the Agreement and Declaration of Trust provides
that each officer and trustee of the Registrant shall be indemnified by the
Registrant against all liabilities incurred in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which the officer or trustee may be or may have been involved by reason of
being or having been an officer or trustee, except that such indemnity shall not
protect any such person against a liability to the Registrant or any shareholder
thereof to which such person would otherwise be subject by reason of (i) not
acting in good faith in the reasonable belief that such person's actions were
not in the best interests of the Trust, (ii) willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his or her office (iii) for a criminal proceeding, not having a reasonable cause
to believe that such conduct was unlawful (collectively, "Disabling Conduct").
Absent a court determination that an officer or trustee seeking indemnification
was not liable on the merits or guilty of Disabling Conduct in the conduct of
his or her office, the decision by the Registrant to indemnify such person must
be based upon the reasonable determination of independent counsel or non-party
independent trustees, after review of the facts, that such officer or trustee is
not guilty of Disabling Conduct in the conduct of his or her office.
The Registrant has purchased insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officers or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.
Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately determined
that he or she is entitled to the indemnification and only if the following
conditions are met: (1) the trustee or officer provides security for the
undertaking; (2) the Registrant is insured against losses arising from lawful
advances; or (3) a majority of a quorum of the Registrant's disinterested,
non-party trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that a recipient of
the advance ultimately will be found entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by the trustee, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such trustee, officer or controlling person in connection with the
shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether
C-4
<PAGE> 695
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See "Investment Advisory Services" in the Prospectus and "Investment
Advisory and Other Services" and "Trustees and Officers" in the Statement of
Additional Information for information regarding the business of Van Kampen
Investment Advisory Corp. (the "Adviser"). For information as to the business,
profession, vocation and employment of a substantial nature of directors and
officers of the Adviser, reference is made to the Adviser's current Form ADV
(File No. 801-18161) filed under the Investment Advisers Act of 1940, as
amended, incorporated herein by reference.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) The sole principal underwriter is Van Kampen Funds Inc., which acts as
principal underwriter for certain investment companies and unit investment
trusts (the "Distributor"). See Exhibit (z)(1).
(b) Van Kampen Funds Inc., which is an affiliated person of an affiliated
person of Registrant, is the sole principal underwriter for Registrant. The
name, principal business address and positions and offices with Van Kampen Funds
Inc. of each of the directors and officers are disclosed in Exhibit (z)(2).
Except as disclosed under the heading "Trustees and Officers" in Part B of this
Registration Statement, none of such persons has any position or office with
Registrant.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Registrant by Section 31(a) of the Investment Company Act of 1940 and the Rules
thereunder will be maintained at the offices of the Registrant, located at 1
Parkview Plaza, PO Box 5555, Oakbrook Terrace, Illinois 60181-5555, Van Kampen
Investors Services Inc., 7501 Tiffany Springs Parkway, Kansas City, Missouri
64153, or at State Street Bank and Trust Company, 1776 Heritage Drive, North
Quincy, Massachusetts 02171. All such accounts, books and other documents
required to be maintained by the Adviser and by Van Kampen Funds Inc., the
principal underwriter, will be maintained at 1 Parkview Plaza, PO Box 5555,
Oakbrook Terrace, Illinois 60181-5555.
ITEM 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
(a) Not applicable.
(b) The Registrant undertakes to file a post-effective amendment to the
Registration Statement to add financial statements, which need not be certified,
within four to six months from the effective date of this Registration Statement
for each of the Van Kampen California Tax Free Income Fund, Van Kampen Michigan
Tax Free Income, Van Kampen Missouri Tax Free Income Fund and Van Kampen Ohio
Tax Free Income Fund.
(c) The Registrant undertakes to furnish to each person to whom a
prospectus is delivered for a particular series with a copy of the latest annual
report to shareholders of such series, upon request and without charge.
C-5
<PAGE> 696
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, VAN KAMPEN TAX FREE TRUST,
certifies that it meets all of the requirements for effectiveness of this
Amendment to the Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Oakbrook Terrace and the State of Illinois, on the
28th day of January, 1999.
VAN KAMPEN TAX FREE TRUST
By: /s/ DENNIS J. McDONNELL
---------------------------------------
Dennis J. McDonnell, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to this Registration Statement has been signed on January 28, 1999 by the
following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
Principal Executive Officer:
/s/ DENNIS J. McDONNELL President
- -----------------------------------------------------
Dennis J. McDonnell
Principal Financial Officer:
/s/ JOHN L. SULLIVAN* Vice President, Chief Financial Officer and
- ----------------------------------------------------- Treasurer
John L. Sullivan
Trustees:
/s/ J. MILES BRANAGAN* Trustee
- -----------------------------------------------------
J. Miles Branagan
/s/ RICHARD M. DeMARTINI* Trustee
- -----------------------------------------------------
Richard M. DeMartini
/s/ LINDA HUTTON HEAGY* Trustee
- -----------------------------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY* Trustee
- -----------------------------------------------------
R. Craig Kennedy
/s/ JACK E. NELSON* Trustee
- -----------------------------------------------------
Jack E. Nelson
/s/ DON G. POWELL* Trustee
- -----------------------------------------------------
Don G. Powell
/s/ PHILLIP B. ROONEY* Trustee
- -----------------------------------------------------
Phillip B. Rooney
/s/ FERNANDO SISTO* Trustee
- -----------------------------------------------------
Fernando Sisto
/s/ WAYNE W. WHALEN* Trustee
- -----------------------------------------------------
Wayne W. Whalen
/s/ PAUL G. YOVOVICH* Trustee
- -----------------------------------------------------
Paul G. Yovovich
- ------------
* Signed by Dennis J. McDonnell pursuant to a power of attorney.
/s/ DENNIS J. McDONNELL January 28, 1999
- -----------------------------------------------------
Dennis J. McDonnell
Attorney-in-Fact
</TABLE>
C-6
<PAGE> 697
SCHEDULE OF EXHIBITS TO
POST-EFFECTIVE AMENDMENT 43 TO FORM N-1A
AS SUBMITTED TO THE SECURITIES AND EXCHANGE
COMMISSION ON JANUARY 28, 1999
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <C> <S>
(j) Consents of KPMG LLP for:
(i) Van Kampen Insured Tax Free Income Fund
(ii) Van Kampen Tax Free High Income Fund
(iii) Van Kampen California Insured Tax Free Fund
(iv) Van Kampen Municipal Income Fund
(v) Van Kampen Intermediate Term Municipal Income Fund
(vi) Van Kampen Florida Insured Tax Free Income Fund
(vii) Van Kampen New York Tax Free Income Fund
(k) -- Computation of Performance Quotations
(i) Van Kampen Insured Tax Free Income Fund
(ii) Van Kampen Tax Free High Income Fund
(iii) Van Kampen California Insured Tax Free Fund
(iv) Van Kampen Municipal Income Fund
(v) Van Kampen Intermediate Term Municipal Income Fund
(vi) Van Kampen Florida Insured Tax Free Income Fund
(vii) Van Kampen New York Tax Free Income Fund
(n) -- Financial Data Schedules
(p) -- Power of Attorney
(z)(1) -- List of Investment Companies in response to Item 27(a)
List of Officers and Directors of Van Kampen Funds Inc. in response
(z)(2) -- to Item 27(b)
</TABLE>
<PAGE> 1
EXHIBIT (j)(i)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Van Kampen Insured Tax Free Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Other Information" in the Statement of Additional Information.
/s/ KPMG LLP
Chicago, Illinois
January 25, 1999
<PAGE> 1
EXHIBIT (j)(ii)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Van Kampen Tax Free High Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Other Information" in the Statement of Additional Information.
/s/ KPMG LLP
Chicago, Illinois
January 25, 1999
<PAGE> 1
EXHIBIT (j)(iii)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Van Kampen California Insured Tax Free Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Other Information" in the Statement of Additional Information.
/s/ KPMG LLP
Chicago, Illinois
January 25, 1999
<PAGE> 1
EXHIBIT (j)(iv)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Van Kampen Municipal Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Other Information" in the Statement of Additional Information.
/s/ KPMG LLP
Chicago, Illinois
January 25, 1999
<PAGE> 1
EXHIBIT (j)(v)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Van Kampen Intermediate Term Municipal Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Other Information" in the Statement of Additional Information.
/s/ KPMG LLP
Chicago, Illinois
January 25, 1999
<PAGE> 1
EXHIBIT (j)(vi)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Van Kampen Florida Insured Tax Free Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Other Information" in the Statement of Additional Information.
/s/ KPMG LLP
Chicago, Illinois
January 25, 1999
<PAGE> 1
EXHIBIT (j)(vii)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Van Kampen New York Tax Free Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Other Information" in the Statement of Additional Information.
/s/ KPMG LLP
Chicago, Illinois
January 25, 1999
<PAGE> 1
EXHIBIT (k)(i)
VAN KAMPEN INSURED TAX FREE INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Formula Current Annual Income Per Share
-------------------------------
Current Offering Price
<S> <C> <C>
Class A Shares $0.960
------
$20.96 = 4.58%
Class B Shares $0.812
------
$19.96 = 4.07%
Class C Shares $0.812
------
$19.95 = 4.07%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula Distribution Rate
-----------------
1 -Tax Rate
<S> <C> <C>
Class A Shares 4.58%
-----
1-36% =7.16%
Class B Shares 4.07%
-----
1-36% =6.36%
Class C Shares 4.07%
-----
1-36% =6.36%
</TABLE>
<PAGE> 2
VAN KAMPEN INSURED TAX FREE INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,033.37 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 3.34% = T
Excluding Payment of the Sales Charge
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,084.92 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 8.49% = T
TOTAL RETURN CALCULATION FIVE YEARS ENDED SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,251.72 = ERV
Five years ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 4.59% = T
Excluding Payment of the Sales Charge
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,314.47 = ERV
Five years ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 5.62% = T
</TABLE>
<PAGE> 3
VAN KAMPEN INSURED TAX FREE INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION TEN YEARS ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,036.00 = ERV
Ten years ended 09/30/98 10 = n
TOTAL RETURN FOR THE PERIOD 7.37% = T
Excluding Payment of the Sales Charge
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,137.42 = ERV
Ten years ended 09/30/98 10 = n
TOTAL RETURN FOR THE PERIOD 7.89% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $3,247.00 = ERV
Inception through 09/30/98 13.80 = n
TOTAL RETURN FOR THE PERIOD 8.91% = T
Excluding Payment of the Sales Charge
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $3,408.46 = ERV
Inception through 09/30/98 13.80 = n
TOTAL RETURN FOR THE PERIOD 9.29% = T
</TABLE>
<PAGE> 4
VAN KAMPEN INSURED TAX FREE INCOME FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
Formula ERV - P
-------
P = T
Including Payment of the Sales Charge
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $3,247.00 = ERV
TOTAL RETURN FOR THE PERIOD 224.70% = T
Excluding Payment of the Sales Charge
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $3,408.46 = ERV
TOTAL RETURN FOR THE PERIOD 240.85% = T
</TABLE>
<PAGE> 5
VAN KAMPEN INSURED TAX FREE INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,036.80 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 3.68% = T
Excluding Payment of the CDSC
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,076.80 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 7.68% = T
TOTAL RETURN CALCULATION FIVE YEAR PERIOD ENDED SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,250.28 = ERV
Five year period ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 4.57% = T
Excluding Payment of the CDSC
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,265.28 = ERV
Five year period ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 4.82% = T
</TABLE>
<PAGE> 6
VAN KAMPEN INSURED TAX FREE INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,322.59 = ERV
Inception through 09/30/98 5.41 = n
TOTAL RETURN FOR THE PERIOD 5.30% = T
Excluding Payment of the CDSC
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,332.59 = ERV
Inception through 09/30/98 5.41 = n
TOTAL RETURN FOR THE PERIOD 5.45% = T
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,322.59 = ERV
TOTAL RETURN FOR THE PERIOD 32.26% = T
Excluding Payment of the CDSC
Net Asset Value $19.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,332.59 = ERV
TOTAL RETURN FOR THE PERIOD 33.26% = T
</TABLE>
<PAGE> 7
VAN KAMPEN INSURED TAX FREE INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $19.95
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,066.82 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 6.68% = T
Excluding Payment of the CDSC
Net Asset Value $19.95
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,076.82 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 7.68% = T
TOTAL RETURN CALCULATION FIVE YEAR PERIOD ENDED SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $19.95
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,264.63 = ERV
Five year period ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 4.81% = T
Excluding Payment of the CDSC
Net Asset Value $19.95
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,264.63 = ERV
Five year period ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 4.81% = T
</TABLE>
<PAGE> 8
VAN KAMPEN INSURED TAX FREE INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
<TABLE>
<S> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $19.95
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,291.44 = ERV
Inception through 09/30/98 5.13 = n
TOTAL RETURN FOR THE PERIOD 5.11% = T
Excluding Payment of the CDSC
Net Asset Value $19.95
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,291.44 = ERV
Inception through 09/30/98 5.13 = n
TOTAL RETURN FOR THE PERIOD 5.11% = T
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $19.95
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,291.44 = ERV
TOTAL RETURN FOR THE PERIOD 29.14% = T
Excluding Payment of the CDSC
Net Asset Value $19.95
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,291.44 = ERV
TOTAL RETURN FOR THE PERIOD 29.14% = T
</TABLE>
<PAGE> 1
EXHIBIT (k)(ii)
VAN KAMPEN TAX FREE HIGH INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED SEPTEMBER 30, 1998
Current Annual Income Per Share
-------------------------------
Current Offering Price
Class A Shares
$ .828
------
$15.83 =5.23%
Class B Shares
$ .720
-------
$15.07 = 4.78%
Class C Shares
$ .720
-------
$15.07 = 4.78%
<PAGE> 2
VAN KAMPEN TAX FREE HIGH INCOME FUND
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula
Distribution Rate
-----------------
1 - Tax Rate
Class A Shares
5.23%
-----
1-36% = 8.17%
Class B Shares
4.78%
-----
1-36% = 7.47%
Class C Shares
4.78%
-----
1-36% = 7.47%
<PAGE> 3
VAN KAMPEN TAX FREE HIGH INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
Formula P(1+T)(n) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.08
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,033.28 = ERV
One Year period ended 9/30/98 1 = (n)
TOTAL RETURN FOR THE PERIOD 3.33% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.08
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,084.52 = ERV
One Year period ended 9/30/98 1 = (n)
TOTAL RETURN FOR THE PERIOD 8.45% = T
TOTAL RETURN CALCULATION FIVE YEARS ENDED SEPTEMBER 30, 1998
Formula P(1+T)(n) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.08
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,291.09 = ERV
Five years ended 9/30/98 5 = (n)
TOTAL RETURN FOR THE PERIOD 5.24% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.08
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,355.80 = ERV
Five years ended 9/30/98 5 = (n)
