<PAGE> 1
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> 2
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
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<PAGE> 3
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>
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<PAGE> 4
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
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<PAGE> 5
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> 6
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
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<PAGE> 7
(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
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<PAGE> 8
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,
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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
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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
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<PAGE> 11
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.
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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
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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
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<PAGE> 14
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.
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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.
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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> 17
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> 18
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> 19
<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> 20
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> 21
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> 22
-- 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> 23
<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> 24
<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> 25
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> 26
<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> 27
<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> 28
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> 29
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> 30
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> 31
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> 32
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> 33
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> 34
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> 35
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> 36
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> 37
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> 38
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> 39
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> 40
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> 41
(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> 42
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> 43
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* 4.0% 4.5% 5.0% 5.5% 6.0% 6.5
- ---------------- --------------- ------- --------- -------- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25,750 15.00% 10.621% 24.00% 5.26% 5.92% 6.58% 7.24% 7.89% 8.55%
$ 0-43,050 15.00 10.564 24.00 5.26 5.92 6.58 7.24 7.89 8.55
25,750-62,450 43,050-104,050 28.00 10.678 35.70 6.22 7.00 7.78 8.55 9.33 10.11
62,450-130,250 104,050-158,550 31.00 10.678 38.40 6.49 7.31 8.12 8.93 9.74 10.55
130,250-283,150 158,550-283,150 36.00 10.678 42.80 6.99 7.87 8.74 9.62 10.49 11.36
Over 283,150 Over 283,150 39.60 10.678 46.00 7.41 8.33 9.26 10.19 11.11 12.04
</TABLE>
<TABLE>
<CAPTION>
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
-----------------------------------------------
7.0% 7.5% 8.0% 8.5% 9.00%
------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
9.21% 9.87% 10.53% 11.18% 11.84%
9.21 9.87 10.53 11.18 11.84
10.89 11.66 12.44 13.22 14.00
11.36 12.18 12.99 13.80 14.61
12.24 13.11 13.99 14.86 15.73
12.96 13.89 14.81 15.74 16.67
</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> 44
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>
$ 0-25,750 $ 0-43,050 15.00% 6.850% 20.80% 4.42% 5.05% 5.68% 6.31% 6.94% 7.58% 8.21%
25,750-62,450 43,050-104,050 28.00 6.850 32.90 5.22 5.96 6.71 7.45 8.20 8.94 9.69
62,450-130,250 104,050-158,550 31.00 6.850 35.70 5.44 6.22 7.00 7.78 8.55 9.33 10.11
130,250-283,150 158,550-283,150 36.00 6.850 40.40 5.87 6.71 7.55 8.39 9.23 10.07 10.91
Over 283,150 Over 283,150 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>
$ 0-25,750 8.84% 9.47% 10.10% 10.73%
25,750-62,450 10.43 11.18 11.92 12.67
62,450-130,250 10.89 11.66 12.44 13.22
130,250-283,150 11.74 12.58 13.42 14.26
Over 283,150 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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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> 65
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