TOTAL RETURN FOR THE PERIOD 6.28% = T
<PAGE> 4
VAN KAMPEN TAX FREE HIGH INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION TEN YEARS ENDED SEPTEMBER 30, 1998
Formula P(1+T)(n) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.08
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,829.76 = ERV
Ten years ended 9/30/98 10 = (n)
TOTAL RETURN FOR THE PERIOD 6.23% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.08
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,920.60 = ERV
Ten years ended 9/30/98 10 = (n)
TOTAL RETURN FOR THE PERIOD 6.74% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
Formula P(1+T)(n) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.08
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,666.13 = ERV
Inception through 9/30/98 13.26 = (n)
TOTAL RETURN FOR THE PERIOD 7.68% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.08
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,798.82 = ERV
Inception through 9/30/98 13.26 = (n)
TOTAL RETURN FOR THE PERIOD 8.07% = T
<PAGE> 5
VAN KAMPEN TAX FREE HIGH INCOME FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
Formula ERV - P
------------
P = T
Including Payment of the Sales Charge
Net Asset Value $15.08
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,666.13 = ERV
TOTAL RETURN FOR THE PERIOD 166.61% = T
Excluding Payment of the Sales Charge
Net Asset Value $ 15.08
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,798.82 = ERV
TOTAL RETURN FOR THE PERIOD 179.88% = T
<PAGE> 6
VAN KAMPEN TAX FREE HIGH INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
Formula P(1+T)(n) = ERV
Including Payment of the CDSC
Net Asset Value $15.07
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,035.88 = ERV
One Year period ended 9/30/98 1 = (n)
TOTAL RETURN FOR THE PERIOD 3.59% = T
Excluding Payment of the CDSC
Net Asset Value $15.07
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,075.88 = ERV
One Year period ended 9/30/98 1 = (n)
TOTAL RETURN FOR THE PERIOD 7.59% = T
TOTAL RETURN CALCULATION FIVE YEAR PERIOD THROUGH SEPTEMBER 30, 1998
Formula P(1+T)(n) = ERV
Including Payment of the CDSC
Net Asset Value $15.07
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,288.02 = ERV
Five year period through 9/30/98 5.00 = (n_
TOTAL RETURN FOR THE PERIOD 5.19% = T
Excluding Payment of the CDSC
Net Asset Value $15.07
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,302.73 = ERV
Five year period through 9/30/98 5.00 = (n)
TOTAL RETURN FOR THE PERIOD 5.43% = T
<PAGE> 7
VAN KAMPEN TAX FREE HIGH INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
Formula P(1+T)(n) = ERV
Including Payment of the CDSC
Net Asset Value $15.07
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,392.40 = ERV
Inception through 9/30/98 5.41 = (n)
TOTAL RETURN FOR THE PERIOD 6.31% = T
Excluding Payment of the CDSC
Net Asset Value $15.07
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,402.40 = ERV
Inception through 9/30/98 5.41 = (n)
TOTAL RETURN FOR THE PERIOD 6.45% = T
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
Formula ERV - P
------------
P = T
Including Payment of the CDSC
Net Asset Value $15.07
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,392.40 = ERV
TOTAL RETURN FOR THE PERIOD 39.24% = T
Excluding Payment of the CDSC
Net Asset Value $15.07
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,402.40 = ERV
TOTAL RETURN FOR THE PERIOD 40.24% = T
<PAGE> 8
VAN KAMPEN TAX FREE HIGH INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
Formula P(1+T)(n) = ERV
Including Payment of the CDSC
Net Asset Value $15.07
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,065.89 = ERV
One Year period ended 9/30/98 1 = (n)
TOTAL RETURN FOR THE PERIOD 6.59% = T
Excluding Payment of the CDSC
Net Asset Value $15.07
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,075.89 = ERV
One Year period ended 9/30/98 1 = (n)
TOTAL RETURN FOR THE PERIOD 7.59% = T
TOTAL RETURN CALCULATION FIVE YEAR PERIOD ENDED SEPTEMBER 30, 1998
Formula P(1+T)(n) = ERV
Including Payment of the CDSC
Net Asset Value $15.07
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,300.16 = ERV
Five year period ended 9/30/98 5 = (n)
TOTAL RETURN FOR THE PERIOD 5.39% = T
Excluding Payment of the CDSC
Net Asset Value $15.07
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,300.16 = ERV
Five year period ended 9/30/98 5 = (n)
TOTAL RETURN FOR THE PERIOD 5.39% = T
<PAGE> 9
VAN KAMPEN TAX FREE HIGH INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
Formula P(1+T)(n) = ERV
Including Payment of the CDSC
Net Asset Value $15.07
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,343.48 = ERV
Inception through 9/30/98 5.13 = (n)
TOTAL RETURN FOR THE PERIOD 5.92% = T
Excluding Payment of the CDSC
Net Asset Value $15.07
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,343.48 = ERV
Inception through 9/30/98 5.13 = (n)
TOTAL RETURN FOR THE PERIOD 5.92% = T
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
Formula ERV - P
-------------
P = T
Including Payment of the CDSC
Net Asset Value $15.07
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,343.48 = ERV
TOTAL RETURN FOR THE PERIOD 34.35% = T
Excluding Payment of the CDSC
Net Asset Value $15.07
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,343.48 = ERV
TOTAL RETURN FOR THE PERIOD 34.35% = T
<PAGE> 1
EXHIBIT (k)(iii)
VAN KAMPEN CALIFORNIA INSURED TAX FREE FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Formula: Current Annual Income Per Share
-------------------------------
Current Offering Price
<S> <C> <C>
Class A Shares $ .882
------
$19.40 = 4.55%
Class B Shares $ .750
------
$18.76 = 4.00%
Class C Shares $ .750
------
$18.75 = 4.00%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula Distribution Rate
-----------------
1 - Tax Rate
Class A Shares 4.55%
------
1-42% = 7.84%
Class B Shares 4.00%
------
1-42% = 6.90%
Class C Shares 4.00%
------
1-42% = 6.90%
</TABLE>
<PAGE> 2
VAN KAMPEN CALIFORNIA INSURED TAX FREE FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $18.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,060.30 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 6.03% = T
Excluding Payment of the Sales Charge
Net Asset Value $18.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,095.66 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 9.57% = T
TOTAL RETURN CALCULATION FIVE YEARS ENDED SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $18.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,270.02 = ERV
Five years ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 4.90% = T
Excluding Payment of the Sales Charge
Net Asset Value $18.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,312.85 = ERV
Five years ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 5.59% = T
</TABLE>
<PAGE> 3
VAN KAMPEN CALIFORNIA INSURED TAX FREE FUND - CLASS A SHARES
CALCULATION TEN YEARS ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $18.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,125.42 = ERV
Ten years ended 09/30/98 10 = n
TOTAL RETURN FOR THE PERIOD 7.83% = T
Excluding Payment of the Sales Charge
Net Asset Value $18.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,196.18 = ERV
Ten years ended 09/30/98 10 = n
TOTAL RETURN FOR THE PERIOD 8.18% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $18.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,679.76 = ERV
Inception through 09/30/98 12.80 = n
TOTAL RETURN FOR THE PERIOD 8.01% = T
Excluding Payment of the Sales Charge
Net Asset Value $18.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,770.06 = ERV
Inception through 09/30/98 12.80 = n
TOTAL RETURN FOR THE PERIOD 8.29% = T
</TABLE>
<PAGE> 4
VAN KAMPEN CALIFORNIA INSURED TAX FREE FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
Formula
ERV - P
-------- = T
P
Including Payment of the Sales Charge
Net Asset Value $18.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,679.76 = ERV
TOTAL RETURN FOR THE PERIOD 167.98% = T
Excluding Payment of the Sales Charge
Net Asset Value $18.77
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,770.06 = ERV
TOTAL RETURN FOR THE PERIOD 177.01% = T
</TABLE>
<PAGE> 5
VAN KAMPEN CALIFORNIA INSURED TAX FREE FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $18.76
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,057.27 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 5.73% = T
Excluding Payment of the CDSC
Net Asset Value $18.76
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,087.27 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 8.73% = T
TOTAL RETURN CALCULATION FIVE YEAR PERIOD ENDED SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $18.76
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,262.51 = ERV
Five year period ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 4.77% = T
Excluding Payment of the CDSC
Net Asset Value $18.76
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,262.51 = ERV
Five year period ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 4.77% = T
</TABLE>
<PAGE> 6
VAN KAMPEN CALIFORNIA INSURED TAX FREE FUND - CLASS B SHARES
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $18.76
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,348.32 = ERV
Inception through 09/30/98 5.41 = n
TOTAL RETURN FOR THE PERIOD 5.68% = T
Excluding Payment of the CDSC
Net Asset Value $18.76
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,348.32 = ERV
Inception through 09/30/98 5.41 = n
TOTAL RETURN FOR THE PERIOD 5.68% = T
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $18.76
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,348.32 = ERV
TOTAL RETURN FOR THE PERIOD 34.83% = T
Excluding Payment of the CDSC
Net Asset Value $18.76
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,348.32 = ERV
TOTAL RETURN FOR THE PERIOD 34.83% = T
</TABLE>
<PAGE> 7
VAN KAMPEN CALIFORNIA INSURED TAX FREE FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
Formula P(1+T)n = ERV
Including Payment of the CDSC
Net Asset Value $18.75
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,076.71 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 7.67% = T
Excluding Payment of the CDSC
Net Asset Value $18.75
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,086.71 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 8.67% = T
TOTAL RETURN CALCULATION FIVE YEAR PERIOD ENDED SEPTEMBER 30, 1998
Formula P(1+T)n = ERV
Including Payment of the CDSC
Net Asset Value $18.75
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,262.59 = ERV
Five year period ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 4.77% = T
Excluding Payment of the CDSC
Net Asset Value $18.75
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,262.59 = ERV
Five year period ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 4.77% = T
<PAGE> 8
VAN KAMPEN CALIFORNIA INSURED TAX FREE FUND - CLASS C SHARES
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
Formula P(1+T)n = ERV
Including Payment of the CDSC
Net Asset Value $18.75
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,297.03 = ERV
Inception through 09/30/98 5.13 = n
TOTAL RETURN FOR THE PERIOD 5.20% = T
Excluding Payment of the CDSC
Net Asset Value $18.75
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,297.03 = ERV
Inception through 09/30/98 5.13 = n
TOTAL RETURN FOR THE PERIOD 5.20% = T
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $18.75
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,297.03 = ERV
TOTAL RETURN FOR THE PERIOD 29.70% = T
Excluding Payment of the CDSC
Net Asset Value $18.75
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,297.03 = ERV
TOTAL RETURN FOR THE PERIOD 29.70% = T
<PAGE> 1
EXHIBIT (k)(iv)
VAN KAMPEN MUNICIPAL INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Formula Current Annual Income Per Share
-------------------------------
Current Offering Price
<S> <C> <C>
Class A Shares $ .846
------
$16.79 = 5.04%
Class B Shares $ .732
------
$15.98 = 4.58%
Class C Shares $ .732
------
$15.96 = 4.58%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula
Distribution Rate
---------------------
1 - Tax Rate
Class A Shares
5.04%
-------
1-36% = 7.88%
Class B Shares
4.58%
-------
1-36% = 7.16%
Class C Shares
4.58%
-------
1-36% = 7.16%
</TABLE>
<PAGE> 2
VAN KAMPEN MUNICIPAL INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $ 15.99
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,033.74 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 3.37% = T
Excluding Payment of the Sales Charge
Net Asset Value $ 15.99
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,085.66 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 8.57% = T
TOTAL RETURN CALCULATION FIVE YEARS ENDED SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $ 15.99
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,254.62 = ERV
Five years ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 4.64% = T
Excluding Payment of the Sales Charge
Net Asset Value $ 15.99
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,317.41 = ERV
Five years ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 5.67% = T
</TABLE>
<PAGE> 3
VAN KAMPEN MUNICIPAL INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $ 15.99
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,779.57 = ERV
Inception through 09/30/98 8.17 = n
TOTAL RETURN FOR THE PERIOD 7.31% = T
Excluding Payment of the Sales Charge
Net Asset Value $ 15.99
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,868.29 = ERV
Inception through 09/30/98 8.17 = n
TOTAL RETURN FOR THE PERIOD 7.95% = T
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
Formula ERV - P
-----------
P = T
Including Payment of the Sales Charge
Net Asset Value $ 15.99
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,779.57 = ERV
TOTAL RETURN FOR THE PERIOD 77.96% = T
Excluding Payment of the Sales Charge
Net Asset Value $ 15.99
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,868.29 = ERV
TOTAL RETURN FOR THE PERIOD 86.83% = T
</TABLE>
<PAGE> 4
VAN KAMPEN MUNICIPAL INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 15.98
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,037.87 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 3.79% = T
Excluding Payment of the CDSC
Net Asset Value $ 15.98
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,077.87 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 7.79% = T
TOTAL RETURN CALCULATION FIVE YEAR PERIOD ENDED SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 15.98
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,255.47 = ERV
One year period ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 4.66% = T
Excluding Payment of the CDSC
Net Asset Value $ 15.98
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,270.33 = ERV
One year period ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 4.90% = T
</TABLE>
<PAGE> 5
VAN KAMPEN MUNICIPAL INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 15.98
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,422.57 = ERV
Inception through 09/30/98 6.10 = n
TOTAL RETURN FOR THE PERIOD 5.95% = T
Excluding Payment of the CDSC
Net Asset Value $ 15.98
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,422.57 = ERV
Inception through 09/30/98 6.10 = n
TOTAL RETURN FOR THE PERIOD 5.95% = T
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
Formula ERV - P
---------
P = T
Including Payment of the CDSC
Net Asset Value $ 15.98
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,422.57 = ERV
TOTAL RETURN FOR THE PERIOD 42.26% = T
Excluding Payment of the CDSC
Net Asset Value $ 15.98
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,422.57 = ERV
TOTAL RETURN FOR THE PERIOD 42.26% = T
</TABLE>
<PAGE> 6
VAN KAMPEN MUNICIPAL INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 15.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,067.26 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 6.73% = T
Excluding Payment of the CDSC
Net Asset Value $ 15.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,077.26 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 7.73% = T
TOTAL RETURN CALCULATION FIVE YEAR PERIOD ENDED SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 15.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,268.88 = ERV
Five Year period ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 4.88% = T
Excluding Payment of the CDSC
Net Asset Value $ 15.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,268.88 = ERV
Five Year period ended 09/30/98 5 = n
TOTAL RETURN FOR THE PERIOD 4.88% = T
</TABLE>
<PAGE> 7
VAN KAMPEN MUNICIPAL INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 15.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,289.67 = ERV
Inception through 09/30/98 5.13 = n
TOTAL RETURN FOR THE PERIOD 5.08% = T
Excluding Payment of the CDSC
Net Asset Value $ 15.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,289.67 = ERV
Inception through 09/30/98 5.13 = n
TOTAL RETURN FOR THE PERIOD 5.08% = T
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
Formula ERV - P
---------
P = T
Including Payment of the CDSC
Net Asset Value $ 15.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,289.67 = ERV
TOTAL RETURN FOR THE PERIOD 28.97% = T
Excluding Payment of the CDSC
Net Asset Value $ 15.96
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,289.67 = ERV
TOTAL RETURN FOR THE PERIOD 28.97% = T
</TABLE>
<PAGE> 1
EXHIBIT (k)(v)
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED SEPTEMBER 30, 1998
Current Annual Income Per Share
--------------------------------
Current Offering Price
Class A Shares
$ .486
------
$11.09 = 4.38%
Class B Shares
$.414
-----
$10.71 = 3.87%
Class C Shares
$.414
-----
$10.71 = 3.87%
<PAGE> 2
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND
CALCULATION OF TAXABLE EQUIVALENT SEC YIELD
Formula
SEC Yield
------------
1 - Tax Rate
Class A Shares
3.69%
------
1-36.0% = 5.76%
Class B Shares
3.10%
------
1-36.0% = 4.84%
Class C Shares
3.06%
-----
1-36.0% = 4.79%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula
Distribution Rate
-----------------
1 - Tax Rate
Class A Shares
4.38%
------
1-36.0% = 6.84%
Class B Shares
3.87%
-----
1-36.0% = 6.05%
Class C Shares
3.87%
-----
1-36.0% = 6.05%
<PAGE> 3
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
Formula P(1+T)n = ERV
Including Payment of the Sales Charge
Net Asset Value $10.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,043.78 = ERV
One-year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 4.38% = T
Excluding Payment of the Sales Charge
Net Asset Value $10.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,078.85 = ERV
One-year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 7.88% = T
<PAGE> 4
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION FIVE YEAR PERIOD ENDED SEPTEMBER 30, 1998
Formula P(1+T)n = ERV
Including Payment of the Sales Charge
Net Asset Value 10.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,301.04 = ERV
Five-year period ended 09/30/98 5.00 = n
TOTAL RETURN FOR THE PERIOD 5.40% = T
Excluding Payment of the Sales Charge
Net Asset Value $10.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,344.77 = ERV
Five-year period ended 09/30/98 5.00 = n
TOTAL RETURN FOR THE PERIOD 6.10% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
Formula P(1+T)n = ERV
Including Payment of the Sales Charge
Net Asset Value $10.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,379.60 = ERV
Inception through 09/30/98 5.34 = n
TOTAL RETURN FOR THE PERIOD 6.21% = T
Excluding Payment of the Sales Charge
Net Asset Value $10.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,426.46 = ERV
Inception through 09/30/98 5.34 = n
TOTAL RETURN FOR THE PERIOD 6.88% = T
<PAGE> 5
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
Formula ERV - P
---------
P = T
Including Payment of the Sales Charge
Net Asset Value $10.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,379.60 = ERV
TOTAL RETURN FOR THE PERIOD 37.96% = T
Excluding Payment of the Sales Charge
Net Asset Value $10.73
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,426.46 = ERV
TOTAL RETURN FOR THE PERIOD 42.65% = T
<PAGE> 6
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
Formula P(1+T)n = ERV
Including Payment of the CDSC
Net Asset Value $10.71
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,040.63 = ERV
One-year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 4.06% = T
Excluding Payment of the CDSC
Net Asset Value $10.71
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,070.63 = ERV
One-year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 7.06% = T
<PAGE> 7
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION FIVE YEAR PERIOD ENDED SEPTEMBER 30, 1998
Formula P(1+T)n = ERV
Including Payment of the CDSC
Net Asset Value $10.71
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,296.86 = ERV
Inception through 09/30/98 5.00 = n
TOTAL RETURN FOR THE PERIOD 5.34% = T
Excluding Payment of the CDSC
Net Asset Value $10.71
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,296.86 = ERV
Inception through 09/30/98 5.00 = n
TOTAL RETURN FOR THE PERIOD 5.34% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
Formula P(1+T)n = ERV
Including Payment of the CDSC
Net Asset Value $10.71
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,371.51 = ERV
Inception through 09/30/98 5.34 = n
TOTAL RETURN FOR THE PERIOD 6.09% = T
Excluding Payment of the CDSC
Net Asset Value $10.71
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,371.51 = ERV
Inception through 09/30/98 5.34 = n
TOTAL RETURN FOR THE PERIOD 6.09% = T
<PAGE> 8
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
Formula ERV - P
---------
P = T
Including Payment of the CDSC
Net Asset Value $10.71
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,371.51 = ERV
TOTAL RETURN FOR THE PERIOD 37.15% = T
Excluding Payment of the CDSC
Net Asset Value $10.71
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,371.51 = ERV
TOTAL RETURN FOR THE PERIOD 37.15% = T
<PAGE> 9
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
Formula P(1+T)n = ERV
Including Payment of the CDSC
Net Asset Value $10.71
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,060.64 = ERV
One-year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 6.06% = T
Excluding Payment of the CDSC
Net Asset Value $10.71
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,070.64 = ERV
One-year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 7.06% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
Formula P(1+T)n = ERV
Including Payment of the CDSC
Net Asset Value $10.71
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,279.03 = ERV
Inception through 09/30/98 4.95 = n
TOTAL RETURN FOR THE PERIOD 5.10% = T
Excluding Payment of the CDSC
Net Asset Value $10.71
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,279.03 = ERV
Inception through 09/30/98 4.95 = n
TOTAL RETURN FOR THE PERIOD 5.10% = T
<PAGE> 10
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
Formula ERV - P
---------
P = T
Including Payment of the CDSC
Net Asset Value $10.71
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,279.03 = ERV
TOTAL RETURN FOR THE PERIOD 27.90% = T
Excluding Payment of the CDSC
Net Asset Value $10.71
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,279.03 ERV
TOTAL RETURN FOR THE PERIOD 27.90% = T
<PAGE> 1
EXHIBIT (k)(vi)
VAN KAMPEN FLORIDA INSURED TAX FREE INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Current Annual Income Per Share
-------------------------------
Current Offering Price
<S> <C>> <C>
Class A Shares
$ .774
--------
$16.71 = 4.63%
Class B Shares
$ .660
--------
$15.93 = 4.14%
Class C Shares
$ .660
--------
$15.94 = 4.14%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula Distribution Rate
---------------------
1 - Tax Rate
Class A Shares
4.63%
-----
1-36% = 7.23%
Class B Shares
4.14%
-----
1-36% = 6.47%
Class C Shares
4.14%
-----
1-36% = 6.47%
</TABLE>
<PAGE> 2
VAN KAMPEN FLORIDA INSURED TAX FREE INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $ 15.92
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,043.03 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 4.30% = T
Excluding Payment of the Sales Charge
Net Asset Value $ 15.92
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,094.95 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 9.50% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $ 15.92
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,316.19 = ERV
Inception through 09/30/98 4.18 = n
TOTAL RETURN FOR THE PERIOD 6.79% = T
Excluding Payment of the Sales Charge
Net Asset Value $ 15.92
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,381.55 = ERV
Inception through 09/30/98 4.18 = n
TOTAL RETURN FOR THE PERIOD 8.04% = T
</TABLE>
<PAGE> 3
VAN KAMPEN FLORIDA INSURED TAX FREE INCOME FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
Formula ERV - P
---------
P = T
Including Payment of the Sales Charge
Net Asset Value $ 15.92
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,316.19 = ERV
TOTAL RETURN FOR THE PERIOD 31.62% = T
Excluding Payment of the Sales Charge
Net Asset Value $ 15.92
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,381.55 = ERV
TOTAL RETURN FOR THE PERIOD 38.16% = T
</TABLE>
<PAGE> 4
VAN KAMPEN FLORIDA INSURED TAX FREE INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 15.93
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,046.95 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 4.70% = T
Excluding Payment of the CDSC
Net Asset Value $ 15.93
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,086.95 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 8.70% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 15.93
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,325.73 = ERV
Inception through 09/30/98 4.18 = n
TOTAL RETURN FOR THE PERIOD 6.98% = T
Excluding Payment of the CDSC
Net Asset Value $ 15.93
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,340.73 = ERV
Inception through 09/30/98 4.18 = n
TOTAL RETURN FOR THE PERIOD 7.27% = T
</TABLE>
<PAGE> 5
VAN KAMPEN FLORIDA INSURED TAX FREE INCOME FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
Formula ERV - P
---------
P = T
Including Payment of the CDSC
Net Asset Value $ 15.93
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,325.73 = ERV
TOTAL RETURN FOR THE PERIOD 32.57% = T
Excluding Payment of the CDSC
Net Asset Value $ 15.93
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,340.73 = ERV
TOTAL RETURN FOR THE PERIOD 34.07% = T
</TABLE>
<PAGE> 6
VAN KAMPEN FLORIDA INSURED TAX FREE INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 15.94
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,076.14 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 7.61% = T
Excluding Payment of the CDSC
Net Asset Value $ 15.94
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,086.14 = ERV
One year period ended 09/30/98 1 = n
TOTAL RETURN FOR THE PERIOD 8.61% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $ 15.94
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,341.49 = ERV
Inception through 09/30/98 4.18 = n
TOTAL RETURN FOR THE PERIOD 7.28% = T
Excluding Payment of the CDSC
Net Asset Value $ 15.94
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,341.49 = ERV
Inception through 09/30/98 4.18 = n
TOTAL RETURN FOR THE PERIOD 7.28% = T
</TABLE>
<PAGE> 7
VAN KAMPEN FLORIDA INSURED TAX FREE INCOME FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C>
Formula
ERV - P
---------
P = T
Including Payment of the CDSC
Net Asset Value $ 15.94
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,341.49 = ERV
TOTAL RETURN FOR THE PERIOD 34.15% = T
Excluding Payment of the CDSC
Net Asset Value $ 15.94
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,341.49 = ERV
TOTAL RETURN FOR THE PERIOD 34.15% = T
</TABLE>
<PAGE> 1
EXHIBIT (k)(vii)
VAN KAMPEN NEW YORK TAX FREE INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED SEPTEMBER 30, 1998
Current Annual Income Per Share
-------------------------------
Current Offering Price
Class A Shares
$.798
-----
$17.03 = 4.69%
Class B Shares
$ .690
------
$16.21 = 4.26%
Class C Shares
$ .690
------
$16.20 = 4.26%
<PAGE> 2
VAN KAMPEN NEW YORK TAX FREE INCOME FUND
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula
Distribution Rate
-----------------
1 - Tax Rate
Class A Shares
4.69%
-----
1-40.4% = 7.87%
Class B Shares
4.26%
-----
1-40.4% = 7.15%
Class C Shares
4.26%
-----
1-40.4% = 7.15%
<PAGE> 3
VAN KAMPEN NEW YORK TAX FREE INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
Formula P(1+T)(n) = ERV
Including Payment of the Sales Charge
Net Asset Value $16.22
Initial Investment $1,000.00 = P
Ending Redeemable Value $1, 054.25 = ERV
One Year period ended 9/30/98 1 = (n)
TOTAL RETURN FOR THE PERIOD 5.42% = T
Excluding Payment of the Sales Charge
Net Asset Value $16.22
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,106.76 = ERV
One Year period ended 9/30/98 1 = (n)
TOTAL RETURN FOR THE PERIOD 10.68% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
Formula P(1+T)(n) = ERV
Including Payment of the Sales Charge
Net Asset Value $16.22
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,355.34 = ERV
Inception through 9/30/98 4.18 = (n)
TOTAL RETURN FOR THE PERIOD 7.55% = T
Excluding Payment of the Sales Charge
Net Asset Value $16.22
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,422.77 = ERV
Inception through 9/30/98 4.18 = (n)
TOTAL RETURN FOR THE PERIOD 8.80% = T
<PAGE> 4
VAN KAMPEN NEW YORK TAX FREE INCOME FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
Formula ERV - P
-------
P = T
Including Payment of the Sales Charge
Net Asset Value $16.22
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,355.34 = ERV
TOTAL RETURN FOR THE PERIOD 35.53% = T
Excluding Payment of the Sales Charge
Net Asset Value $16.22
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,422.77 = ERV
TOTAL RETURN FOR THE PERIOD 42.28% = T
<PAGE> 5
VAN KAMPEN NEW YORK TAX FREE INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
Formula P(1+T)(n) = ERV
Including Payment of the CDSC
Net Asset Value $16.21
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,059.30 = ERV
One Year period ended 9/30/98 1 = (n)
TOTAL RETURN FOR THE PERIOD 5.93% = T
Excluding Payment of the CDSC
Net Asset Value $16.21
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,099.30 = ERV
One Year period ended 9/30/98 1 = (n)
TOTAL RETURN FOR THE PERIOD 9.93 % = T
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
Formula P(1+T)(n) = ERV
Including Payment of the CDSC
Net Asset Value $16.21
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,365.43 = ERV
Inception through 9/30/98 4.18 = (n)
TOTAL RETURN FOR THE PERIOD 7.74% = T
Excluding Payment of the CDSC
Net Asset Value $16.21
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,380.43 = ERV
Inception through 9/30/98 4.18 = (n)
TOTAL RETURN FOR THE PERIOD 8.02% = T
<PAGE> 6
VAN KAMPEN NEW YORK TAX FREE INCOME FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $16.21
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,365.43 = ERV
TOTAL RETURN FOR THE PERIOD 36.54% = T
Excluding Payment of the CDSC
Net Asset Value $16.21
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,380.43 = ERV
TOTAL RETURN FOR THE PERIOD 38.04% = T
<PAGE> 7
VAN KAMPEN NEW YORK TAX FREE INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED SEPTEMBER 30, 1998
Formula P(1+T)(n) = ERV
Including Payment of the CDSC
Net Asset Value $16.20
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,088.62 = ERV
One Year period ended 9/30/98 1 = (n)
TOTAL RETURN FOR THE PERIOD 8.86% = T
Excluding Payment of the CDSC
Net Asset Value $16.20
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,098.62 = ERV
One Year period ended 9/30/98 1 = (n)
TOTAL RETURN FOR THE PERIOD 9.86% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH SEPTEMBER 30, 1998
Formula P(1+T)(n) = ERV
Including Payment of the CDSC
Net Asset Value $16.20
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,379.59 = ERV
Inception through 9/30/98 4.18 = (n)
TOTAL RETURN FOR THE PERIOD 8.00% = T
Excluding Payment of the CDSC
Net Asset Value $16.20
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,379.59 = ERV
Inception through 9/30/98 4.18 = (n)
TOTAL RETURN FOR THE PERIOD 8.00% = T
<PAGE> 8
VAN KAMPEN NEW YORK TAX FREE INCOME FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH SEPTEMBER 30, 1998
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $16.20
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,379.59 = ERV
TOTAL RETURN FOR THE PERIOD 37.96% = T
Excluding Payment of the CDSC
Net Asset Value $16.20
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,379.59 = ERV
TOTAL RETURN FOR THE PERIOD 37.96% = T
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 11
[NAME] INSURED TF CLASS A
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 1,287,475,348<F1>
[INVESTMENTS-AT-VALUE] 1,430,623,524<F1>
[RECEIVABLES] 46,065,562<F1>
[ASSETS-OTHER] 26,238<F1>
[OTHER-ITEMS-ASSETS] 15,577<F1>
[TOTAL-ASSETS] 1,476,730,901<F1>
[PAYABLE-FOR-SECURITIES] 40,154,755<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 3,992,561<F1>
[TOTAL-LIABILITIES] 44,147,316<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,199,841,126
[SHARES-COMMON-STOCK] 67,843,044
[SHARES-COMMON-PRIOR] 65,380,120
[ACCUMULATED-NII-CURRENT] (521,990)<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] 15,232,609<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 143,148,176<F1>
[NET-ASSETS] 1,353,881,347
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 58,756,607<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (9,646,069)<F1>
[NET-INVESTMENT-INCOME] 49,110,538<F1>
[REALIZED-GAINS-CURRENT] 15,077,312<F1>
[APPREC-INCREASE-CURRENT] 12,112,058<F1>
[NET-CHANGE-FROM-OPS] 76,299,908<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (47,397,474)
[DISTRIBUTIONS-OF-GAINS] (2,262,642)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 24,717,457
[NUMBER-OF-SHARES-REDEEMED] (24,001,702)
[SHARES-REINVESTED] 1,747,169
[NET-CHANGE-IN-ASSETS] 70,375,960
[ACCUMULATED-NII-PRIOR] 164,030<F1>
[ACCUMULATED-GAINS-PRIOR] 2,556,582<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 5,135,396<F1>
[INTEREST-EXPENSE] 8,938<F1>
[GROSS-EXPENSE] 9,646,069<F1>
[AVERAGE-NET-ASSETS] 1,290,047,822
[PER-SHARE-NAV-BEGIN] 19,631
[PER-SHARE-NII] 0.710
[PER-SHARE-GAIN-APPREC] 0.371
[PER-SHARE-DIVIDEND] (0.720)
[PER-SHARE-DISTRIBUTIONS] (0.036)
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 19.956
[EXPENSE-RATIO] 0.90
[AVG-DEBT-OUTSTANDING] 199,100<F1>
[AVG-DEBT-PER-SHARE] 0.003<F1>
<FN>
<F1>This item relates to the Fund on a composite
basis and not or a class basis.
</FN>
</TABLE>
<PAGE> 2
[ARTICLE] 6
[SERIES]
[NUMBER] 12
[NAME] INSURED TF CLASS B
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 1,287,475,348<F1>
[INVESTMENTS-AT-VALUE] 1,430,623,524<F1>
[RECEIVABLES] 46,065,562<F1>
[ASSETS-OTHER] 26,238<F1>
[OTHER-ITEMS-ASSETS] 15,577<F1>
[TOTAL-ASSETS] 1,476,730,901<F1>
[PAYABLE-FOR-SECURITIES] 40,154,755<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 3,992,561<F1>
[TOTAL-LIABILITIES] 44,147,316<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 68,091,721
[SHARES-COMMON-STOCK] 3,601,092
[SHARES-COMMON-PRIOR] 3,572,287
[ACCUMULATED-NII-CURRENT] (521,990)<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] 15,232,609<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 143,148,176<F1>
[NET-ASSETS] 71,867,314
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 58,756,607<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (9,646,069)<F1>
[NET-INVESTMENT-INCOME] 49,110,538<F1>
[REALIZED-GAINS-CURRENT] 15,077,312<F1>
[APPREC-INCREASE-CURRENT] 12,112,058<F1>
[NET-CHANGE-FROM-OPS] 76,299,908<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (2,215,435)
[DISTRIBUTIONS-OF-GAINS] (128,797)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 517,918
[NUMBER-OF-SHARES-REDEEMED] (552,971)
[SHARES-REINVESTED] 63,858
[NET-CHANGE-IN-ASSETS] 1,730,780
[ACCUMULATED-NII-PRIOR] 164,030<F1>
[ACCUMULATED-GAINS-PRIOR] 2,556,582<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 5,135,396<F1>
[INTEREST-EXPENSE] 8,938<F1>
[GROSS-EXPENSE] 9,646,069<F1>
[AVERAGE-NET-ASSETS] 71,341,680
[PER-SHARE-NAV-BEGIN] 19.634
[PER-SHARE-NII] 0.598
[PER-SHARE-GAIN-APPREC] 0.370
[PER-SHARE-DIVIDEND] (0.609)
[PER-SHARE-DISTRIBUTIONS] (0.036)
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 19.957
[EXPENSE-RATIO] 1.66
[AVG-DEBT-OUTSTANDING] 199,100<F1>
[AVG-DEBT-PER-SHARE] 0.003<F1>
<FN>
<F1>This item relates to the Fund on a composite
basis and not on a class basis
</FN>
</TABLE>
<PAGE> 3
[ARTICLE] 6
[SERIES]
[NUMBER] 13
[NAME] INSURED TF CLASS C
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 1,287,475,348<F1>
[INVESTMENTS-AT-VALUE] 1,430,623,524<F1>
[RECEIVABLES] 46,065,562<F1>
[ASSETS-OTHER] 26,238<F1>
[OTHER-ITEMS-ASSETS] 15,577<F1>
[TOTAL-ASSETS] 1,476,730,901<F1>
[PAYABLE-FOR-SECURITIES] 40,154,755<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 3,992,561<F1>
[TOTAL-LIABILITIES] 44,147,316<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 6,791,943
[SHARES-COMMON-STOCK] 342,562
[SHARES-COMMON-PRIOR] 284,125
[ACCUMULATED-NII-CURRENT] (521,990)<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] 15,232,609<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 143,148,176<F1>
[NET-ASSETS] 6,834,924
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 58,756,607<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (9,646,069)<F1>
[NET-INVESTMENT-INCOME] 49,110,538<F1>
[REALIZED-GAINS-CURRENT] 15,077,312<F1>
[APPREC-INCREASE-CURRENT] 12,112,058<F1>
[NET-CHANGE-FROM-OPS] 76,299,908<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (183,649)
[DISTRIBUTIONS-OF-GAINS] (9,846)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 621,935
[NUMBER-OF-SHARES-REDEEMED] (570,061)
[SHARES-REINVESTED] 6,563
[NET-CHANGE-IN-ASSETS] 1,257,572
[ACCUMULATED-NII-PRIOR] 164,030<F1>
[ACCUMULATED-GAINS-PRIOR] 2,556,582<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 5,135,396<F1>
[INTEREST-EXPENSE] 8,938<F1>
[GROSS-EXPENSE] 9,646,069<F1>
[AVERAGE-NET-ASSETS] 5,908,367
[PER-SHARE-NAV-BEGIN] 19.630
[PER-SHARE-NII] 0.594
[PER-SHARE-GAIN-APPREC] 0.373
[PER-SHARE-DIVIDEND] (0.609)
[PER-SHARE-DISTRIBUTIONS] (0.036)
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 19.952
[EXPENSE-RATIO] 1.66
[AVG-DEBT-OUTSTANDING] 199,100<F1>
[AVG-DEBT-PER-SHARE] 0.003<F1>
<FN>
<F1>This item relates to the fund on a composite
basis and not on a class basis
</FN>
</TABLE>
<PAGE> 4
[ARTICLE] 6
[SERIES]
[NUMBER] 21
[NAME] T.F.H.I. CLASS A
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 1,048,931,160<F1>
[INVESTMENTS-AT-VALUE] 1,117,693,268<F1>
[RECEIVABLES] 39,909,411<F1>
[ASSETS-OTHER] 38,608<F1>
[OTHER-ITEMS-ASSETS] 0<F1>
[TOTAL-ASSETS] 1,157,641,287<F1>
[PAYABLE-FOR-SECURITIES] 20,696,273<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 22,738,083<F1>
[TOTAL-LIABILITIES] 43,434,356<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 814,716,102
[SHARES-COMMON-STOCK] 51,164,482
[SHARES-COMMON-PRIOR] 47,576,526
[ACCUMULATED-NII-CURRENT] (9,019,837)<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (95,598,361)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 68,326,173<F1>
[NET-ASSETS] 771,367,472
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 51,036,492<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (8,881,386)<F1>
[NET-INVESTMENT-INCOME] 42,155,106<F1>
[REALIZED-GAINS-CURRENT] (861,253)<F1>
[APPREC-INCREASE-CURRENT] 17,628,426<F1>
[NET-CHANGE-FROM-OPS] 58,922,279<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (30,895,725)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 7,418,156
[NUMBER-OF-SHARES-REDEEMED] (4,753,839)
[SHARES-REINVESTED] 923,639
[NET-CHANGE-IN-ASSETS] 65,092,734
[ACCUMULATED-NII-PRIOR] (9,046,242)<F1>
[ACCUMULATED-GAINS-PRIOR] (94,737,108)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 3,672,538<F1>
[INTEREST-EXPENSE] 132,020<F1>
[GROSS-EXPENSE] 8,881,386<F1>
[AVERAGE-NET-ASSETS] 730,577,765
[PER-SHARE-NAV-BEGIN] 14.845
[PER-SHARE-NII] 0.643
[PER-SHARE-GAIN-APPREC] 0.217
[PER-SHARE-DIVIDEND] (0.629)
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 15.076
[EXPENSE-RATIO] 0.92
[AVG-DEBT-OUTSTANDING] 3,003,400<F1>
[AVG-DEBT-PER-SHARE] 2,079,005<F1>
<FN>
<F1>THIS ITEM RELATES TO THE FUND ON A COMPOSITE BASIS AND NOT ON A CLASS BASIS
</FN>
</TABLE>
<PAGE> 5
[ARTICLE] 6
[SERIES]
[NUMBER] 22
[NAME] T.F.H.I. CLASS B
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 1,048,931,160<F1>
[INVESTMENTS-AT-VALUE] 1,117,693,268<F1>
[RECEIVABLES] 39,909,411<F1>
[ASSETS-OTHER] 38,608<F1>
[OTHER-ITEMS-ASSETS] 0<F1>
[TOTAL-ASSETS] 1,157,641,287<F1>
[PAYABLE-FOR-SECURITIES] 20,696,273<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 22,738,083<F1>
[TOTAL-LIABILITIES] 43,434,356<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 273,821,581
[SHARES-COMMON-STOCK] 18,554,723
[SHARES-COMMON-PRIOR] 15,466,416
[ACCUMULATED-NII-CURRENT] (9,019,837)<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (95,598,361)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 68,326,173<F1>
[NET-ASSETS] 279,631,431
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 51,036,492<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (8,881,386)<F1>
[NET-INVESTMENT-INCOME] 42,155,106<F1>
[REALIZED-GAINS-CURRENT] (861,253)<F1>
[APPREC-INCREASE-CURRENT] 17,628,426<F1>
[NET-CHANGE-FROM-OPS] 58,922,279<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (9,369,462)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 4,566,294
[NUMBER-OF-SHARES-REDEEMED] (1,723,537)
[SHARES-REINVESTED] 245,550
[NET-CHANGE-IN-ASSETS] 50,055,443
[ACCUMULATED-NII-PRIOR] (9,046,242)<F1>
[ACCUMULATED-GAINS-PRIOR] (94,737,108)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 3,672,538<F1>
[INTEREST-EXPENSE] 132,020<F1>
[GROSS-EXPENSE] 8,881,386<F1>
[AVERAGE-NET-ASSETS] 255,082,605
[PER-SHARE-NAV-BEGIN] 14.844
[PER-SHARE-NII] 0.545
[PER-SHARE-GAIN-APPREC] 0.229
[PER-SHARE-DIVIDEND] (0.547)
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 15.071
[EXPENSE-RATIO] 1.68
[AVG-DEBT-OUTSTANDING] 3,003,400<F1>
[AVG-DEBT-PER-SHARE] 753,948<F1>
<FN>
<F1>THIS ITEM RELATES TO THE FUND ON A COMPOSITE BASIS AND NOT ON A CLASS BASIS
</FN>
</TABLE>
<PAGE> 6
[ARTICLE] 6
[SERIES]
[NUMBER] 23
[NAME] T.F.H.I. CLASS C
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 1,048,931,160<F1>
[INVESTMENTS-AT-VALUE] 1,117,693,268<F1>
[RECEIVABLES] 39,909,411<F1>
[ASSETS-OTHER] 38,608<F1>
[OTHER-ITEMS-ASSETS] 0<F1>
[TOTAL-ASSETS] 1,157,641,287<F1>
[PAYABLE-FOR-SECURITIES] 20,696,273<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 27,738,083<F1>
[TOTAL-LIABILITIES] 43,434,356<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 61,961,273
[SHARES-COMMON-STOCK] 4,194,703
[SHARES-COMMON-PRIOR] 2,602,078
[ACCUMULATED-NII-CURRENT] (9,019,837)<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (95,598,361)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 68,326,173<F1>
[NET-ASSETS] 63,208,028
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 51,036,492<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (8,881,386)<F1>
[NET-INVESTMENT-INCOME] 42,155,106<F1>
[REALIZED-GAINS-CURRENT] (861,253)<F1>
[APPREC-INCREASE-CURRENT] 17,628,426<F1>
[NET-CHANGE-FROM-OPS] 58,922,279<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (1,863,514)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,827,970
[NUMBER-OF-SHARES-REDEEMED] (306,853)
[SHARES-REINVESTED] 71,508
[NET-CHANGE-IN-ASSETS] 24,586,748
[ACCUMULATED-NII-PRIOR] (9,046,242)<F1>
[ACCUMULATED-GAINS-PRIOR] (94,737,108)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 3,672,538<F1>
[INTEREST-EXPENSE] 132,020<F1>
[GROSS-EXPENSE] 8,881,386<F1>
[AVERAGE-NET-ASSETS] 50,962,553
[PER-SHARE-NAV-BEGIN] 14.842
[PER-SHARE-NII] 0.549
[PER-SHARE-GAIN-APPREC] 0.225
[PER-SHARE-DIVIDEND] (0.547)
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 15.069
[EXPENSE-RATIO] 1.68
[AVG-DEBT-OUTSTANDING] 3,003,400<F1>
[AVG-DEBT-PER-SHARE] 170,447<F1>
<FN>
<F1>THIS ITEM RELATES TO THE FUND ON A COMPOSITE BASIS AND NOT ON A CLASS BASIS
</FN>
</TABLE>
<PAGE> 7
[ARTICLE] 6
[SERIES]
[NUMBER] 31
[NAME] CAL INS CLASS A
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 175,013,797<F1>
[INVESTMENTS-AT-VALUE] 194,052,785<F1>
[RECEIVABLES] 2,390,498<F1>
[ASSETS-OTHER] 19,046<F1>
[OTHER-ITEMS-ASSETS] 189,076<F1>
[TOTAL-ASSETS] 196,651,405<F1>
[PAYABLE-FOR-SECURITIES] 0<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 757,272<F1>
[TOTAL-LIABILITIES] 757,272<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 135,566,795
[SHARES-COMMON-STOCK] 8,043,260
[SHARES-COMMON-PRIOR] 7,688,471
[ACCUMULATED-NII-CURRENT] 252,535<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (2,188,087)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 19,038,988<F1>
[NET-ASSETS] 150,959,105
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 7,517,715<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (1,410,770)<F1>
[NET-INVESTMENT-INCOME] 6,106,945<F1>
[REALIZED-GAINS-CURRENT] 1,695,395<F1>
[APPREC-INCREASE-CURRENT] 3,409,163<F1>
[NET-CHANGE-FROM-OPS] 11,211,503<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (5,158,867)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 896,618
[NUMBER-OF-SHARES-REDEEMED] (709,317)
[SHARES-REINVESTED] 167,488
[NET-CHANGE-IN-ASSETS] 10,304,495
[ACCUMULATED-NII-PRIOR] 486,148<F1>
[ACCUMULATED-GAINS-PRIOR] (3,883,482)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 648,214<F1>
[INTEREST-EXPENSE] 0<F1>
[GROSS-EXPENSE] 1,410,770<F1>
[AVERAGE-NET-ASSETS] 143,035,989
[PER-SHARE-NAV-BEGIN] 18.294
[PER-SHARE-NII] 0.638
[PER-SHARE-GAIN-APPREC] 0.498
[PER-SHARE-DIVIDEND] (0.662)
[PER-SHARE-DISTRIBUTIONS] (0.000)
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 18.768
[EXPENSE-RATIO] 0.88
[AVG-DEBT-OUTSTANDING] 0<F1>
[AVG-DEBT-PER-SHARE] 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis
</FN>
</TABLE>
<PAGE> 8
[ARTICLE] 6
[SERIES]
[NUMBER] 32
[NAME] CAL INS CLASS B
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 175,013,797<F1>
[INVESTMENTS-AT-VALUE] 194,052,785<F1>
[RECEIVABLES] 2,390,498<F1>
[ASSETS-OTHER] 19,046<F1>
[OTHER-ITEMS-ASSETS] 189,076<F1>
[TOTAL-ASSETS] 196,651,405<F1>
[PAYABLE-FOR-SECURITIES] 0<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 757,272<F1>
[TOTAL-LIABILITIES] 757,272<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 38,277,053
[SHARES-COMMON-STOCK] 2,140,606
[SHARES-COMMON-PRIOR] 1,696,407
[ACCUMULATED-NII-CURRENT] 252,535<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (2,188,087)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 19,038,988<F1>
[NET-ASSETS] 40,153,059
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 7,517,715<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (1,410,770)<F1>
[NET-INVESTMENT-INCOME] 6,106,945<F1>
[REALIZED-GAINS-CURRENT] 1,695,395<F1>
[APPREC-INCREASE-CURRENT] 3,409,163<F1>
[NET-CHANGE-FROM-OPS] 11,211,503<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (1,050,450)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 595,781
[NUMBER-OF-SHARES-REDEEMED] (188,629)
[SHARES-REINVESTED] 37,047
[NET-CHANGE-IN-ASSETS] 9,126,884
[ACCUMULATED-NII-PRIOR] 486,148<F1>
[ACCUMULATED-GAINS-PRIOR] (3,883,482)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 648,214<F1>
[INTEREST-EXPENSE] 0<F1>
[GROSS-EXPENSE] 1,410,770<F1>
[AVERAGE-NET-ASSETS] 34,327,820
[PER-SHARE-NAV-BEGIN] 18.289
[PER-SHARE-NII] 0.526
[PER-SHARE-GAIN-APPREC] 0.506
[PER-SHARE-DIVIDEND] (0.563)
[PER-SHARE-DISTRIBUTIONS] (0.000)
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 18.758
[EXPENSE-RATIO] 1.64
[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>
<PAGE> 9
[ARTICLE] 6
[SERIES]
[NUMBER] 33
[NAME] CAL INS CLASS C
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 175,013,797<F1>
[INVESTMENTS-AT-VALUE] 194,052,785<F1>
[RECEIVABLES] 2,390,498<F1>
[ASSETS-OTHER] 19,046<F1>
[OTHER-ITEMS-ASSETS] 189,076<F1>
[TOTAL-ASSETS] 196,651,405<F1>
[PAYABLE-FOR-SECURITIES] 0<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 757,272<F1>
[TOTAL-LIABILITIES] 757,272<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 4,946,849
[SHARES-COMMON-STOCK] 254,972
[SHARES-COMMON-PRIOR] 206,908
[ACCUMULATED-NII-CURRENT] 252,535<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (2,188,087)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 19,038,988<F1>
[NET-ASSETS] 4,781,969
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 7,517,715<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (1,410,770)<F1>
[NET-INVESTMENT-INCOME] 6,106,945<F1>
[REALIZED-GAINS-CURRENT] 1,695,395<F1>
[APPREC-INCREASE-CURRENT] 3,409,163<F1>
[NET-CHANGE-FROM-OPS] 11,211,503<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (131,241)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 114,887
[NUMBER-OF-SHARES-REDEEMED] (70,739)
[SHARES-REINVESTED] 3,916
[NET-CHANGE-IN-ASSETS] 998,406
[ACCUMULATED-NII-PRIOR] 486,148<F1>
[ACCUMULATED-GAINS-PRIOR] (3,883,482)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 648,214<F1>
[INTEREST-EXPENSE] 0<F1>
[GROSS-EXPENSE] 1,410,770<F1>
[AVERAGE-NET-ASSETS] 4,280,818
[PER-SHARE-NAV-BEGIN] 18.286
[PER-SHARE-NII] 0.529
[PER-SHARE-GAIN-APPREC] 0.502
[PER-SHARE-DIVIDEND] (0.563)
[PER-SHARE-DISTRIBUTIONS] (0.000)
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 18.754
[EXPENSE-RATIO] 1.63
[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>
<PAGE> 10
[ARTICLE] 6
[SERIES]
[NUMBER] 41
[NAME] MUNI INC CLASS A
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 951,139,270<F1>
[INVESTMENTS-AT-VALUE] 1,042,279,757<F1>
[RECEIVABLES] 21,665,500<F1>
[ASSETS-OTHER] 18,002<F1>
[OTHER-ITEMS-ASSETS] 0<F1>
[TOTAL-ASSETS] 1,063,963,259<F1>
[PAYABLE-FOR-SECURITIES] 19,611,246<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 42,176,796<F1>
[TOTAL-LIABILITIES] 61,788,042<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 718,935,008
[SHARES-COMMON-STOCK] 49,321,491
[SHARES-COMMON-PRIOR] 48,593,827
[ACCUMULATED-NII-CURRENT] 2,282,049<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (11,247,639)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 90,902,720<F1>
[NET-ASSETS] 788,717,387
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 48,555,300<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (7,801,638)<F1>
[NET-INVESTMENT-INCOME] 40,753,662<F1>
[REALIZED-GAINS-CURRENT] 6,553,399<F1>
[APPREC-INCREASE-CURRENT] 6,332,209<F1>
[NET-CHANGE-FROM-OPS] 53,639,270<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (31,284,803)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 32,662,126
[NUMBER-OF-SHARES-REDEEMED] (32,937,857)
[SHARES-REINVESTED] 1,003,395
[NET-CHANGE-IN-ASSETS] 22,552,481
[ACCUMULATED-NII-PRIOR] 535,106<F1>
[ACCUMULATED-GAINS-PRIOR] (17,801,038)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 3,545,745<F1>
[INTEREST-EXPENSE] 252,574<F1>
[GROSS-EXPENSE] 7,801,638<F1>
[AVERAGE-NET-ASSETS] 776,555,325
[PER-SHARE-NAV-BEGIN] 15.767
[PER-SHARE-NII] 0.664
[PER-SHARE-GAIN-APPREC] 0.195
[PER-SHARE-DIVIDEND] (0.635)
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 15.991
[EXPENSE-RATIO] 0.87
[AVG-DEBT-OUTSTANDING] 5,707,000<F1>
[AVG-DEBT-PER-SHARE] 0.091<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis
</FN>
</TABLE>
<PAGE> 11
[ARTICLE] 6
[SERIES]
[NUMBER] 42
[NAME] MUNI INC CLASS B
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 951,139,270<F1>
[INVESTMENTS-AT-VALUE] 1,042,279,757<F1>
[RECEIVABLES] 21,665,500<F1>
[ASSETS-OTHER] 18,002<F1>
[OTHER-ITEMS-ASSETS] 0<F1>
[TOTAL-ASSETS] 1,063,963,259<F1>
[PAYABLE-FOR-SECURITIES] 19,611,246<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 42,176,796<F1>
[TOTAL-LIABILITIES] 61,788,042<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 186,604,874
[SHARES-COMMON-STOCK] 12,385,888
[SHARES-COMMON-PRIOR] 13,395,856
[ACCUMULATED-NII-CURRENT] 2,282,049<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (11,247,639)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 90,902,720<F1>
[NET-ASSETS] 197,947,399
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 48,555,300<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (7,801,638)<F1>
[NET-INVESTMENT-INCOME] 40,753,662<F1>
[REALIZED-GAINS-CURRENT] 6,553,399<F1>
[APPREC-INCREASE-CURRENT] 6,332,209<F1>
[NET-CHANGE-FROM-OPS] 53,639,270<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (7,203,055)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 929,950
[NUMBER-OF-SHARES-REDEEMED] (2,179,386)
[SHARES-REINVESTED] 239,468
[NET-CHANGE-IN-ASSETS] (13,218,950)
[ACCUMULATED-NII-PRIOR] 535,106<F1>
[ACCUMULATED-GAINS-PRIOR] (17,801,038)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 3,545,745<F1>
[INTEREST-EXPENSE] 252,574<F1>
[GROSS-EXPENSE] 7,801,638<F1>
[AVERAGE-NET-ASSETS] 206,568,470
[PER-SHARE-NAV-BEGIN] 15.764
[PER-SHARE-NII] 0.572
[PER-SHARE-GAIN-APPREC] 0.195
[PER-SHARE-DIVIDEND] (0.549)
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 15.982
[EXPENSE-RATIO] 1.65
[AVG-DEBT-OUTSTANDING] 5,707,000<F1>
[AVG-DEBT-PER-SHARE] 0.091<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis
</FN>
</TABLE>
<PAGE> 12
[ARTICLE] 6
[SERIES]
[NUMBER] 43
[NAME] MUNI INC CLASS C
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 951,139,270<F1>
[INVESTMENTS-AT-VALUE] 1,042,279,757<F1>
[RECEIVABLES] 21,665,500<F1>
[ASSETS-OTHER] 18,002<F1>
[OTHER-ITEMS-ASSETS] 0<F1>
[TOTAL-ASSETS] 1,063,963,259<F1>
[PAYABLE-FOR-SECURITIES] 19,611,246<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 42,176,796<F1>
[TOTAL-LIABILITIES] 61,788,042<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 14,698,205
[SHARES-COMMON-STOCK] 971,576
[SHARES-COMMON-PRIOR] 970,252
[ACCUMULATED-NII-CURRENT] 2,282,049<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (11,247,639)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 90,902,720<F1>
[NET-ASSETS] 15,510,431
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 48,555,300<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (7,801,638)<F1>
[NET-INVESTMENT-INCOME] 40,753,662<F1>
[REALIZED-GAINS-CURRENT] 6,553,399<F1>
[APPREC-INCREASE-CURRENT] 6,332,209<F1>
[NET-CHANGE-FROM-OPS] 53,639,270<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (518,861)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 198,389
[NUMBER-OF-SHARES-REDEEMED] (216,155)
[SHARES-REINVESTED] 19,090
[NET-CHANGE-IN-ASSETS] 231,431
[ACCUMULATED-NII-PRIOR] 535,106<F1>
[ACCUMULATED-GAINS-PRIOR] (17,801,038)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 3,545,745<F1>
[INTEREST-EXPENSE] 252,574<F1>
[GROSS-EXPENSE] 7,801,638<F1>
[AVERAGE-NET-ASSETS] 14,854,123
[PER-SHARE-NAV-BEGIN] 15.747
[PER-SHARE-NII] 0.570
[PER-SHARE-GAIN-APPREC] 0.196
[PER-SHARE-DIVIDEND] (0.549)
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 15.964
[EXPENSE-RATIO] 1.65
[AVG-DEBT-OUTSTANDING] 5,707,000<F1>
[AVG-DEBT-PER-SHARE] 0.091<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis
</FN>
</TABLE>
<PAGE> 13
[ARTICLE] 6
[SERIES]
[NUMBER] 51
[NAME] INTER TERM MUNI A
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 37,650,751<F1>
[INVESTMENTS-AT-VALUE] 40,735,204<F1>
[RECEIVABLES] 583,482<F1>
[ASSETS-OTHER] 0<F1>
[OTHER-ITEMS-ASSETS] 113,467<F1>
[TOTAL-ASSETS] 41,432,153<F1>
[PAYABLE-FOR-SECURITIES] 2,026,300<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 345,638<F1>
[TOTAL-LIABILITIES] 2,371,938<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 19,411,810
[SHARES-COMMON-STOCK] 1,918,546
[SHARES-COMMON-PRIOR] 1,226,471
[ACCUMULATED-NII-CURRENT] 32,934<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (300,052)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 3,084,453<F1>
[NET-ASSETS] 20,581,162
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 1,654,380<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (469,855)<F1>
[NET-INVESTMENT-INCOME] 1,184,525<F1>
[REALIZED-GAINS-CURRENT] 38,354<F1>
[APPREC-INCREASE-CURRENT] 650,720<F1>
[NET-CHANGE-FROM-OPS] 1,873,599<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (625,738)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,074,637
[NUMBER-OF-SHARES-REDEEMED] (425,765)
[SHARES-REINVESTED] 43,203
[NET-CHANGE-IN-ASSETS] 7,658,720
[ACCUMULATED-NII-PRIOR] 33,324<F1>
[ACCUMULATED-GAINS-PRIOR] (338,406)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 139,295<F1>
[INTEREST-EXPENSE] 0<F1>
[GROSS-EXPENSE] 469,855<F1>
[AVERAGE-NET-ASSETS] 18,259,549
[PER-SHARE-NAV-BEGIN] 10.536
[PER-SHARE-NII] 0.358
[PER-SHARE-GAIN-APPREC] 0.199
[PER-SHARE-DIVIDEND] (0.365)
[PER-SHARE-DISTRIBUTIONS] (0.000)
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 10.728
[EXPENSE-RATIO] 1.30
[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>
<PAGE> 14
[ARTICLE] 6
[SERIES]
[NUMBER] 52
[NAME] INTER TERM MUNI B
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 37,650,751
[INVESTMENTS-AT-VALUE] 40,735,204<F1>
[RECEIVABLES] 583,482<F1>
[ASSETS-OTHER] 0<F1>
[OTHER-ITEMS-ASSETS] 113,467<F1>
[TOTAL-ASSETS] 41,432,153<F1>
[PAYABLE-FOR-SECURITIES] 2,026,300<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 345,638<F1>
[TOTAL-LIABILITIES] 2,371,938<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 14,023,192
[SHARES-COMMON-STOCK] 1,417,778
[SHARES-COMMON-PRIOR] 1,559,757
[ACCUMULATED-NII-CURRENT] 32,934<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (300,052)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 3,084,453<F1>
[NET-ASSETS] 15,189,684
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 1,654,380<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (469,855)<F1>
[NET-INVESTMENT-INCOME] 1,184,525<F1>
[REALIZED-GAINS-CURRENT] 38,354<F1>
[APPREC-INCREASE-CURRENT] 650,720<F1>
[NET-CHANGE-FROM-OPS] 1,873,599<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (469,656)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 130,358
[NUMBER-OF-SHARES-REDEEMED] (297,555)
[SHARES-REINVESTED] 25,218
[NET-CHANGE-IN-ASSETS] (1,228,798)
[ACCUMULATED-NII-PRIOR] 33,324<F1>
[ACCUMULATED-GAINS-PRIOR] (338,406)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 139,295<F1>
[INTEREST-EXPENSE] 0<F1>
[GROSS-EXPENSE] 469,855<F1>
[AVERAGE-NET-ASSETS] 15,977,137
[PER-SHARE-NAV-BEGIN] 10.526
[PER-SHARE-NII] 0.308
[PER-SHARE-GAIN-APPREC] 0.191
[PER-SHARE-DIVIDEND] (0.311)
[PER-SHARE-DISTRIBUTIONS] (0.000)
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 10.714
[EXPENSE-RATIO] 2.06
[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>
<PAGE> 15
[ARTICLE] 6
[SERIES]
[NUMBER] 53
[NAME] INTER TERM MUNI C
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 37,650,751<F1>
[INVESTMENTS-AT-VALUE] 40,735,204<F1>
[RECEIVABLES] 583,482<F1>
[ASSETS-OTHER] 0<F1>
[OTHER-ITEMS-ASSETS] 113,467<F1>
[TOTAL-ASSETS] 41,432,153<F1>
[PAYABLE-FOR-SECURITIES] 2,206,300<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 345,638<F1>
[TOTAL-LIABILITIES] 2,371,938<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 2,807,878
[SHARES-COMMON-STOCK] 307,071
[SHARES-COMMON-PRIOR] 290,114
[ACCUMULATED-NII-CURRENT] 32,934<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (300,052)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 3,084,453<F1>
[NET-ASSETS] 3,289,369
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 1,654,380<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (469,855)<F1>
[NET-INVESTMENT-INCOME] 1,184,525<F1>
[REALIZED-GAINS-CURRENT] 38,354<F1>
[APPREC-INCREASE-CURRENT] 650,720<F1>
[NET-CHANGE-FROM-OPS] 1,873,599<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (89,521)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 59,963
[NUMBER-OF-SHARES-REDEEMED] (50,238)
[SHARES-REINVESTED] 7,232
[NET-CHANGE-IN-ASSETS] 235,825
[ACCUMULATED-NII-PRIOR] 33,324<F1>
[ACCUMULATED-GAINS-PRIOR] (338,406)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 139,295<F1>
[INTEREST-EXPENSE] 0<F1>
[GROSS-EXPENSE] 469,855<F1>
[AVERAGE-NET-ASSETS] 3,046,759
[PER-SHARE-NAV-BEGIN] 10.525
[PER-SHARE-NII] 0.308
[PER-SHARE-GAIN-APPREC] 0.190
[PER-SHARE-DIVIDEND] (0.311)
[PER-SHARE-DISTRIBUTIONS] (0.000)
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 10.712
[EXPENSE-RATIO] 2.06
[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>
<PAGE> 16
[ARTICLE] 6
[SERIES]
[NUMBER] 61
[NAME] FL INSD A
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 50,755,943<F1>
[INVESTMENTS-AT-VALUE] 55,346,292<F1>
[RECEIVABLES] 2,083,067<F1>
[ASSETS-OTHER] 11,532<F1>
[OTHER-ITEMS-ASSETS] 125,992<F1>
[TOTAL-ASSETS] 57,566,883<F1>
[PAYABLE-FOR-SECURITIES] 4,806,234<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 409,888<F1>
[TOTAL-LIABILITIES] 5,216,122<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 24,924,266
[SHARES-COMMON-STOCK] 1,703,029
[SHARES-COMMON-PRIOR] 1,887,297
[ACCUMULATED-NII-CURRENT] (58,071)<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (282,787)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 4,590,349<F1>
[NET-ASSETS] 27,113,986
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 2,048,317<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (359,261)<F1>
[NET-INVESTMENT-INCOME] 1,689,056<F1>
[REALIZED-GAINS-CURRENT] 310,611<F1>
[APPREC-INCREASE-CURRENT] 952,580<F1>
[NET-CHANGE-FROM-OPS] 2,952,247<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (981,519)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 352,234
[NUMBER-OF-SHARES-REDEEMED] (566,619)
[SHARES-REINVESTED] 30,117
[NET-CHANGE-IN-ASSETS] (2,233,035)
[ACCUMULATED-NII-PRIOR] (4,556)<F1>
[ACCUMULATED-GAINS-PRIOR] (593,398)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 188,173<F1>
[INTEREST-EXPENSE] 0<F1>
[GROSS-EXPENSE] 623,272<F1>
[AVERAGE-NET-ASSETS] 26,327,927
[PER-SHARE-NAV-BEGIN] 15.550
[PER-SHARE-NII] 0.564
[PER-SHARE-GAIN-APPREC] 0.388
[PER-SHARE-DIVIDEND] (0.581)
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 15.921
[EXPENSE-RATIO] 0.60
[AVG-DEBT-OUTSTANDING] 0<F1>
[AVG-DEBT-PER-SHARE] 0<F1>
<FN>
<F1>This item relates to the Fund on a composite
basis and not on a class basis
</FN>
</TABLE>
<PAGE> 17
[ARTICLE] 6
[SERIES]
[NUMBER] 62
[NAME] FL INSD B
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 50,755,943<F1>
[INVESTMENTS-AT-VALUE] 55,346,292<F1>
[RECEIVABLES] 2,083,067<F1>
[ASSETS-OTHER] 11,532<F1>
[OTHER-ITEMS-ASSETS] 125,992<F1>
[TOTAL-ASSETS] 57,566,883<F1>
[PAYABLE-FOR-SECURITIES] 4,806,234<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 409,888<F1>
[TOTAL-LIABILITIES] 5,216,122<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 21,619,168
[SHARES-COMMON-STOCK] 1,482,836
[SHARES-COMMON-PRIOR] 1,446,624
[ACCUMULATED-NII-CURRENT] (58,071)<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (282,787)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 4,590,349<F1>
[NET-ASSETS] 23,614,356
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 2,048,317<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (359,261)<F1>
[NET-INVESTMENT-INCOME] 1,689,056<F1>
[REALIZED-GAINS-CURRENT] 310,611<F1>
[APPREC-INCREASE-CURRENT] 952,580<F1>
[NET-CHANGE-FROM-OPS] 2,952,247<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (722,360)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 320,092
[NUMBER-OF-SHARES-REDEEMED] (303,798)
[SHARES-REINVESTED] 19,918
[NET-CHANGE-IN-ASSETS] 1,112,419
[ACCUMULATED-NII-PRIOR] (4,556)<F1>
[ACCUMULATED-GAINS-PRIOR] (593,398)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 188,173<F1>
[INTEREST-EXPENSE] 0<F1>
[GROSS-EXPENSE] 623,272<F1>
[AVERAGE-NET-ASSETS] 22,759,739
[PER-SHARE-NAV-BEGIN] 15.554
[PER-SHARE-NII] 0.478
[PER-SHARE-GAIN-APPREC] 0.388
[PER-SHARE-DIVIDEND] (0.495)
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 15.925
[EXPENSE-RATIO] 1.35
[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>
<PAGE> 18
[ARTICLE] 6
[SERIES]
[NUMBER] 63
[NAME] FL INSD C
[MULTIPLIER] 1
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 50,755,943<F1>
[INVESTMENTS-AT-VALUE] 55,346,292<F1>
[RECEIVABLES] 2,083,067<F1>
[ASSETS-OTHER] 11,532<F1>
[OTHER-ITEMS-ASSETS] 125,992<F1>
[TOTAL-ASSETS] 57,566,883<F1>
[PAYABLE-FOR-SECURITIES] 4,806,234<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 409,888<F1>
[TOTAL-LIABILITIES] 5,216,122<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,557,836
[SHARES-COMMON-STOCK] 101,774
[SHARES-COMMON-PRIOR] 76,703
[ACCUMULATED-NII-CURRENT] (58,071)<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] (282,787)<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 4,590,349<F1>
[NET-ASSETS] 1,622,419
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 2,048,317<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (359,261)<F1>
[NET-INVESTMENT-INCOME] 1,689,056<F1>
[REALIZED-GAINS-CURRENT] 310,611<F1>
[APPREC-INCREASE-CURRENT] 952,580<F1>
[NET-CHANGE-FROM-OPS] 2,952,247<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (38,692)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 64,525
[NUMBER-OF-SHARES-REDEEMED] (40,958)
[SHARES-REINVESTED] 1,504
[NET-CHANGE-IN-ASSETS] 427,334
[ACCUMULATED-NII-PRIOR] (4,556)<F1>
[ACCUMULATED-GAINS-PRIOR] (593,398)<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 188,173<F1>
[INTEREST-EXPENSE] 0<F1>
[GROSS-EXPENSE] 623,272<F1>
[AVERAGE-NET-ASSETS] 1,228,115
[PER-SHARE-NAV-BEGIN] 15.581
[PER-SHARE-NII] 0.483
[PER-SHARE-GAIN-APPREC] 0.372
[PER-SHARE-DIVIDEND] (0.495)
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 15.941
[EXPENSE-RATIO] 1.32
[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>
<PAGE> 19
[ARTICLE] 6
[SERIES]
[NUMBER] 81
[NAME] N.Y.T.F. CLASS A
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 44,561,936<F1>
[INVESTMENTS-AT-VALUE] 47,728,067<F1>
[RECEIVABLES] 769,114<F1>
[ASSETS-OTHER] 12,522<F1>
[OTHER-ITEMS-ASSETS] 21,300<F1>
[TOTAL-ASSETS] 48,531,003<F1>
[PAYABLE-FOR-SECURITIES] 1,265,208<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 172,582<F1>
[TOTAL-LIABILITIES] 1,437,790<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 23,341,371
[SHARES-COMMON-STOCK] 1,541,195
[SHARES-COMMON-PRIOR] 1,142,337
[ACCUMULATED-NII-CURRENT] (15,670)<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] 271,913<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 3,166,131<F1>
[NET-ASSETS] 25,002,174
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 1,605,334<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (218,613)<F1>
[NET-INVESTMENT-INCOME] 1,386,721<F1>
[REALIZED-GAINS-CURRENT] 271,958<F1>
[APPREC-INCREASE-CURRENT] 1,080,991<F1>
[NET-CHANGE-FROM-OPS] 2,739,670<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (809,026)
[DISTRIBUTIONS-OF-GAINS] (22,100)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 520,265
[NUMBER-OF-SHARES-REDEEMED] (160,416)
[SHARES-REINVESTED] 39,009
[NET-CHANGE-IN-ASSETS] 7,027,835
[ACCUMULATED-NII-PRIOR] 28<F1>
[ACCUMULATED-GAINS-PRIOR] 40,951<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 178,001<F1>
[INTEREST-EXPENSE] 0<F1>
[GROSS-EXPENSE] 529,240<F1>
[AVERAGE-NET-ASSETS] 21,479,868
[PER-SHARE-NAV-BEGIN] 15.734
[PER-SHARE-NII] 0.596
[PER-SHARE-GAIN-APPREC] 0.509
[PER-SHARE-DIVIDEND] (0.599)
[PER-SHARE-DISTRIBUTIONS] (0.017)
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 16.223
[EXPENSE-RATIO] 0.39
[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>
<PAGE> 20
[ARTICLE] 6
[SERIES]
[NUMBER] 82
[NAME] N.Y.T.F. CLASS B
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 44,561,936<F1>
[INVESTMENTS-AT-VALUE] 47,728,067<F1>
[RECEIVABLES] 769,114<F1>
[ASSETS-OTHER] 12,522<F1>
[OTHER-ITEMS-ASSETS] 21,300<F1>
[TOTAL-ASSETS] 48,531,003<F1>
[PAYABLE-FOR-SECURITIES] 1,265,208<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 172,582<F1>
[TOTAL-LIABILITIES] 1,437,790<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 17,309,186
[SHARES-COMMON-STOCK] 1,169,362
[SHARES-COMMON-PRIOR] 833,648
[ACCUMULATED-NII-CURRENT] (15,670)<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] 271,913<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 3,166,131<F1>
[NET-ASSETS] 18,953,004
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 1,605,334<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (218,613)<F1>
[NET-INVESTMENT-INCOME] 1,386,721<F1>
[REALIZED-GAINS-CURRENT] 271,958<F1>
[APPREC-INCREASE-CURRENT] 1,080,991<F1>
[NET-CHANGE-FROM-OPS] 2,739,670
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (523,570)
[DISTRIBUTIONS-OF-GAINS] (16,870)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 391,237
[NUMBER-OF-SHARES-REDEEMED] (72,177)
[SHARES-REINVESTED] 16,654
[NET-CHANGE-IN-ASSETS] 5,842,527
[ACCUMULATED-NII-PRIOR] 28<F1>
[ACCUMULATED-GAINS-PRIOR] 40,951<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 178,001<F1>
[INTEREST-EXPENSE] 0<F1>
[GROSS-EXPENSE] 529,240<F1>
[AVERAGE-NET-ASSETS] 16,119,325
[PER-SHARE-NAV-BEGIN] 15.727
[PER-SHARE-NII] 0.509
[PER-SHARE-GAIN-APPREC] 0.507
[PER-SHARE-DIVIDEND] (0.518)
[PER-SHARE-DISTRIBUTIONS] (0.017)
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 16.208
[EXPENSE-RATIO] 1.14
[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>
<PAGE> 21
[ARTICLE] 6
[SERIES]
[NUMBER] 83
[NAME] N.Y.T.F. CLASS C
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] SEP-30-1998
[INVESTMENTS-AT-COST] 44,561,936<F1>
[INVESTMENTS-AT-VALUE] 47,728,067<F1>
[RECEIVABLES] 769,114<F1>
[ASSETS-OTHER] 12,522<F1>
[OTHER-ITEMS-ASSETS] 21,300<F1>
[TOTAL-ASSETS] 48,531,003<F1>
[PAYABLE-FOR-SECURITIES] 1,265,208<F1>
[SENIOR-LONG-TERM-DEBT] 0<F1>
[OTHER-ITEMS-LIABILITIES] 172,582<F1>
[TOTAL-LIABILITIES] 1,437,790<F1>
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 3,020,282
[SHARES-COMMON-STOCK] 193,648
[SHARES-COMMON-PRIOR] 65,610
[ACCUMULATED-NII-CURRENT] (15,670)<F1>
[OVERDISTRIBUTION-NII] 0<F1>
[ACCUMULATED-NET-GAINS] 271,913<F1>
[OVERDISTRIBUTION-GAINS] 0<F1>
[ACCUM-APPREC-OR-DEPREC] 3,166,131<F1>
[NET-ASSETS] 3,138,035
[DIVIDEND-INCOME] 0<F1>
[INTEREST-INCOME] 1,605,334<F1>
[OTHER-INCOME] 0<F1>
[EXPENSES-NET] (218,613)<F1>
[NET-INVESTMENT-INCOME] 1,386,721<F1>
[REALIZED-GAINS-CURRENT] 271,958<F1>
[APPREC-INCREASE-CURRENT] 1,080,991<F1>
[NET-CHANGE-FROM-OPS] 2,739,670<F1>
[EQUALIZATION] 0<F1>
[DISTRIBUTIONS-OF-INCOME] (69,823)
[DISTRIBUTIONS-OF-GAINS] (2,026)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 135,402
[NUMBER-OF-SHARES-REDEEMED] (9,896)
[SHARES-REINVESTED] 2,532
[NET-CHANGE-IN-ASSETS] 2,106,263
[ACCUMULATED-NII-PRIOR] 28<F1>
[ACCUMULATED-GAINS-PRIOR] 40,951<F1>
[OVERDISTRIB-NII-PRIOR] 0<F1>
[OVERDIST-NET-GAINS-PRIOR] 0<F1>
[GROSS-ADVISORY-FEES] 178,001<F1>
[INTEREST-EXPENSE] 0<F1>
[GROSS-EXPENSE] 529,240<F1>
[AVERAGE-NET-ASSETS] 2,159,760
[PER-SHARE-NAV-BEGIN] 15.726
[PER-SHARE-NII] 0.515
[PER-SHARE-GAIN-APPREC] 0.498
[PER-SHARE-DIVIDEND] (0.518)
[PER-SHARE-DISTRIBUTIONS] (0.017)
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 16.204
[EXPENSE-RATIO] 1.14
[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>
<PAGE> 1
EXHIBIT (p)
POWER OF ATTORNEY
The undersigned, being officers and trustees of each of the Van Kampen
Open End Trusts (individually, a "Trust") as indicated on Schedule 1 attached
hereto and incorporated by reference, each a Delaware business trust except for
the Van Kampen Pennsylvania Tax Free Income Fund being a Pennsylvania business
trust (individually, a "Trust"), and being officers and directors of the Van
Kampen Series Fund, Inc. (the "Corporation"), a Maryland corporation, do hereby,
in the capacities shown below, appoint Dennis J. McDonnell of Oakbrook Terrace,
Illinois, as agent and attorney-in-fact with full power of substitution and
resubstitution, for each of the undersigned, to execute and deliver, for and on
behalf of the undersigned, any and all amendments to the Registration Statement
filed by each Trust or the Corporation with the Securities and Exchange
Commission pursuant to the provisions of the Securities Act of 1933 and the
Investment Company Act of 1940.
This Power of Attorney may be executed in multiple counterparts, each
of which shall be deemed an original, but which taken together shall constitute
one instrument.
Dated: January 12, 1999
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ DENNIS J. MCDONNELL President
----------------------------------
Dennis J. McDonnell
/s/ JOHN L. SULLIVAN Vice President, Chief Financial Officer
---------------------------------- and Treasurer
John L. Sullivan
/s/ J. MILES BRANAGAN Trustee/Director
----------------------------------
J. Miles Branagan
/s/ RICHARD M. DEMARTINI Trustee/Director
----------------------------------
Richard M. DeMartini
/s/ LINDA HUTTON HEAGY Trustee/Director
----------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY Trustee/Director
----------------------------------
R. Craig Kennedy
/s/ JACK E. NELSON Trustee/Director
----------------------------------
Jack E. Nelson
/s/ DON G. POWELL Trustee/Director
----------------------------------
Don G. Powell
/s/ PHILLIP B. ROONEY Trustee/Director
----------------------------------
Phillip B. Rooney
/s/ FERNANDO SISTO, SC.D. Trustee/Director
----------------------------------
Fernando Sisto, Sc. D.
/s/ WAYNE W. WHALEN Trustee/Director and Chairman
----------------------------------
Wayne W. Whalen
/s/ PAUL G. YOVOVICH Trustee/Director
----------------------------------
Paul G. Yovovich
</TABLE>
<PAGE> 2
SCHEDULE 1
VAN KAMPEN U.S. GOVERNMENT TRUST
VAN KAMPEN TAX FREE TRUST
VAN KAMPEN TRUST
VAN KAMPEN EQUITY TRUST
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
VAN KAMPEN TAX FREE MONEY FUND
VAN KAMPEN COMSTOCK FUND
VAN KAMPEN CORPORATE BOND FUND
VAN KAMPEN EMERGING GROWTH FUND
VAN KAMPEN ENTERPRISE FUND
VAN KAMPEN EQUITY INCOME FUND
VAN KAMPEN LIMITED MATURITY GOVERNMENT FUND
VAN KAMPEN GLOBAL MANAGED ASSETS FUND
VAN KAMPEN GOVERNMENT SECURITIES FUND
VAN KAMPEN GROWTH AND INCOME FUND
VAN KAMPEN HARBOR FUND
VAN KAMPEN HIGH INCOME CORPORATE BOND FUND
VAN KAMPEN LIFE INVESTMENT TRUST
VAN KAMPEN PACE FUND
VAN KAMPEN REAL ESTATE SECURITIES FUND
VAN KAMPEN RESERVE FUND
VAN KAMPEN SMALL CAPITALIZATION FUND
VAN KAMPEN TAX-EXEMPT TRUST
VAN KAMPEN U.S. GOVERNMENT TRUST FOR INCOME
VAN KAMPEN WORLD PORTFOLIO SERIES TRUST
<PAGE> 1
EXHIBIT(z)(1)
Item 27(a)
- ----------
VAN KAMPEN ADVANTAGE MUNICIPAL INCOME TRUST
VAN KAMPEN ADVANTAGE MUNICIPAL INCOME TRUST II
VAN KAMPEN ADVANTAGE PENNSYLVANIA MUNICIPAL INCOME TRUST
VAN KAMPEN BOND FUND
VAN KAMPEN CALIFORNIA MUNICIPAL TRUST
VAN KAMPEN CALIFORNIA QUALITY MUNICIPAL TRUST
VAN KAMPEN CALIFORNIA VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN COMSTOCK FUND
VAN KAMPEN CONVERTIBLE SECURITIES FUND
VAN KAMPEN CORPORATE BOND FUND
VAN KAMPEN EMERGING GROWTH FUND
VAN KAMPEN ENTERPRISE FUND
VAN KAMPEN EQUITY TRUST
VAN KAMPEN AGGRESSIVE GROWTH FUND
VAN KAMPEN GREAT AMERICAN COMPANIES FUND
VAN KAMPEN GROWTH FUND
VAN KAMPEN MID CAP VALUE FUND
VAN KAMPEN PROSPECTOR FUND
VAN KAMPEN UTILITY FUND
VAN KAMPEN EQUITY INCOME FUND
THE EXPLORER INSTITUTIONAL TRUST
EXPLORER INSTITUTIONAL ACTIVE CORE FUND
EXPLORER INSTITUTIONAL LIMITED DURATION FUND
VAN KAMPEN AMERICAN CAPITAL EXCHANGE FUND
VAN KAMPEN FLORIDA MUNICIPAL OPPORTUNITY TRUST
VAN KAMPEN FLORIDA QUALITY MUNICIPAL TRUST
VAN KAMPEN GLOBAL MANAGED ASSETS FUND
VAN KAMPEN GOVERNMENT SECURITIES FUND
VAN KAMPEN GROWTH AND INCOME FUND
VAN KAMPEN HARBOR FUND
VAN KAMPEN HIGH INCOME CORPORATE BOND FUND
VAN KAMPEN HIGH INCOME TRUST
VAN KAMPEN HIGH INCOME TRUST II
VAN KAMPEN INCOME TRUST
VAN KAMPEN INVESTMENT GRADE MUNICIPAL TRUST
VAN KAMPEN LIFE INVESTMENT TRUST
on behalf of its Series
ASSET ALLOCATION PORTFOLIO
COMSTOCK PORTFOLIO
DOMESTIC INCOME PORTFOLIO
EMERGING GROWTH PORTFOLIO
ENTERPRISE PORTFOLIO
GLOBAL EQUITY PORTFOLIO
GOVERNMENT PORTFOLIO
GROWTH AND INCOME PORTFOLIO
MONEY MARKET PORTFOLIO
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO
STRATEGIC STOCK PORTFOLIO
VAN KAMPEN LIMITED MATURITY GOVERNMENT FUND
VAN KAMPEN MASSACHUSETTS VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN MUNICIPAL INCOME TRUST
VAN KAMPEN MUNICIPAL OPPORTUNITY TRUST
<PAGE> 2
VAN KAMPEN MUNICIPAL OPPORTUNITY TRUST II
VAN KAMPEN MUNICIPAL TRUST
VAN KAMPEN NEW JERSEY VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN NEW YORK QUALITY MUNICIPAL TRUST
VAN KAMPEN NEW YORK VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN OHIO QUALITY MUNICIPAL TRUST
VAN KAMPEN OHIO VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN PACE FUND
VAN KAMPEN PENNSYLVANIA QUALITY MUNICIPAL TRUST
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
VAN KAMPEN PENNSYLVANIA VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN PRIME RATE INCOME TRUST
VAN KAMPEN REAL ESTATE SECURITIES FUND
VAN KAMPEN RESERVE FUND
VAN KAMPEN SELECT SECTOR MUNICIPAL TRUST
VAN KAMPEN SENIOR FLOATING RATE FUND
VAN KAMPEN SENIOR INCOME TRUST
VAN KAMPEN SERIES FUND, INC.
VAN KAMPEN AGGRESSIVE EQUITY FUND
VAN KAMPEN AMERICAN VALUE FUND
VAN KAMPEN ASIAN GROWTH FUND
VAN KAMPEN EMERGING MARKETS DEBT FUND*
VAN KAMPEN EMERGING MARKETS FUND
VAN KAMPEN EQUITY GROWTH FUND*
VAN KAMPEN EUROPEAN EQUITY FUND*
VAN KAMPEN GLOBAL EQUITY ALLOCATION FUND
VAN KAMPEN GLOBAL EQUITY FUND
VAN KAMPEN GLOBAL FIXED INCOME FUND
VAN KAMPEN GLOBAL FRANCHISE FUND*
MORGAN STANLEY GOVERNMENT OBLIGATIONS MONEY MARKET FUND
VAN KAMPEN GROWTH AND INCOME FUND II*
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
VAN KAMPEN INTERNATIONAL MAGNUM FUND
VAN KAMPEN JAPANESE EQUITY FUND*
VAN KAMPEN LATIN AMERICAN FUND
VAN KAMPEN MID CAP GROWTH FUND*
MORGAN STANLEY MONEY MARKET FUND
MORGAN STANLEY TAX-FREE MONEY MARKET FUND*
VAN KAMPEN U.S. REAL ESTATE FUND
VAN KAMPEN VALUE FUND
VAN KAMPEN WORLDWIDE HIGH INCOME FUND
VAN KAMPEN SMALL CAPITALIZATION FUND
VAN KAMPEN STRATEGIC SECTOR MUNICIPAL TRUST
VAN KAMPEN TAX-EXEMPT TRUST
on behalf of its Series
HIGH YIELD MUNICIPAL FUND
VAN KAMPEN TAX FREE TRUST
VAN KAMPEN CALIFORNIA INSURED TAX FREE FUND
VAN KAMPEN CALIFORNIA TAX FREE INCOME FUND*
VAN KAMPEN FLORIDA INSURED TAX FREE INCOME FUND
VAN KAMPEN INSURED TAX FREE INCOME FUND
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND
<PAGE> 3
VAN KAMPEN MICHIGAN TAX FREE INCOME FUND*
VAN KAMPEN MISSOURI TAX FREE INCOME FUND*
VAN KAMPEN MUNICIPAL INCOME FUND
VAN KAMPEN NEW YORK TAX FREE INCOME FUND
VAN KAMPEN OHIO TAX FREE INCOME FUND*
VAN KAMPEN TAX FREE HIGH INCOME FUND
VAN KAMPEN TAX FREE MONEY FUND
VAN KAMPEN TRUST
VAN KAMPEN HIGH YIELD FUND
VAN KAMPEN SHORT-TERM GLOBAL INCOME FUND
VAN KAMPEN STRATEGIC INCOME FUND
VAN KAMPEN TRUST FOR INSURED MUNICIPALS
VAN KAMPEN TRUST FOR INVESTMENT GRADE CALIFORNIA MUNICIPALS
VAN KAMPEN TRUST FOR INVESTMENT GRADE FLORIDA MUNICIPALS
VAN KAMPEN TRUST FOR INVESTMENT GRADE MUNICIPALS
VAN KAMPEN TRUST FOR INVESTMENT GRADE NEW JERSEY MUNICIPALS
VAN KAMPEN TRUST FOR INVESTMENT GRADE NEW YORK MUNICIPALS
VAN KAMPEN TRUST FOR INVESTMENT GRADE PENNSYLVANIA MUNICIPALS
VAN KAMPEN U.S. GOVERNMENT TRUST
VAN KAMPEN U.S. GOVERNMENT FUND
VAN KAMPEN U.S. GOVERNMENT TRUST FOR INCOME
VAN KAMPEN VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN WORLD PORTFOLIO SERIES TRUST
on behalf of its Series
VAN KAMPEN GLOBAL GOVERNMENT SECURITIES FUND
* Funds have not commenced investment operations.
<PAGE> 4
<TABLE>
<S> <C>
Insured Municipals Income Trust Series 404
California Insured Municipals Income Trust Series 178
Colorado Insured Municipals Income Trust Series 88
Connecticut Insured Municipals Income Trust Series 38
Florida Insured Municipals Income Trust Series 124
Georgia Insured Municipals Income Trust Series 88
Maryland Investors' Quality Tax-Exempt Trust Series 87
Michigan Insured Municipals Income Trust Series 153
Minnesota Insured Municipals Income Trust Series 62
Missouri Insured Municipals Income Trust Series 109
New Jersey Insured Municipals Income Trust Series 125
New York Insured Municipals Income Trust Series 147
North Carolina Investors' Quality Tax-Exempt Trust Series 96
Ohio Insured Municipals Income Trust Series 111
Pennsylvania Insured Municipals Income Trust Series 240
South Carolina Investors' Quality Tax-Exempt Trust Series 86
Tennessee Insured Municipals Income Trust Series 41
Tennessee Investors' Quality Tax Exempt Trust Series 1
Virginia Investors' Quality Tax-Exempt Trust Series 83
Van Kampen American Capital Insured Income Trust Series 73
Internet Trust Series 13
The Dow SM Strategic 10 Trust January 1999
Series
The Dow SM Strategic 10 Trust January 1999
Traditional
Series
The Dow SM Strategic 5 Trust January 1999
Series
The Dow SM Strategic 5 Trust January 1999
Traditional
Series
EAFE Strategic 20 Trust January 1999
Series
EURO Strategic 20 Trust January 1999
Series
Strategic Picks Opportunity Trust January 1999
PACT Strategic 10 Trust January 1999
Series
Great International Firms Trust Series 7
Dow 30 Index Trust Series 6
Dow 30 Index and Treasury Trust Series 8
Baby Boomer Opportunity Trust Series 6
Global Energy Trust Series 8
Brand Name Equity Trust Series 8
Edward Jones Select Growth Trust January 1999
Series
Banking Trust Series 5
Morgan Stanley High-Technology 35 Index Trust Series 5
Health Care Trust Series 4
Telecommunications Trust Series 4
Utility Trust Series 4
Financial Services Trust Series 3
Morgan Stanley Euro Tec Trust Series 2
Gruntal Global Transport Trust Series 1
Josepthal Financial Institutions Growth & Consolidation Trust Series 2001
Josepthal - Select Equity Portfolio 1
Northern Illinois Equity Value Trust Series
Euro/Pacific Strategy Series 1
</TABLE>
<PAGE> 1
EXHIBIT (z)(2)
Item 27(b)
- ----------
<TABLE>
<S> <C> <C>
Powers, Richard F. III Chief Executive Officer Oakbrook Terrace, IL
Zimmermann, III, John H. President Oakbrook Terrace, IL
Gehman, Douglas B. Executive Vice President Houston, TX
Nyberg, Ronald A. Executive Vice President, Gen. Coun., Asst. Sec. Oakbrook Terrace, IL
Rybak, William R. Executive Vice President & Chief Financial Officer Oakbrook Terrace, IL
Wolkenberg, Paul R. Executive Vice President Oakbrook Terrace, IL
Althoff, Laurence Joseph Senior Vice President & Controller Oakbrook Terrace, IL
DeMoss, Gary R. Senior Vice President Oakbrook Terrace, IL
Doyle, John E. Senior Vice President Oakbrook Terrace, IL
Golod, Richard G. Senior Vice President Annapolis, MD
Martin, Scott Evan Sen. V.P., Deputy Gen. Coun. and Sec. Oakbrook Terrace, IL
McGannon, Mark T. Senior Vice President Oakbrook Terrace, IL
Millington, Charles G. Senior Vice President and Treasurer Oakbrook Terrace, IL
Rein, Walter E. Senior Vice President Oakbrook Terrace, IL
Saucedo, Colette M. Senior Vice President Houston, TX
Shepherd, Frederick Senior Vice President Houston, TX
Sorenson, Steven P. Senior Vice President Oakbrook Terrace, IL
Stallard, Michael L. Senior Vice President Oakbrook Terrace, IL
West, Robert Scott Senior Vice President Oakbrook Terrace, IL
Wood, Edward C, III Senior Vice President & Chief Operating Officer Oakbrook Terrace, IL
Cackovic, Glenn M. First Vice President Laguna Nigel, CA
Hargens, Eric J. First Vice President Orlando, FL
Hogaboom, David S. First Vice President Oakbrook Terrace, IL
Martellaro, Dominic C. First Vice President Danville, CA
Mayfield, Carl First Vice President Lakewood, CO
McClure, Mark R. First Vice President Oakbrook Terrace, IL
Ryan, James J. First Vice President Oakbrook Terrace, IL
Vogel, George J. First Vice President Oakbrook Terrace, IL
Woelfel, Patrick J. First Vice President Oakbrook Terrace, IL
Abreu, Robert J. Vice President New York, NY
Ambrosio, James K. Vice President Massapequa, NY
Arcara, Brian P. Vice President Buffalo, NY
Bart, Louis P Vice President
Bettlach, Patricia A. Vice President Chesterfield, Mo
Biegel, Carol S. Vice President Oakbrook Terrace, IL
Bisaillon, Chistopher M. Vice President Oakbrook Terrace, IL
Boos, Michal P. Vice President Oakbrook Terrace, IL
Boyne, James Joseph V.P., Associate Gen. Coun. & Asst. Sec. Oakbrook Terrace, IL
Brooks, Robert C. Vice President Oakbrook Terrace, IL
Burke, Jr., William F. Vice President Mendham, NJ
Burket, Loren Vice President Plymouth, MN
Byrum, Christine Cleary Vice President Tampa, FL
Caggiano, Joseph N. Vice President New York, NY
Chambers, Daniel R. Vice President Austin, TX
</TABLE>
<PAGE> 2
[CAPTION]
<TABLE>
<S> <C> <C>
Charlino, Richard J. Vice President Houston, TX
Chiaro, Deanne Margaret Vice President Oakbrook Terrace, IL
Chriske, Scott A. Vice President Plano, TX
Clavijo, German Vice President Atlanta, GA
Cloud, Eleanor M. Vice President Oakbrook Terrace, IL
Cogliandro, Dominick Vice President and Assistant Treasurer New York, NY
Colston, Michael Vice President Louisville, KY
Cummings, Suzanne Vice President Oakbrook Terrace, IL
Dalmaso, Nicholas V.P., Associate Gen. Coun. & Asst. Sec. Oakbrook Terrace, IL
Eccleston, Michael E. Vice President Oakbrook Terrace, IL
Eckhard, Jonathan Vice President Tampa, FL
Fisher, Charles Edward Vice President Naperville, IL
Fow, William J. Vice President Redding, CT
Foxhoven, Nicholas J. Vice President Englewood, CO
Friday, Charles Vice President Gibsonia, PA
Griffith, Timothy D. Vice President Kirkland, WA
Haas, Kyle D. Vice President Oakbrook Terrace, IL
Hamilton, Daniel Vice President Austin, TX
Hansen, John G. Vice President Oakbrook Terrace, IL
Hays, Joseph Vice President Cherry Hill, NJ
Heffington, Gregory Vice President Ft. Collins, CO
Hill, Susan Jean Vice President and Senior Attorney Oakbrook Terrace, IL
Hindelang, Thomas R. Vice President Gilbert, AZ
Hoggard, Bryn M. Vice President Houston, TX
Hughes, Michael B. Vice President Oakbrook Terrace, IL
Hunt, Robert S. Vice President Phoenix, MD
Jackson, Lowell Vice President Norcross, GA
Jajuga, Kevin G. Vice President Baltimore, MD
Johnson, Steven T. Vice President Oakbrook Terrace, IL
Klein, Dana R. Vice President Oakbrook Terrace, IL
Kohly, Frederick Vice President Miami, FL
Kowalski, David Richard Vice President & Director of Compliance Oakbrook Terrace, IL
Kozlowski, Richard D. Vice President Atlanta, GA
Langs, Bradford N. Vice President Oakbrook Terrace, IL
Lathrop, Patricia D. Vice President Tampa, FL
Laux, Brian Vice President Staten Island, NY
Leal, Tony E. Vice President Daphne, AL
Lehew III, S. William Vice President Charlotte, NC
Levinson, Eric Vice President San Francisco, CA
Linstra, Jonathan Vice President Oakbrook Terrace, IL
Lundgren, Richard M. Vice President Oakbrook Terrace, IL
Lynn, Walter Vice President Flower Mound, TX
MacAyeal, Linda S. Vice President and Senior Attorney Oakbrook Terrace, IL
Marsh, Kevin S. Vice President Bellevue, WA
</TABLE>
<PAGE> 3
[CAPTION]
<TABLE>
<S> <C> <C>
McCartney, Brooks D. Vice President Puyallup, WA
McGrath, Anne Therese Vice President Los Gatos, CA
McGrath, Maura A. Vice President New York, NY
Mills, John Vice President Kenner, LA
Morrow, Ted Vice President Dallas, TX
Muller, Jr. Robert F. Vice President Cypress, TX
Nicolas, Peter Vice President Beverly, MA
Page, Todd W. Vice President Oakbrook Terrace, IL
Parker, Gregory S. Vice President Houston, TX
Petrungaro, Christopher Vice President Oakbrook Terrace, IL
Poli, Richard J. Vice President Philadelphia, PA
Pratt, Ronald E. Vice President Marletta, GA
Prichard, Craig S. Vice President Fairlawn, OH
Reams, Daniel D. Vice President Royal Oak, MI
Rohr, Michael W. Vice President Oakbrook Terrace, IL
Rose, Jeffrey L. Vice President Houston, TX
Rothberg, Suzette N. Vice President Plymouth, MN
Rourke, Jeffrey Vice President Oakbrook Terrace, IL
Rowley, Thomas Vice President St. Louis, MO
Sabo, Heather R. Vice President Richmond, VA
Scarlata, Stephanie Vice President Bedford Corners, NY
Scherer, Andrew J. Vice President Oakbrook Terrace, IL
Schuster, Ronald J. Vice President Tampa, FL
Shaneyfelt, Gwen L. Vice President Oakbrook Terrace, IL
Shirk, Jefferey C. Vice President Swampscott, MA
Sorensen, Traci T. Vice President Oakbrook Terrace, IL
Spangler, Kimberly M. Vice President Fairfax, VA
Stabler, Darren D. Vice President Phoenix, AZ
Staniforth, Christopher Vice President Leawood, KS
Stefanec, Richard Vice President Los Angeles, CA
Stevens, James D. Vice President North Andover, MA
Strafford, William C. Vice President Granger, IN
Syswerda, Mark A. Vice President Oakbrook Terrace, IL
Tabone, David A. Vice President Scottsdale, AZ
Tierney, John F. Vice President Oakbrook Terrace, IL
Ulvestad, Curtis L. Vice President Red Wing, MN
Volkman, Todd A. Vice President Austin, TX
Waldron, Daniel B. Vice President Oakbrook Terrace, IL
Warland, Jeff Vice President Oakbrook Terrace, IL
Wetherell, Weston B. V.P., Associate Gen. Coun. & Asst. Sec Oakbrook Terrace, IL
Whitworth III, Harold Vice President Oakbrook Terrace, IL
Wilson, Thomas M. Vice President Oakbrook Terrace, IL
Withers, Barbara A. Vice President Oakbrook Terrace, IL
Wynn, David M. Vice President Phoenix, AZ
Yount, James R. Vice President Mercer Island, WA
</TABLE>
<PAGE> 4
[CAPTION]
<TABLE>
<S> <C> <C>
Zacchea, Patrick M. Vice President Oakbrook Terrace, IL
Becker, Scott F. Assistant Vice President Oakbrook Terrace, IL
Binder, Brian E. Assistant Vice President Oakbrook Terrace, IL
Blackwood, Joan E. Assistant Vice President Oakbrook Terrace, IL
Bronaugh, Billie J. Assistant Vice President Houston, TX
Brunk, Gregory T. Assistant Vice President Oakbrook Terrace, IL
Costello, Gina Assistant Vice President & Assistant Secretary Oakbrook Terrace, IL
Gieser, Sarah K. Assistant Vice President Oakbrook Terrace, IL
Gray, Walter C. Assistant Vice President Houston, TX
Jones, Laurie L. Assistant Vice President Houston, TX
Jordan, Robin R. Assistant Vice President Oakbrook Terrace, IL
Lowe, Ivan R. Assistant Vice President Houston, TX
Moehlman, Stuart R. Assistant Vice President Houston, TX
Norvid, Steven R. Assistant Vice President Oakbrook Terrace, IL
Putong, Christine K. Assistant Vice President & Assistant Secretary Oakbrook Terrace, IL
Robbins, David P. Assistant Vice President Oakbrook Terrace, IL
Rosen, Regina Assistant Vice President Oakbrook Terrace, IL
Salley, Pamela S. Assistant Vice President Houston, TX
Sanchez, Vanessa M. Assistant Vice President Oakbrook Terrace, IL
Sauerborn, Thomas J. Assistant Vice President New York, NY
Saxon, Bruce Assistant Vice President Oakbrook Terrace, IL
Saylor, David T. Assistant Vice President Oakbrook Terrace, IL
Schmieder, Christina L. Assistant Vice President Oakbrook Terrace, IL
Sinai, Lauren B. Assistant Vice President Oakbrook Terrace, IL
Transier, Kristen L. Assistant Vice President Houston, TX
Villarreal, David H. Assistant Vice President Oakbrook Terrace, IL
Wells, Sharon M.C. Assistant Vice President Oakbrook Terrace, IL
Napoli, Cathy Assistant Secretary Oakbrook Terrace, IL
Brown, Elizabeth M. Officer Houston, TX
Browning, John Officer Oakbrook Terrace, IL
George, Leticia Officer Houston, TX
McLaughlin, William D. Officer Houston, TX
Newman, Rebecca Officer Houston, TX
Renn, Theresa M. Officer Oakbrook Terrace, IL
Vickrey, Larry Officer Houston, TX
Yovanovic, John Officer Houston, TX
Powers, Richard F. III Director
Nyberg, Ronald A. Director
Rybak, William R. Director
Zimmermann, III, John H. Director
</TABLE>
